Chapman and Cutler llp
111 West Monroe Street
Chicago, Illinois 60603
May 8, 2018
VIA EDGAR CORRESPONDENCE
David Orlic
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: First Trust Exchange-Traded Fund VI (the“Trust”)
File Nos. 811-22717 and 333-182308
Dear Mr. Orlic:
This letter responds to your comments, provided by telephone, regarding Post-Effective Amendment No. 93 under the Investment Company Act of 1940 (the“1940 Act”) and Amendment No. 95 under the Securities Act of 1933 (the“1933 Act”) to the registration statement of First Trust Exchange-Traded Fund VI (the“Trust”) filed on Form N-1A with the U.S. Securities and Exchange Commission (the“Commission”) on February 23, 2018 (the“Registration Statement”) and your comments to the Registration Statement filed with the Commission on April 23, 2018. The Registration Statement relates to the First Trust Dorsey Wright DALI 1 ETF (the“Fund”), a series of the Trust. Capitalized terms used herein, but not otherwise defined, have the meanings ascribed to them in the Registration Statement. The Fund’s revised prospectus and statement of additional information, incorporating the Commission’s comments, are set forth on Exhibit A.
Comment 1 – Fee Table
Please provide a completed fee table as soon as possible.
Response to Comment 1
Pursuant to the Commission’s request, the completed fee table is set forth in the prospectus on
Exhibit A.
Comment 2 – Principal Risks
Given the frequency with which the Fund’s portfolio may turn over, please add additional disclosure regarding any tax risks and trading implications that are attributable to the potentially higher levels of portfolio turnover.
Response to Comment 2
Pursuant to the Commission’s request, “Portfolio Turnover Risk” has been revised to include the following additional disclosure:
It may result in more short-term capital gains taxable to shareholders. These gains are taxable at higher rates than long-term capital gains.
Comment 3 – Principal Investment Strategies
Please revise the disclosure to clarify that both the Fund and the Index will rebalance and reconstitute when the Index changes its allocation from one asset class to another.
Response to Comment 3
Pursuant to the Commission’s request, the second sentence of the fourth paragraph has been revised as follows:
The Index, and thus the Fund, will reconstitute and rebalance to reflect the asset class exhibiting the highest levels of relative strength.
Comment 4 – Principal Risks
To the extent that the Fund has concentrated exposure to the companies comprising one or more investment sectors, please revise the disclosure accordingly.
Response to Comment 4
Pursuant to the Commission’s request, the following disclosure has been added to “Principal Risks”:
INFORMATION TECHNOLOGY COMPANIES RISK. Information technology companies are generally subject to the risks of rapidly changing technologies, short product life cycles, fierce competition, aggressive pricing and reduced profit margins, loss of patent, copyright and trademark protections, cyclical market patterns, evolving industry standards, and frequent new product introductions. Information technology companies may be smaller and less experienced companies, with limited product lines, markets or financial resources and fewer experienced management or marketing personnel.
Comment 5 – Additional Information on the Fund’s Investment Objectives and Strategies
The Commission believes that the language reproduced below is too broad in its scope. Please either revise the disclosure to explain in detail the circumstances contemplated by this language or remove the disclosure in its entirety.
However, under various circumstances, it may not be possible or practicable to purchase all of those securities in those weightings. In those circumstances, the Fund may purchase a sample of securities in the Index. There may also be instances in which First Trust may choose to overweight certain securities in the Index, purchase securities not in the Index which First Trust believes are appropriate to substitute for certain securities in the Index, use futures or derivative instruments, or utilize various combinations of the above techniques in seeking to track the Index.
Response to Comment 5
Pursuant to the Commission’s request, the referenced language has been removed.
Comment 6 – Statement of Additional Information
The Commission believes that the only collateral that is appropriate in securities lending arrangements is cash, U.S. government securities and irrevocable bank standby letters of credit not issued by the Fund’s bank lending agent. Accordingly, please revise the disclosure to remove the reference to the possibility that the Fund may receive “other high-grade debt obligations” as collateral in connection with its securities lending activities.
Response to Comment 6
Pursuant to the Commission’s request, the referenced disclosure has been revised as follows:
In these loan arrangements, the Fund will receive collateral in the form of cash, U.S. government securities and irrevocable bank standby letters of credit not issued by the Fund’s bank lending agent equal to at least 102% (for domestic securities) or 105% (for international securities) of the market value of the securities loaned as determined at the time of loan origination.
