UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22039
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
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(Exact name of registrant as specified in charter)
1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-241-4141
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Date of fiscal year end: NOVEMBER 30
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Date of reporting period: MAY 31, 2007
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
SEMI-ANNUAL REPORT
FOR THE PERIOD MAY 25, 2007 (COMMENCEMENT OF OPERATIONS) TO MAY 31, 2007
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TABLE OF CONTENTS
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2007
Shareholder Letter .................................................. 1
Sub-Advisor and Portfolio Management Team ........................... 2
Portfolio Components ................................................ 3
Portfolio of Investments ............................................ 4
Statement of Assets and Liabilities ................................. 5
Statement of Operations ............................................. 6
Statement of Changes in Net Assets .................................. 7
Financial Highlights ................................................ 8
Notes to Financial Statements ....................................... 9
Additional Information .............................................. 13
Dividend Reinvestment Plan
Proxy Voting Policies and Procedures
Portfolio Holdings
NYSE Certification Information
By-Law Amendments
Advisory and Sub-Advisory Agreements
Privacy Policy
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Forward-looking statements include
statements regarding the goals, beliefs, plans or current expectations of First
Trust Advisors L.P. (the "Advisor") and/or Gallatin Asset Management, Inc.
("Gallatin" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and/or Gallatin and their respective representatives
only as of the date hereof. We undertake no obligation to publicly revise or
update these forward-looking statements to reflect events and circumstances that
arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that the market
values of securities owned by the Fund will decline and that the value of the
Fund shares may therefore be less than what you paid for them. Accordingly, you
can lose money investing in the Fund.
Performance data quoted represents past performance, which is no guarantee
of future results, and current performance may be lower or higher than the
figures shown. For the most recent month-end performance figures, please visit
ftportfolios.com or speak with your financial advisor. Investment returns, net
asset value and common share price will fluctuate and Fund shares, may be worth
more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your
investment. It includes details about the Fund and presents data and analysis
that provide insight into the Fund's performance and investment approach.
By reading the letter from the Fund's President, James A. Bowen, you may
obtain an understanding of how the market environment affected the Fund's
performance.
It is important to keep in mind that the opinions expressed by Mr. Bowen
and personnel of Gallatin are just that: informed opinions. They should not be
considered to be promises or advice. The opinions, like the statistics, cover
the period through the date on the cover of this report. Of course, the risks of
investing in the Fund are spelled out in the prospectus.
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Shareholder Letter
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2007
Dear Shareholders:
We believe investment opportunities abound, both here and abroad, affording the
potential for exceptional returns for investors. At First Trust Advisors L.P.
("First Trust"), we realize that we must be mindful of the complexities of the
global economy and at the same time address the needs of our customers through
the types of investments we bring to market.
We are single-minded about providing a range of investment products, including
our family of closed-end funds, to help First Trust meet the challenge of
maximizing our customers' financial opportunities. Translating investment ideas
into products which can deliver performance over the long term while continuing
to support our current product line remains a focus for First Trust as we head
into the future.
First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") began trading on the New York Stock Exchange on May 25, 2007 under the
ticker symbol "FGB". The report you hold is the first semi-annual report for the
Fund and covers the limited period from May 25, 2007 (commencement of
operations) to May 31, 2007. The market value and net asset value total returns
during this period were 2.45% and -0.21%, respectively. Since the Fund is in its
initial invest-up period, only 3.8% of its net assets were invested as of May
31, 2007. Given the limited time period and the small amount of net assets
invested through the report date, a portfolio commentary by Gallatin Asset
Management, Inc. ("Gallatin"), the Fund's sub-advisor, is not included in this
report. However, on the following page you will find a description of the
sub-advisor and biographies of the portfolio management team.
First Trust is pleased to be a part of your financial portfolio and we will
continue to offer you current information about your investment, as well as new
opportunities in the financial marketplace, through your financial advisor. We
value our relationship with you and appreciate the opportunity to assist you in
achieving your financial goals.
Sincerely,
/S/JAMES A. BOWEN
James A. Bowen
President of First Trust/Gallatin Specialty Finance and Financial
Opportunities Fund
July 13, 2007
Page 1
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SUB-ADVISOR AND PORTFOLIO MANAGEMENT TEAM
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SUB-ADVISOR
Gallatin Asset Management, Inc. ("Gallatin" or the "Sub-Advisor"), a registered
investment advisor, is the Sub-Advisor to First Trust/Gallatin Specialty Finance
and Financial Opportunities Fund (the "Fund"). Gallatin provides asset
management and advisory services to high net worth individuals and institutional
investors. Gallatin, organized in 2005, is a wholly-owned subsidiary of A.G.
Edwards, Inc. The majority of Gallatin's investment personnel previously
comprised A.G. Edwards' Asset Management Department, and its investment
management team has remained intact since that time. Its 13 managers and
analysts count more than 180 years of aggregate investment experience.
Among its investment strategies, Gallatin has approximately $10.3 billion of
assets under management as of May 31, 2007. Of these, approximately $3.1 billion
are managed in equity and investment grade fixed income portfolios. Gallatin
also manages approximately $7.2 billion in portfolios of selected
exchange-traded funds ("ETFs") that are guided by proprietary asset allocation
models. These models are driven by the firm's analysis of cyclical changes
within the economy and financial markets combined with quantitative modeling.
Gallatin's advisory arm also employs investment manager analysts who provide
careful selection and monitoring of mutual funds, unit investment trusts, ETFs
and separate account managers.