***
Please call me at (312) 845-3484 if you have any questions or issues you would like to discuss regarding these matters.
Sincerely yours, Chapman and Cutler llp | ||
By: | /s/ Morrison C. Warren | |
Morrison C. Warren |
Exhibit A
First Trust Exchange-Traded Fund VI |
SUBJECT TO COMPLETION
Ticker Symbol: | DALI |
Exchange: | Nasdaq |
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) | None |
(expenses that you pay each year as a percentage of the value of your investment)
Management Fees | 0.30% |
Distribution and Service (12b-1) Fees | 0.00% |
Other Expenses(1) | 0.00% |
Acquired Fund Fees and Expenses(1) | 0.62% |
Total Annual Fund Operating Expenses | 0.92% |
(1) | "Other Expenses" and "Aquired Fund Fees and Expenses" are estimates based on the expenses the Fund expects to incur for the current fiscal year. |
1 Year | 3 Years |
$94 | $293 |
• | 65% of the Fund’s assets will be equally weighted among the constituents of the Dorsey Wright Focus Five Index (an index of ETFs designed to select the five sector/industry-based First Trust ETFs exhibiting the greatest relative strength). |
• | 35% of the Fund’s assets will be equally weighted among the First Trust Large Cap Growth AlphaDEX Fund (an ETF that provides exposure to large capitalization U.S. issuers that have exhibited higher levels of growth potential) and First Trust Small Cap Growth AlphaDEX Fund (an ETF that provides exposure to small capitalization U.S. issuers that have exhibited higher levels of growth potential) |
• | The Index will re-balance back to the 65% and 35% target weights quarterly. The Index may re-constitute periodically in response to changes in the composition of the Dorsey Wright Focus Five Index. |
• | 65% of the Fund’s assets will be equally weighted among the constituents of the Dorsey Wright Focus Five Index Dorsey Wright International Focus Five Index (an index of ETFs designed to select the five country/region-based First Trust ETFs exhibiting the greatest relative strength). |
• | 35% of the Fund’s assets will be equally weighted among the First Trust Emerging Markets AlphaDEX Fund (an ETF that provides exposure to equity securities issued by companies operating in emerging markets) and First Trust Developed Markets ex-US AlphaDEX Fund (an ETF that provides exposure to equity securities issued by companies operating in non-U.S. developed markets). |
• | The Index will re-balance back to the 65% and 35% target weights quarterly. The Index may re-constitute periodically in response to changes in the composition of the Dorsey Wright International Focus Five Index. |
• | 65% of the Fund’s assets will be equally weighted among three ETFs that seek broad exposure to the U.S. investment grade fixed income securities market. |
• | 35% of the Fund’s assets will be equally weighted among the constituents of the Dorsey Wright Fixed Income Model (a model that seeks to select four ETFs that invest principally in fixed income securities exhibiting the greatest relative strength). |
• | The Index will re-balance back to the 65% and 35% target weights quarterly. The Index may re-constitute periodically in response to changes in the composition of the Dorsey Wright Fixed Income Model. |
• | First Trust Global Tactical Commodity Strategy Fund (an ETF that invests in a combination of exchange-listed commodity futures contracts and commodity-linked instruments through a wholly-owned Cayman subsidiary with the objective of providing investors with commodity exposure) is included in the Index and given a weight of 100%. |
1. | First Trust Large Cap Growth AlphaDEX® Fund (FTC) |
2. | First Trust Small Cap Growth AlphaDEX® Fund (FYC) |
3. | First Trust Dow Jones Internet Index Fund (FDN) |
4. | First Trust Nasdaq Bank ETF (FTXO) |
5. | First Trust Technology AlphaDEX® Fund (FXL) |
6. | First Trust NASDAQ-100-Technology Sector Index Fund (QTEC) |
7. | First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR) |
• | Daniel J. Lindquist, Chairman of the Investment Committee and Managing Director of First Trust |
• | Jon C. Erickson, Senior Vice President of First Trust |
• | David G. McGarel, Chief Investment Officer, Chief Operating Officer and Managing Director of First Trust |
• | Roger F. Testin, Senior Vice President of First Trust |
• | Stan Ueland, Senior Vice President of First Trust |
• | Chris A. Peterson, Senior Vice President of First Trust |
Cocoa
Cotton / 1-1/16”
Feeder Cattle
Coffee ‘C’ / Colombian
Soybeans / No. 2 Yellow
Soybean Meal / 48% Protein
Soybean Oil / Crude
Corn / No. 2 Yellow
Wheat / No. 2 Hard Winter
Wheat / No. 2 Soft Red
Sugar #11 / World Raw
Hogs, Lean / Average Iowa/S Minn
Crude Oil, WTI / Global Spot
Crude Oil, Brent / Global Spot
NY Harbor ULSD (Heating Oil)
Gas-Oil-Petroleum
Natural Gas, Henry Hub
Gasoline, Blendstock (RBOB)
Gold
Silver
Platinum
Copper High Grade / Scrap No. 2 Wire
Aluminum, LME Primary 3 Month Rolling Forward
Lead, LME Primary 3 Month Rolling Forward
Nickel, LME Primary 3 Month Rolling Forward
Zinc, LME Primary 3 Month Rolling Forward
• | Limited Voting Rights. Generally, holders of preferred securities (such as an underlying ETF) have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a number of directors to the issuer’s board. Generally, once the issuer pays all the arrearages, the preferred security holders no longer have voting rights. |
• | Special Redemptions Rights. In certain circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in federal income tax or securities laws. As with call provisions, a special redemption by the issuer may negatively impact the return of the security held by an underlying ETF. |
• | Deferral. Preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If an underlying ETF owns a preferred security that is deferring its distributions, the underlying ETF may be required to report income for federal income tax purposes although it has not yet received such income in cash. |
• | Subordination. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income and liquidation payments and therefore will be subject to greater credit risk than those debt instruments. |
• | Liquidity. Preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. government securities. |
• | Mr. Lindquist is Chairman of the Investment Committee and presides over Investment Committee meetings. Mr. Lindquist is responsible for overseeing the implementation of the Fund’s investment strategy. Mr. Lindquist was a Senior Vice President of First Trust and FTP from September 2005 to July 2012 and is now a Managing Director of First Trust and FTP. |
• | Mr. Erickson joined First Trust in 1994 and is a Senior Vice President of First Trust and FTP. As the head of First Trust’s Equity Research Group, Mr. Erickson is responsible for determining the securities to be purchased and sold by funds that do not utilize quantitative investment strategies. |
• | Mr. McGarel is the Chief Investment Officer, Chief Operating Officer and a Managing Director of First Trust and FTP. As First Trust’s Chief Investment Officer, Mr. McGarel consults with the other members of the Investment Committee on market conditions and First Trust’s general investment philosophy. Mr. McGarel was a Senior Vice President of First Trust and FTP from January 2004 to July 2012. |
• | Mr. Testin is a Senior Vice President of First Trust and FTP. Mr. Testin is the head of First Trust’s Portfolio Management Group. Mr. Testin has been a Senior Vice President of First Trust and FTP since November 2003. |
• | Mr. Ueland joined First Trust as a Vice President in August 2005 and has been a Senior Vice President of First Trust and FTP since September 2012. At First Trust, he plays an important role in executing the investment strategies of each portfolio of exchange-traded funds advised by First Trust. |
• | Mr. Peterson is a Senior Vice President and head of First Trust’s strategy research group. He joined First Trust in January of 2000. Mr. Peterson is responsible for developing and implementing quantitative equity investment strategies. Mr. Peterson received his B.S. in Finance from Bradley University in 1997 and his M.B.A. from the University of Chicago Booth School of Business in 2005. He has over 19 years of financial services industry experience and is a recipient of the Chartered Financial Analyst designation. |
Aggregate Adjusted Market Value/Divisor
(1) | For purposes of this document, Last Sale Price refers to the last regular way trade reported on such security’s Index Market. The Index Market is the listing market for which prices are received and used by Nasdaq in the Index calculation and generally will represent the most liquid trading market of the Index Security. If a security does not trade on its Index Market on a given day or the Index Market has not opened for trading, the most recent last sale price from the Index Market (adjusted for corporate actions, if any) is used. For securities where Nasdaq is Index Market, the Last Sale Price may be the Nasdaq Official Closing Price (NOCP) when Nasdaq is closed. |
(Market Value after Adjustments/Market Value before Adjustments) X Divisor before Adjustments
• | The price return index (Nasdaq: NQDALI) is ordinarily calculated without regard to cash dividends on Index component securities. |
• | The total return index (Nasdaq: NQDALIT) reinvests cash dividends on the ex-date. |
• | The net total return index (Nasdaq: NQDALIN) reinvests cash dividends on the ex-date. |
• | US Equity Securities: 35% core holding equally distributed between exposure to a Large Cap Growth ETF and a Small Cap Growth ETF; 65% tactical holding tracking the Dorsey Wright Focus Five Index. |
• | International Equity Securities: 35% core holding equally distributed between Developed Markets ex-US and Emerging Markets ETF; 65% tactical holding tracking the Dorsey Wright International Focus Five Index. |
• | Fixed Income: 65% core holding to broad based aggregate bond funds; 35% tactical holding of 4 of the strongest relative strength ETFs from a universe of about 12. |
• | Commodities: 100% allocated to a broad commodity ETF |
Asset Class Review | Review Schedule |