Gallatin is responsible for the day-to-day management of the Fund's portfolio
utilizing a team of portfolio managers comprised of the following Gallatin
personnel:
PORTFOLIO MANAGEMENT TEAM
MARK A. KELLER, CFA, SENIOR VICE PRESIDENT, CHIEF INVESTMENT OFFICER
Mark Keller serves as senior vice president and chief investment officer for
Gallatin. Since 1994, Mr. Keller has led the Asset Management program for A.G.
Edwards, Inc. and its affiliates and continues in this capacity now as part of
the wholly-owned subsidiary, Gallatin. Mr. Keller also chairs the A.G. Edwards
Investment Strategy Committee. Prior to 1994, he served for 15 years in A.G.
Edwards' Securities Research Department as an analyst covering a variety of
industries. During his last five years in Securities Research, Mr. Keller served
as equity strategist and manager of the firm's Focus List. He has been a CFA
charterholder since 1984 and has a B.A. from Wheaton College (Illinois).
DAVID B. MIYAZAKI, CFA, VICE PRESIDENT, EQUITY PORTFOLIO MANAGER
David Miyazaki serves as a portfolio manager for Gallatin where he manages
equity portfolios with a value discipline. He is also a member of the A.G.
Edwards Investment Strategy Committee, working to establish and maintain the
firm's asset allocation recommendations. Prior to joining A.G. Edwards in 1999,
Mr. Miyazaki managed a short-term interest rate arbitrage portfolio for Koch
Industries from 1996 to 1999. He worked as an analyst for Prudential Capital's
private placement group from 1993 to 1996 and traded mortgage-backed securities
for a boutique firm in Dallas, Texas, from 1991 to 1993. Mr. Miyazaki has been a
CFA charterholder since 1995. He graduated from Texas Christian University with
a B.A. in business administration.
DANIEL T. WINTER, CFA, VICE PRESIDENT, EQUITY PORTFOLIO MANAGER
Dan Winter serves as a portfolio manager for Gallatin where he manages equity
portfolios with a value discipline. He has served A.G. Edwards, Inc. and its
affiliates in an equity portfolio manager capacity since 1992, first for A.G.
Edwards Trust Co., then with A.G. Edwards Asset Management department and
continues in this capacity now as part of the wholly-owned subsidiary, Gallatin.
During his tenure with A.G. Edwards Trust Co., Mr. Winter specialized in the
management of a variety of portfolios, including charitable remainder trusts,
foundations, endowments, employee benefits, and rabbi and personal trusts; in
1996 he formally joined the Asset Management department. He also directs the
daily trading for the equity portfolios. Mr. Winter has been a CFA charterholder
since 1995. He earned a B.A. in business management with a finance concentration
from Eckerd College (St. Petersburg, Fla.) and an M.B.A. from Saint Louis
University.
Page 2
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO COMPONENTS (A)
MAY 31, 2007 (UNAUDITED)
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Capital Markets 90.7%
Real Estate Investment Trust 8.6%
Oil, Gas & Consumable Fuels 0.7%
(a) Percentages are based on total investments. Please note that the percentages
shown on the Portfolio of Investments are based on net assets.
See Notes to Financial Statements. Page 3
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2007 (UNAUDITED)
MARKET
SHARES DESCRIPTION VALUE
-------- --------------------------------------- ------------
COMMON STOCKS - 3.8%
CAPITAL MARKETS - 3.5%
48,700 Allied Capital Corp. ................ $ 1,543,790
100,000 Apollo Investment Corp. ............. 2,353,000
100,000 Ares Capital Corp. .................. 1,853,000
6,328 Kohlberg Capital Corp. .............. 118,080
25,000 PennantPark Investment Corp. (a) .... 374,500
10,000 Prospect Energy Corp. ............... 177,400
100,000 Technology Investment Capital Corp. . 1,722,000
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8,141,770
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OIL, GAS & CONSUMABLE FUELS - 0.0%
3,406 NGP Capital Resources Co. ........... 58,924
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REAL ESTATE INVESTMENT TRUST (REIT) - 0.3%
50,000 Annaly Capital Management, Inc. ..... 772,000
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TOTAL INVESTMENTS - 3.8% ............ 8,972,694
(Cost $8,985,121) (b)
NET OTHER ASSETS AND LIABILITIES - 96.2% 225,527,959
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NET ASSETS - 100.0% ................. $ 234,500,653
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(a) Non-income producing security.
(b) Aggregate cost for federal tax and financial reporting purposes.
Page 4 See Notes to Financial Statements.
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2007 (UNAUDITED)
ASSETS:
Investments, at value
Cost ($8,985,121) ............................................................. $ 8,972,694
Cash ................................................................................... 235,030,008
Receivables:
Dividends ...................................................................... 41
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Total Assets .............................................................. 244,002,743
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LIABILITIES:
Payables:
Investment securities purchased .................................................... 8,985,121
Offering cost ...................................................................... 492,210
Investment advisory fees ........................................................... 19,276
Administrative fees ................................................................ 1,871
Printing fees ...................................................................... 991
Audit and legal fees ............................................................... 970
Custodian fees ..................................................................... 424
Trustees' fees and expenses ........................................................ 321
Transfer agent fees ................................................................ 311
Accrued expenses and other liabilities ................................................. 595
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Total Liabilities ......................................................... 9,502,090
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NET ASSETS ............................................................................. $ 234,500,653
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NET ASSETS CONSIST OF:
Accumulated net investment loss ........................................................ $ (24,718)
Net unrealized appreciation (depreciation) on investments .............................. (12,427)
Par value .............................................................................. 123,052
Paid-in capital ........................................................................ 234,414,746
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Net Assets ..................................................................... $ 234,500,653
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NET ASSET VALUE, applicable to Common Share (par value $0.01 per Common Share) ......... $ 19.06
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Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) 12,305,236
=================
See Notes to Financial Statements. Page 5
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MAY 31, 2007(A)(UNAUDITED)
INVESTMENT INCOME:
Dividends .................................................................. $ 41
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Total investment income ................................................. 41
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EXPENSES:
Investment advisory fees ................................................... 19,276
Administration fees ........................................................ 1,871
Printing fees .............................................................. 991
Audit and legal fees ....................................................... 970
Custodian fees ............................................................. 424
Trustees' fees and expenses ................................................ 321
Transfer agent fees ........................................................ 311
Other ...................................................................... 595
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Total expenses .......................................................... 24,759
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NET INVESTMENT LOSS ........................................................ (24,718)
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NET UNREALIZED GAIN (LOSS):
Net change in unrealized appreciation (depreciation) on investments ........ (12,427)
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NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............ $ (37,145)
===========
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(a) Initial seed date of April 23, 2007. The Fund commenced operations on May 25, 2007.
Page 6 See Notes to Financial Statements.
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
PERIOD
ENDED
5/31/2007(A)
(UNAUDITED)
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OPERATIONS:
Net investment loss ................................................... $ (24,718)
Net change in unrealized appreciation (depreciation) on investments ... (12,427)
---------------
Net increase (decrease) in net assets resulting from operations ....... (37,145)
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CAPITAL TRANSACTIONS:
Net proceeds from sale of 12,305,236 Common Shares .................... 235,030,008
Offering costs ........................................................ (492,210)
---------------
Net increase from capital transactions ................................ 234,537,798
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Net increase in net assets ............................................ 234,500,653
NET ASSETS:
Beginning of period ................................................... --
---------------
End of period ......................................................... $ 234,500,653
===============
Accumulated net investment loss at end of period ...................... $ (24,718)
===============
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(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.
See Notes to Financial Statements. Page 7
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD
ENDED
5/31/07(A)
(UNAUDITED)
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Net asset value, beginning of period .......................... $ 19.10(b)
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INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......................................... --(c)
Net realized and unrealized gain (loss) on investments ........ --(c)
---------
Total from investment operations .............................. --(c)
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DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ......................................... --
Total from distributions ...................................... --
---------
Common Shares offering costs charged to paid-in capital ....... (0.04)
---------
Net asset value, end of period ................................ $ 19.06
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Market value, end of period ................................... $ 20.49
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TOTAL RETURN BASED ON NET ASSET VALUE (d)(e) .................. (0.21)%
=========
TOTAL RETURN BASED ON MARKET VALUE (e)(f) ..................... 2.45%
=========
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RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .......................... $ 234,501
Ratio of total expenses to average net assets ................. 1.28%(g)
Ratio of net investment income to average net assets .......... (1.28)%(g)
Portfolio turnover rate ....................................... 0%
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(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.
(b) Net of sales load of $0.90 per share on initial shares issued.
(c) Amount represents less than $0.01 per Common Share.
(d) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gainsdistributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share anddoes not reflect sales load.
(e) Total return is not annualized for periods less than one year.
(f) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gainsdistributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share market price per share.
(g) Annualized.
Page 8 See Notes to Financial Statements.
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NOTES TO FINANCIAL STATEMENTS
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
1. FUND DESCRIPTION
First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") is a non-diversified, closed-end management investment company organized
as a Massachusetts business trust on March 20, 2007, and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FGB
on the New York Stock Exchange ("NYSE").
The Fund's investment primary objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund seeks to achieve its investment objectives by
investing at least 80% of its Managed Assets in a portfolio of securities of
specialty finance and other financial companies that Gallatin Asset Management,
Inc. ("Gallatin" or the "Sub-Advisor") believes offer attractive opportunities
for income and capital appreciation. There can be no assurance that the Fund's
investment objectives will be achieved. Under normal market conditions, the Fund
will concentrate its investments in securities of companies within industries in
the financial sector. Managed Assets are defined as the value of the securities
and other investments the Fund holds plus cash and other assets, including
interest accrued but not yet received, minus accrued liabilities other than the
principal amount of borrowings.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The Fund determines the net asset value ("NAV") of its Common Shares daily, as
of the close of regular session trading on the NYSE, normally 4:00 p.m. Eastern
time, on each day the NYSE is open for trading. Domestic debt securities and
foreign securities are priced using data reflecting the earlier closing of the
principal markets for those securities. The NAV per Common Share is computed by
subtracting the Fund's liabilities (including accrued expenses, dividends
payable and any borrowings of the Fund) and the liquidation value of any
outstanding Preferred Shares, if any, from the Fund's total assets (the value of
securities and other investments the Fund holds plus cash or other assets,
including interest accrued but not yet received) and dividing the result by the
total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, or if events occurring after the close of the principal markets for
particular securities (e.g., domestic debt and foreign securities), but before
the Fund values its assets, would materially affect NAV, First Trust Advisors
L.P. ("First Trust") may use a fair value method to value the Fund's securities
and investments. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees and in accordance
with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days are valued at amortized cost.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At May 31, 2007, the Fund had no
when-issued or delayed-delivery purchase commitments.
Page 9
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income, if any, of the Fund are declared and paid
quarterly or as the Board of Trustees may determine from time to time.
Distributions of any net capital gains earned by the Fund are distributed at
least annually. Distributions will automatically be reinvested into additional
Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
D. INCOME TAXES:
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, and by distributing substantially all of its net investment income and
net realized gains to shareholders. Accordingly, no provision has been made for
federal or state income taxes.