Standard Frequency of Review | Review will skip the 2nd Friday in January, April, July and October. |
International moving in or out of #1 Asset Class | Review will skip the 4th Friday in February, May, August and November if the First Trust Nifty Fifty Equal Weight ETF (NFTY) is a component of the Dorsey Wright International Focus Five Index. |
Tactical Sleeve Name | Review Schedule |
Dorsey Wright Focus Five Index | 2nd and 4th week containing a Friday |
Dorsey Wright International Focus Five Index | 1st and 3rd week containing a Friday |
Tactical Fixed Income | Monthly on the 4th week containing a Friday |
Rebalance Back to Target 65%/35% Allocations | Quarterly on the 4th week containing a Friday in January, April, July and October |
as of the Date of this Prospectus
First Trust Exchange-Traded Fund VI |
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
(800) 621-1675
www.ftportfolios.com
Dated May 8, 2018
FUND NAME | TICKER SYMBOL | EXCHANGE | ||
First Trust Dorsey Wright DALI 1 ETF | DALI | Nasdaq |
1 | |
3 | |
3 | |
4 | |
8 | |
8 | |
11 | |
18 | |
19 | |
20 | |
22 | |
23 | |
24 | |
25 | |
30 | |
34 | |
36 | |
36 | |
A-1 |
Fund Name | Classification |
First Trust Dorsey Wright DALI 1 ETF | Non-Diversified |
(1) | The Fund may not issue senior securities, except as permitted under the 1940 Act. |
(2) | The Fund may not borrow money, except as permitted under the 1940 Act. |
(3) | The Fund will not underwrite the securities of other issuers except to the extent the Fund may be considered an underwriter under the Securities Act of 1933, as amended (the“1933 Act”), in connection with the purchase and sale of portfolio securities. |
(4) | The Fund will not purchase or sell real estate or interests therein, unless acquired as a result of ownership of securities or other instruments (but this shall not prohibit the Fund from purchasing or selling securities or other instruments backed by real estate or of issuers engaged in real estate activities). |
(5) | The Fund may not make loans to other persons, except through (i) the purchase of debt securities permissible under the Fund's investment policies, (ii) repurchase agreements, or (iii) the lending of portfolio securities,provided that no such loan of portfolio securities may be made by the Fund if, as a result, the aggregate of such loans would exceed 33⅓% of the value of the Fund's total assets. |
(6) | The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, forward contracts or other derivative instruments, or from investing in securities or other instruments backed by physical commodities). |
(7) | The Fund may not invest 25% or more of the value of its total assets in securities of issuers in any one industry or group of industries, except to the extent that the Fund’s Index is concentrated in an industry or a group of industries. |
(1) | The Fund may invest in U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government securities include securities that are issued or guaranteed by the United States Treasury, by various agencies of the U.S. government, or by various instrumentalities that have been established or sponsored by the U.S. government. U.S. Treasury securities are backed by the “full faith and credit” of the United States. Securities issued or guaranteed by federal agencies and U.S. government-sponsored instrumentalities may or may not be backed by the full faith and credit of the United States. Some of the U.S. government agencies that issue or guarantee securities include the Export-Import Bank of the United States, the Farmers Home Administration, the Federal Housing Administration, the Maritime Administration, the Small Business Administration and The Tennessee Valley Authority. An instrumentality of the U.S. government is a government agency organized under federal charter with government supervision. Instrumentalities issuing or guaranteeing securities include, among others, Federal Home Loan Banks, the Federal Land Banks, the Central Bank for Cooperatives, Federal Intermediate Credit Banks and FNMA. In the case of those U.S. government securities not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the security for ultimate repayment, and may not be able to assert a claim against the United States itself in the event that the agency or instrumentality does not meet its commitment. The U.S. government, its agencies and instrumentalities do not guarantee the market value of their securities, and consequently, the value of such securities may fluctuate. In addition, each Fund may invest in sovereign debt obligations of non-U.S. countries. A sovereign debtor’s willingness or ability to repay principal and interest in a timely manner may be affected by a number of factors, including its cash flow situation, the extent of its non-U.S. reserves, the availability of sufficient non-U.S. exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward principal international lenders and the political constraints to which it may be subject. |