E. EXPENSES:
The Fund pays all expenses directly related to its operations.
F. ORGANIZATION AND OFFERING COSTS:
Organization costs consist of costs incurred to establish the Fund and enable it
to legally do business. These costs include filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's Common Shares offered for sale, registration fees, underwriting
fees, and printing of the initial prospectus, among other fees. First Trust and
Gallatin have paid all organization expenses and all offering costs of the Fund
(other than sales load) that exceeded $0.04 per Common Share. The Fund's share
of Common Share offering costs, $492,210, was recorded as a reduction of the
proceeds from the sale of Common Shares.
G. ACCOUNTING PRONOUNCEMENTS:
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes."
This pronouncement provides guidance on the recognition, measurement,
classification, and disclosures related to uncertain tax positions, along with
any related interest and penalties. FIN 48 is effective for fiscal years
beginning after December 15, 2006. At this time, management is evaluating the
implications of FIN 48 and its impact on the financial statements has not yet
been determined.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157 ("SFAS 157"), Fair Value Measurements was issued by the FASB and is
effective for fiscal years beginning after November 15, 2007. SFAS 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Management is currently evaluating
the impact the adoption of SFAS 157 will have on the Fund's financial statement
disclosures.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets.
Gallatin serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee at an annual rate of 0.50% of Managed Assets that is paid monthly
by First Trust from its investment advisory fee.
On May 31, 2007, Wachovia Corp. announced that it had reached an agreement in
principle with A.G. Edwards, Inc. under which Wachovia Corp. will acquire A.G.
Edwards, Inc. (the "Acquisition"). A.G. Edwards & Sons, Inc., the Fund's lead
managing underwriter of the initial public offering of the Fund's Common Shares,
and Gallatin are wholly-owned subsidiaries of A.G. Edwards, Inc. Subject to
certain regulatory approvals and the approval by the shareholders of A.G.
Edwards, Inc., the Acquisition is expected to be completed in the fourth quarter
of 2007. Depending on the structure and terms of the Acquisition, the
Acquisition, if completed, may result in a change of control of Gallatin which
would constitute an assignment, as that term is defined in the1940 Act, of the
sub-advisory agreement among
Page 10
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
the Fund, Gallatin and First Trust, thus having the effect of automatically
terminating the sub-advisory agreement. In the event of the automatic
termination of the sub-advisory agreement, it is expected that a new
sub-advisory agreement among the Fund, Gallatin and First Trust, pursuant to
which Gallatin would continue to serve as the Fund's Sub-Advisor following
completion of the Acquisition, would be presented to the Fund's Board of
Trustees and the Fund's shareholders for their approval.
PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of The PNC Financial
Services Group, Inc., serves as the Fund's Administrator and Transfer Agent in
accordance with certain fee arrangements. PFPC Trust Company, also an indirect,
majority-owned subsidiary of The PNC Financial Services Group, Inc., serves as
the Fund's Custodian in accordance with certain fee arrangements.
The Fund pays each Trustee who is not an officer or employee of First Trust, any
sub-advisor or any of their affiliates ("Independent Trustees") an annual
retainer of $10,000 per investment company for the first 14 investment companies
of the First Trust Fund Complex and an annual retainer of $7,500 per investment
company of each subsequent investment company added to the First Trust Fund
Complex. The annual retainer is allocated equally among each of the investment
companies. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, Thomas R. Kadlec is paid $10,000 annually to serve as the Lead
Trustee and Niel B. Nielson is paid $5,000 annually to serve as the chairman of
the Audit Committee, with such compensation paid by the funds in the First Trust
Fund Complex and divided among those funds. Independent Trustees are also
reimbursed by the investment companies in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
U.S. government and short-term investments, for the period ended May 31, 2007,
were $8,985,122 and $0, respectively.
As of May 31, 2007, the aggregate gross unrealized appreciation for all
securities in which there as an excess of value over tax cost was $10,381 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $22,808.
5. COMMON SHARES
As of May 31, 2007, 12,305,236 of $0.01 par value Common Shares were issued. An
unlimited number of Common Shares has been authorized under the Fund's Dividend
Reinvestment Plan.
COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:
PERIOD ENDED MAY 31, 2007
SHARES AMOUNT
Proceeds from Common Shares Sold ........ 12,305,236 $ 235,030,008
Offering Costs .......................... -- (492,210)
---------- -------------
12,305,236 $ 234,537,798
========== =============
6. CONCENTRATION OF RISK
An investment in the Fund's Common Shares is subject to investment risk,
including the possible loss of the entire principal invested. An investment in
Common Shares represents an indirect investment in the securities owned by the
Fund. The value of these securities, like other market investments, may move up
or down, sometimes rapidly and unpredictably. Common Shares at any point in time
may be worth less than the original investment, even after taking into account
the reinvestment of Fund dividends and distributions. Security prices can
fluctuate for several reasons including the general condition of the equity
market, or when political or economic events affecting the issuers occur.
FINANCIAL SECTOR CONCENTRATION RISK: Under normal market conditions, the Fund
will invest at least 25% of its total assets in securities of companies within
industries in the financial sector. A fund concentrated in a single industry or
group of industries is likely to present more risks than a fund that is broadly
diversified over several industries or groups of industries. Compared to the
broad market, an individual sector may be more strongly affected by changes in
the economic climate, broad market shifts, moves in a particular dominant stock,
or regulatory changes. Specialty finance and other financial companies in
general are subject to extensive government regulation, which may change
frequently. The profitability of specialty finance and other financial companies
is largely dependent upon the availability and cost of capital funds, and may
fluctuate significantly in response to changes in interest rates, as well as
changes in general economic conditions. From time to time, severe competition
may also affect the profitability of specialty finance and other financial
companies. Financial companies can be highly dependent upon access to capital
markets and any impediments to such access, such as
Page 11
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
general economic conditions or a negative perception in the capital markets of a
company's financial condition or prospects could adversely affect its business.
Leasing companies can be negatively impacted by changes in tax laws which affect
the types of transactions in which such companies engage.
Page 12
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PFPC
Inc. (the "Plan Agent"), in additional Common Shares under the Plan. If you
elect to receive cash distributions, you will receive all distributions in cash
paid by check mailed directly to you by PFPC Inc., as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of
valuation, the Fund will issue new shares at a price equal to the
greater of (i) NAV per Common Share on that date or (ii) 95% of
the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation,
the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the New
York Stock Exchange or elsewhere, for the participants' accounts.
It is possible that the market price for the Common Shares may
increase before the Plan Agent has completed its purchases.
Therefore, the average purchase price per share paid by the Plan
Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund.
The Plan Agent will use all dividends and distributions received
in cash to purchase Common Shares in the open market within 30
days of the valuation date except where temporary curtailment or
suspension of purchases is necessary to comply with federal
securities laws. Interest will not be paid on any uninvested cash
payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean
that you do not have to pay income taxes due upon receiving dividends and
distributions. Capital gains and income are realized, although cash is not
received by you. Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PFPC Inc., 301 Bellevue
Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 13
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q will available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 27, 2007, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR and N-Q will contain certifications by the Fund's principal
executive officer and principal financial officer that relate to the Fund's
public disclosure in such reports and are required by Rule 30a-2 under the 1940
Act.
BY-LAW AMENDMENTS
On June 11, 2007, the Board of Trustees of the Fund approved certain changes to
the By-Laws of the Fund relating to the staggered Board of Trusteess. These
changes were not required to be, and were not, approved by the Fund's
Shareholders. To receive a copy of the amended By-Laws, investors may call the
Fund at (800) 988-5891.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust/Gallatin Specialty Finance and Financial
Opportunities Fund (the "Fund"), including the Independent Trustees, unanimously
approved the Investment Management Agreement (the "Advisory Agreement") between
the Fund and First Trust Advisors L.P. (the "Advisor") and the Investment
Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together with the
Advisory Agreement, the "Agreements") among the Fund, the Advisor and Gallatin
Asset Management, Inc. (the "Sub-Advisor"), at a meeting held on April 16, 2007.
The Board determined that the terms of the Agreements are fair and reasonable
and that the Agreements are in the best interests of the Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services to be provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the proposed advisory and sub-advisory fees for the Fund as
compared to fees charged by investment advisors and sub-advisors to comparable
funds and as compared to fees charged to other clients of the Advisor and the
Sub-Advisor; estimated expenses of the Fund as compared to expense ratios of
comparable funds; the nature of expenses to be incurred in providing services to
the Fund and the potential for economies of scale, if any; financial data on the
Advisor and the Sub-Advisor; any fall-out benefits to the Advisor and the
Sub-Advisor; and information on the Advisor's and the Sub-Advisor's compliance
programs. The Independent Trustees also met separately with their independent
legal counsel to discuss the information provided by the Advisor and the
Sub-Advisor. The Board applied its business judgment to determine whether the
arrangements between the Fund and the Advisor and among the Fund, the Advisor
and the Sub-Advisor are reasonable business arrangements from the Fund's
perspective as well as from the perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services to be provided by the Advisor and the Sub-Advisor under the
Agreements. With respect to the Advisory Agreement, the Board considered that
the Advisor will be responsible for the overall management and administration of
the Fund, including the oversight of the Sub-Advisor. The Board noted the
compliance program that had been developed by the Advisor and considered that
the compliance program includes policies and procedures for monitoring the
Sub-Advisor's compliance with the 1940 Act and with the Fund's investment
objectives and policies. The Board also noted the efforts expended by the
Advisor in organizing the Fund and making arrangements for entities to provide
services to the Fund. With respect to the Sub-Advisory Agreement, the Board
noted the background and experience of the Sub-Advisor's portfolio managers and
the Sub-Advisor's investment style. At the meeting, the Trustees received a
presentation from representatives of the Sub-Advisor and its affiliate, A.G.
Edwards & Sons, Inc., the proposed lead managing underwriter, and were able to
ask questions about the Sub-Advisor's
Page 14
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
proposed investment strategies for the Fund. 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 Fund by the Advisor and the
Sub-Advisor under the Agreements are expected to be satisfactory.
The Board considered the advisory and sub-advisory fees to be paid under the
Agreements. The Board reviewed information compiled by the Advisor showing the
proposed management fee and estimated expense ratio of the Fund as compared to
the management fees and expense ratios of other similar funds. The Board
discussed with representatives of the Advisor the limitations in creating a
relevant peer group for the Fund and the reasoning behind selecting the peer
funds provided in the materials. The Board also considered the proposed
sub-advisory fee rate and how it would relate to the overall management fee
structure of the Fund, noting that the fees to be paid to the Sub-Advisor would
be paid by the Advisor from its advisory fee. The Board also considered the
advisory fees paid to the Advisor by similar funds, and noted that the Advisor
does not provide advisory services to clients with investment objectives and
policies similar to the Fund's, other than to two other closed-end funds (for
which the overall management fees are the same). The Board also considered
information provided by the Sub-Advisor as to the fees it charges to other
clients for a similar investment strategy, noting that such fees were higher
than the proposed sub-advisory fee. Since the Fund is newly organized, the Board
did not consider investment performance of the Fund. On the basis of all the
information provided on the fees and expenses of the Fund, the Board concluded
that the advisory and sub-advisory fees were reasonable and appropriate in light
of the nature, quality and extent of services expected to be provided by the
Advisor and the Sub-Advisor under the Agreements.