(2) | The Fund may invest in certificates of deposit issued against funds deposited in a bank or savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. If such certificates of deposit are non-negotiable, they will be considered illiquid securities and be subject to the Fund’s 15% restriction on investments in illiquid securities. Pursuant to the certificate of deposit, the issuer agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $250,000; therefore, certificates of deposit purchased by the Fund may not be fully insured. The Fund may only invest in certificates of deposit issued by U.S. banks with at least $1 billion in assets. |
(3) | The Fund may invest in bankers’ acceptances, which are short-term credit instruments used to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then “accepted” by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an asset or it may be sold in the secondary market at the going rate of interest for a specific maturity. |
(4) | The Fund may invest in repurchase agreements, which involve purchases of debt securities with counterparties that are deemed by First Trust to present acceptable credit risks. In such an action, at the time the Fund purchases the security, it simultaneously agrees to resell and redeliver the security to the seller, who also simultaneously agrees to buy back the security at a fixed price and time. This assures a predetermined yield for the Fund during its holding period since the resale price is always greater than the purchase price and reflects an agreed upon market rate. Such actions afford an opportunity for the Fund to invest temporarily available cash. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers’ acceptances in which the Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that the affected Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, however, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss of both principal and interest. The Investment Committee monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Investment Committee does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws. |
(5) | The Fund may invest in bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest. There may be penalties for the early withdrawal of such time deposits, in which case the yields of these investments will be reduced. |
(6) | The Fund may invest in commercial paper, which are short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for the notes. However, they are redeemable by the Fund at any time. The Investment Committee will consider the financial condition of the corporation (e.g.,earning power, cash flow and other liquidity ratios) and will continuously monitor the corporation’s ability to meet all of its financial obligations, because the Fund’s liquidity might be impaired if the corporation were unable to pay principal and interest on demand. The Fund may invest in commercial paper only if it has received the highest rating from at least one nationally recognized statistical rating organization or, if unrated, judged by First Trust to be of comparable quality. |
(7) | The Fund may invest in shares of money market funds, as consistent with its investment objective and policies. Shares of money market funds are subject to management fees and other expenses of those funds. Therefore, investments in money market funds will cause the Fund to bear proportionately the costs incurred by the money market funds’ operations. At the same time, the Fund will continue to pay its own management fees and expenses with respect to all of its assets, including any portion invested in the shares of other investment companies. It is possible for the Fund to lose money by investing in money market funds. |
Name and Year of Birth | Position and Offices with Trust | Term of Office and Year First Elected or Appointed | Principal Occupations During Past 5 Years | Number of Portfolios in the First Trust Fund Complex Overseen by Trustee | Other Trusteeships or Directorships Held by Trustee During the Past 5 Years |
TRUSTEE WHO IS AN INTERESTED PERSON OF THE TRUST | |||||
James A. Bowen(1) 1955 | Chairman of the Board and Trustee | • Indefinite term • Since inception | Chief Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chairman of the Board of Directors, BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) | 154 Portfolios | None |
INDEPENDENT TRUSTEES | |||||
Richard E. Erickson 1951 | Trustee | • Indefinite term • Since inception | Physician; Officer, Wheaton Orthopedics; Limited Partner, Gundersen Real Estate Limited Partnership (June 1992 to December 2016); Member, Sportsmed LLC (April 2007 to November 2015) | 154 Portfolios | None |
Thomas R. Kadlec 1957 | Trustee | • Indefinite term • Since inception | President, ADM Investor Services, Inc. (Futures Commission Merchant) | 154 Portfolios | Director of ADM Investor Services, Inc., ADM Investor Services International, Futures Industry Association, and National Futures Association |
Robert F. Keith 1956 | Trustee | • Indefinite term • Since inception | President, Hibs Enterprises (Financial and Management Consulting) | 154 Portfolios | Director of Trust Company of Illinois |