The Board noted that the Advisor continues to invest in personnel and
infrastructure but did not identify any economies of scale to be realized by the
Fund and indicated that, because the Fund is a closed-end fund that is not
issuing more shares after the initial issuance of shares other than pursuant to
its dividend reinvestment plan, the Advisor believed that any discussion of
economies of scale was not meaningful. The Board concluded that the management
fee reflects an appropriate level of sharing of any economies of scale. The
Board took the costs to be borne by the Advisor in connection with its services
to be performed under the Advisory Agreement into consideration and noted that
the Advisor was unable to estimate the profitability of the Advisory Agreement
to the Advisor. The Board considered that the Sub-Advisor was unable to estimate
the profitability of the Sub-Advisory Agreement to the Sub-Advisor, but the
Board noted that the sub-advisory fee rate was negotiated at arm's length
between the Advisor and the Sub-Advisor, and that the Sub-Advisor would be paid
by the Advisor. The Board considered that the Advisor had identified as a
fall-out benefit to the Advisor its exposure to investors and brokers who, in
the absence of the Fund, may have had no dealings with the Advisor. The Board
also considered the fall-out benefits expected to be realized by the Sub-Advisor
and its affiliate, A.G. Edwards & Sons, Inc., from its relationship with the
Fund. The Board noted that the Sub-Advisor would not utilize soft dollars in
connection with its management of the Fund's portfolio.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements are expected to be fair and reasonable and that the approval of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"FUND") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
o Information we receive from you or your broker-dealer, investment advisor
or financial representative through interviews, applications, agreements or
other forms;
o Information about your transactions with us, our affiliates or others;
o Information we receive from your inquiries by mail, e-mail or telephone;
and
o Information we collect on our website through the use of "cookies." For
example, we may identify the pages on our website that your browser
requests or visits.
Page 15
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ADDITIONAL INFORMATION - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
MAY 31, 2007 (UNAUDITED)
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your personal
information as described above to unaffiliated financial service providers
and other companies that perform administrative or other services on our
behalf, such as transfer agents, custodians and trustees, or that assist us
in the distribution of investor materials such as trustees, banks,
financial representatives and printers.
o We may release information we have about you if you direct us to do so, if
we are compelled by law to do so, or in other legally limited circumstances
(for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund. Please note,
however, that the California Financial Information Privacy Act contains an "opt
out" mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 16
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not Applicable.
(b) IDENTIFICATION OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
All investment decisions for the registrant, as well as other
investment strategies of Gallatin Asset Management, Inc. ("Gallatin"),
are made utilizing a team approach by which no one member can make
decisions unilaterally. All portfolios are developed based on research
conducted internally by Gallatin's research committee which is
comprised of ten members, including portfolio managers which all serve
as security analysts also. Each member of the research committee has
general sector/industry areas of concentration and is responsible for
making security recommendations to the research committee. The research
team generally meets a couple times each week to discuss new security
recommendations, new security ideas in progress, as well as securities
already held in any of the portfolio models.
Once a new security has been approved by the research committee, the
Management Team for the registrant, comprised of the following three
portfolio managers, is responsible for reviewing the appropriateness
and fit of every new security that has been approved for investment by
the research committee.
Mark A. Keller - Mark serves as senior vice president and chief
investment officer for Gallatin and chairman of the registrant's
Management Team. Since 1994 Mark has led A.G. Edwards' separately
managed accounts program and continues in this capacity now as part of
the wholly owned subsidiary, Gallatin Asset Management, Inc. Mark also
chairs A.G. Edwards' Investment Strategy Committee. Prior to 1994, he
served for 15 years in A.G. Edwards' Securities Research Department as
an analyst covering a variety of industries. During his last five years
in Securities Research, Mark served as equity strategist and manager of
the firm's Focus List. As chairman of the Management Team, Mark has
overall responsibility for oversight of the investment process which
includes security research, portfolio development and implementation.
David B Miyazaki - David serves as an equity portfolio manager and a
member of A.G. Edwards' Investment Strategy Committee. One of David's
security research focuses since joining A.G. Edwards in 1999, has been
in the area of BDC's and REITS. Prior to joining A.G. Edwards in 1999,
David worked with high net worth investment portfolios and administered
corporate retirement assets for Koch Industries in Wichita, Kansas His
previous experience includes investment analysis for an institutional
buyer of private placement debt, mezzanine lending and mortgage-backed
securities trading for a regional firm in Dallas, Texas.
Daniel T. Winter - Dan serves as an equity portfolio manager and
directs the daily trading for Gallatin's equity portfolios. He has
served in the capacity of portfolio manager since 1992, first for A.G.
Edwards Trust Co., then with the firm's separately managed accounts
department. Since joining the firm's separately managed accounts
department, one of Dan's research focuses has been in the financial
sector including lending institutions and insurance.
Length of
NAME TITLE SERVICE BUSINESS EXPERIENCE PAST 5 YEARS
---- ----- ------- --------------------------------
1.Mark A. Keller SVP, Chief Inv Officer 27 years CIO AGE Asset Mgmt (1994 - 2005)
CIO Gallatin Asset Mgmt (2005 -present).
2.David B. Miyazaki VP, Portfolio Manager 8 years Portfolio Mgr, AGE Asset Mgmt (1999-2005)
Portfolio Mgr, Gallatin Asset Mgmt (2005 -
present)
3.Daniel T. Winter VP, Portfolio Manager 14 years Portfolio Mgr, AGE Asset Mgmt (1996-2005)
Portfolio Mgr, Gallatin Asset Mgmt
(2005-present)
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND
POTENTIAL CONFLICTS OF INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
Total # of Accounts Total Assets
Managed for which for which
# of Advisory Fee is Advisory Fee
Name of Portfolio Manager OR ACCOUNTS Based on is Based on
TEAM MEMBER TYPE OF ACCOUNTS* MANAGED Total ASSETS PERFORMANCE PERFORMANCE
----------- ----------------- ------- ------- ----------- -----------
1. MARK A. KELLER Registered Investment Companies: 2 $493.2 0 n/a
---------------
million
Other Pooled Investment Vehicles: 12 $75.8 0 n/a
million
Other Accounts: 49,457 $8.9 0 n/a
billion
2. DAVID B. MIYAZAKI Registered Investment Companies: 2 $493.2 0 n/a
-----------------
million
Other Pooled Investment Vehicles: 11 $29.2 0 n/a
million
Other Accounts: 47,553 $7.6 0 n/a
billion
3. DANIEL T. WINTER Registered Investment Companies: 2 $493.2 0 n/a
------------------
million
Other Pooled Investment Vehicles: 11 $29.2 0 n/a
million
Other Accounts: 47,553 $7.6 0 n/a
billion
Information provided as of May 31, 2007.
POTENTIAL CONFLICTS OF INTERESTS
Gallatin recognizes its fiduciary responsibility as an adviser which requires a
duty of loyalty to all of its clients, including the registrant. Such duty
requires that the adviser act in the best interest of all its clients and always
place the clients' interests first and foremost. Acknowledging this, Gallatin
has adopted policies and procedures to mitigate conflicts of interests that
could arise because members of the registrant's Management team also manage
other equity portfolios where similar investments to those of the registrant,
are appropriate. These conflicts could include such things as: the allocation of
investment opportunities amongst clients, employee trading, implementation and
proxy voting.
ALLOCATION OF INVESTMENT OPPORTUNITIES: At times it is possible that security
ideas developed and approved by the research committee are potentially
appropriate for more than one of Gallatin's equity strategies. In these
instances, it is the portfolio management team's responsibility to review all of
the possible strategies to determine if it is appropriate to add the new
security to a strategy. The portfolio management team looks at many factors
starting with a review of the current holdings in each of the possible
strategies to first determine if there is room (or available cash) for another
security in the strategy. They also compare the new security to similar
securities already held in the model to determine if the new security is more or
less attractive than what is already held, as well as sector weightings within
the strategy. At times the portfolio management team may decide that a new
security would be an equally attractive addition to more than one of its
strategies, in which case it is added to both. It is also possible, that
continuously changing factors (such as a sale of a similar security) in an
equity strategy will cause the portfolio management team to add a security to a
second or additional strategy at a later date.
EMPLOYEE TRADING - When advisory employees invest for their own accounts,
conflicts of interest could arise between the registrant's and the employee's
interests. Potential conflicts would include taking an investment opportunity
from the registrant for an employee's own portfolio, using an employee's
advisory position to take advantage of available investments, or front running
(which may be an employee trading before making registrant transactions, thereby
taking advantage of information or using registrant portfolio assets to have an
effect on the market which is used to the employee's benefit). This potential
conflict exists because employees within the Gallatin are responsible not only
for the research and selection of securities for the registrant but also for the
trading and implementation for the registrant. To that extent, Gallatin has
adopted stringent policies and procedures for trading by its personnel which
includes a trade pre-approval process that must occur BEFORE trades in
non-exempt securities may be placed, a black-out period for purchases, as well
as "last-in, last-out" provisions for sales of securities held in client
portfolios.
The supervision of trading in employee or related accounts is the responsibility
of the Chief Investment Officer and is affected through daily reviews of trades
in employee and family accounts, as well as initial holdings reviews for new
employees, and quarterly holding and transaction reviews. Reports utilized by
the CIO for purposes of supervision are dated and initialed, then filed in a
secure file to meet evidence and recordkeeping requirements.
PROXY VOTING - Gallatin retains the services of an unaffiliated third-party
proxy-voting agent to monitor corporate actions, analyze proxy voting issues and
provide voting recommendations and execute proxy votes based on its
predetermined voting policy. This predetermined voting policy is predicated on
general proxy-voting guidelines, which have been adopted by Gallatin. These
guidelines are reviewed periodically by the Gallatin Proxy Committee and are
subject to change.
Because proxy issues and the circumstances of individual companies are so
varied, there may be rare situations when Gallatin may determine it appropriate
to deviate from these guidelines. As in all other cases, Gallatin has a
fiduciary duty to vote these proxies in what it believes to be the best interest
of the clients. However, Gallatin may occasionally be subject to conflicts of
interest in voting proxies due to business or personal relationships with
persons or entities having an interest in the outcome of certain votes. For
example, A.G. Edwards, Inc. may provide custody, investment management,
brokerage, investment banking and related services to accounts owned or
controlled by companies whose management is soliciting proxies. Additionally,
Gallatin may have business or personal relationships with other proponents of
proxy proposals, corporate directors or candidates for directorship.
In instances where Gallatin determines it appropriate to deviate from the
pre-determined voting policy, it has adopted due diligence policies and
procedures to take reasonable steps to identify possible conflicts of interest
that could bias its voting decision. With respect to identifying possible
conflicts of interest resulting from BUSINESS RELATIONSHIPS, Gallatin's policies
and procedures include steps to determine whether any of the companies
(including their executive officers) involved in the proxy votes have accounts
or relationships with Edwards or their immediate family members, before a vote
may be changed.
IMPLEMENTATION: Gallatin has adopted policies and procedures by which trades are
aggregated and blocked across all portfolios whenever possible and clients
receive an average price if the block is executed at multiple prices. Partially
executed trades are allocated using a computer generated, total random process.
In those cases where it is not possible to aggregate all orders of the same
security, Gallatin has adopted trade rotation procedures for all of its
discretionary clients that it feels are fair and equitable to all clients, with
no client being favored or disfavored over any other group.
Supervision of Gallatin's allocation process is the responsibility of the
Gallatin Best Execution Committee, which is chaired by the Chief Investment
Officer and is comprised of equity and fixed income portfolio managers, as well
as implementation staff. The committee meets on a quarterly basis to review Best
Execution practices and is evidenced by meeting minutes.
COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
Gallatin seeks to maintain a highly competitive compensation program designed to
attract and retain qualified investment professionals, which includes portfolio
managers and research analysts, and to align the interests of its investment
professionals with that of its clients and overall firm results. The principal
components of compensation for portfolio managers include a base salary, annual
bonus, restricted stock, annual discretionary merit cash and stock bonus, and
various retirement benefits including contributions to an attractive 401(k) plan
and excess profit sharing plan.
Compensation is based on a number of subjective factors, including overall
contribution of the employee to the firm and the department, and is not tied to
the performance of the registrant.
DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of May 31, 2007.
Dollar Range of Fund Shares
Name Beneficially Owned
Mark A. Keller $0.00
David B. Miyazaki $0.00
Daniel T. Winter $0.00
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Item 10. Submission of Matters to a Vote of Security Holders.
At the Registrant's organizational meeting on April 16, 2007, the
registrant's Board of Trustees adopted a Nominating and Governance Committee
Charter which includes procedures by which shareholders may recommend nominees
to the Registrant's board of trustees as described below:
Any proposal to elect any person nominated by shareholders for election
as trustee may only be brought before an annual meeting of the Registrant if
timely written notice (the "Shareholder Notice") is provided to the secretary of
the Registrant. Unless a greater or lesser period is required under applicable
law, to be timely, the Shareholder Notice must be delivered to or mailed and
received at Registrant's address, 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, Attn: W. Scott Jardine, not less than forty-five (45) days nor
more than sixty (60) days prior to the first anniversary date of the date of the
Registrant's proxy statement released to shareholders for the prior year's
annual meeting; provided, 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 in the manner provided herein 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.
Any shareholder submitting a nomination of any person or persons (as
the case may be) for election as a trustee or trustees of the Registrant shall
deliver, as part of such Shareholder Notice: (i) a statement in writing setting
forth (A) the name, age, date of birth, business address, residence address and
nationality of the person or persons to be nominated; (B) the class or series
and number of all shares of the Registrant owned of record or beneficially by
each such person or persons, as reported to such shareholder by such nominee(s);
(C) any other information regarding each such person required by paragraphs (a),
(d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of
Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (or any successor provision thereto); (D) any other
information regarding the person or persons to be nominated that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitation of proxies for election of trustees or
directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder; and (E) whether such shareholder believes
any nominee is or will be an "interested person" of the Registrant (as defined
in the Investment Company Act of 1940) and, if not an "interested person,"
information regarding each nominee that will be sufficient for the Registrant to
make such determination; and (ii) the written and signed consent of any person
to be nominated to be named as a nominee and to serve as a trustee if elected.
In addition, the trustees may require any proposed nominee to furnish such other
information as they may reasonably require or deem necessary to determine the
eligibility of such proposed nominee to serve as a trustee.
Without limiting the foregoing, any shareholder who gives a Shareholder
Notice of any matter proposed to be brought before a shareholder meeting
(whether or not involving nominees for trustees) shall deliver, as part of such
Shareholder Notice: (i) the description of and text of the proposal to be
presented; (ii) a brief written statement of the reasons why such shareholder
favors the proposal; (iii) such shareholder's name and address as they appear on
the Registrant's books; (iv) any other information relating to the shareholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with the solicitation of proxies with respect
to the matter(s) proposed pursuant to Section 14 of the Exchange Act; (v) the
class or series and number of all shares of the Registrant owned beneficially
and of record by such shareholder; (vi) any material interest of such
shareholder in the matter proposed (other than as a shareholder); (vii) a
representation that the shareholder intends to appear in person or by proxy at
the shareholder meeting to act on the matter(s) proposed; (viii) if the proposal
involves nominee(s) for trustees, a description of all arrangements or
understandings between the shareholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by the shareholder; and (ix) in the case of a shareholder (a
"Beneficial Owner") that holds shares entitled to vote at the meeting through a
nominee or "street name" holder of record, evidence establishing such Beneficial
Owner's indirect ownership of, and entitlement to vote, shares at the meeting of
shareholders. As used herein, shares "beneficially owned" shall mean all shares
which such person is deemed to beneficially own pursuant to Rules 13d-3 and
13d-5 under the Exchange Act.
A copy of the Nominating and Governance Committee Charter is available
on the Registrant's website at www.ftportfolios.com.
Registrant's website at www.ftportfolios.com.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES
FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date AUGUST 6, 2007
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date AUGUST 6, 2007
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By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)
Date AUGUST 6, 2007
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* Print the name and title of each signing officer under his or her signature.