Niel B. Nielson 1954 | Trustee | • Indefinite term • Since inception | Managing Director and Chief Operating Officer (January 2015 to present), Pelita Harapan Educational Foundation (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services) | 154 Portfolios | Director of Covenant Transport, Inc. (May 2003 to May 2014) |
Name and Year of Birth | Position and Offices with Trust | Term of Office and Length of Service | Principal Occupations During Past 5 Years |
OFFICERS OF THE TRUST | |||
James M. Dykas 1966 | President and Chief Executive Officer | • Indefinite term • Since January 2016 | Managing Director and Chief Financial Officer (January 2016 to present), Controller (January 2011 to January 2016), Senior Vice President (April 2007 to January 2016), First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer (January 2016 to present), BondWave LLC (Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
W. Scott Jardine 1960 | Secretary and Chief Legal Officer | • Indefinite term • Since inception | General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; and Secretary, Stonebridge Advisors LLC |
Daniel J. Lindquist 1970 | Vice President | • Indefinite term • Since inception | Managing Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Kristi A. Maher 1966 | Chief Compliance Officer and Assistant Secretary | • Indefinite term • Since inception | Deputy General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Donald P. Swade 1972 | Treasurer, Chief Financial Officer and Chief Accounting Officer | • Indefinite term • Since January 2016 | Senior Vice President (July 2016 to Present), Vice President (April 2012 to July 2016), First Trust Advisors L.P. and First Trust Portfolios L.P. |
Roger F. Testin 1966 | Vice President | • Indefinite term • Since inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Name and Year of Birth | Position and Offices with Trust | Term of Office and Length of Service | Principal Occupations During Past 5 Years |
Stan Ueland 1970 | Vice President | • Indefinite term • Since inception | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1) | Mr. Bowen is deemed an “interested person” of the Trust due to his position as Chief Executive Officer of First Trust, investment advisor of the Fund. |
Name of Trustee | Estimated Compensation from the Fund(1) | Total Compensation from the First Trust Fund Complex(2) |
Richard E. Erickson | $1,797 | $414,011 |
Thomas R. Kadlec | $1,782 | $403,267 |
Robert F. Keith | $1,782 | $403,163 |
Niel B. Nielson | $1,768_ | $392,987 |
(1) | The estimated compensation to be paid by the Fund to the Independent Trustees for one fiscal year for services to the Fund. |
(2) | The total compensation paid to the Independent Trustees for the calendar year ended December 31, 2017 for services to the 151 portfolios, which consists of 7 open-end mutual funds, 16 closed-end funds and 128 exchange-traded funds. |
Name | Position with First Trust | Length of Service with First Trust | Principal Occupation During Past Five Years |
Daniel J. Lindquist | Chairman of the Investment Committee and Managing Director | Since 2004 | Managing Director (2012 to present), Senior Vice President (2005 to 2012), First Trust Advisors L.P. and First Trust Portfolios L.P. |
Jon C. Erickson | Senior Vice President | Since 1994 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
David G. McGarel | Chief Operating Officer, Chief Investment Officer and Managing Director | Since 1997 | Chief Operating Officer (2016 to present) Chief Investment Officer (2012 to present), Managing Director (2012 to present), Senior Vice President (2005 to 2012), First Trust Advisors L.P. and First Trust Portfolios L.P. |
Roger F. Testin | Senior Vice President | Since 2001 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Stan Ueland | Senior Vice President | Since 2005 | Senior Vice President (2012 to present), Vice President (2005 to 2012), First Trust Advisors L.P. and First Trust Portfolios L.P. |
Chris A. Peterson | Senior Vice President | Since 2000 | Senior Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Investment Committee Member | Registered Investment Companies Number of Accounts ($ Assets) | Other Pooled Investment Vehicles Number of Accounts ($ Assets) | Other Accounts Number of Accounts ($ Assets) |
Daniel J. Lindquist | 105 ($44,686,170,061) | 31 ($1,015,599,880) | 1,692 ($585,713,514) |
Jon C. Erickson | 105 ($44,686,170,061) | 31 ($1,015,599,880) | 1,692 ($585,713,514) |
David G. McGarel | 105 ($44,686,170,061) | 31 ($1,015,599,880) | 1,692 ($585,713,514) |
Investment Committee Member | Registered Investment Companies Number of Accounts ($ Assets) | Other Pooled Investment Vehicles Number of Accounts ($ Assets) | Other Accounts Number of Accounts ($ Assets) |
Roger F. Testin | 105 ($44,686,170,061) | 31 ($1,015,599,880) | 1,692 ($585,713,514) |
Stan Ueland | 99 ($43,807,694,802) | 30 ($961,632,556) | N/A |
Chris A. Peterson | 105 ($44,686,170,061) | 12 ($677,119,505) | 1,692 ($585,713,514) |
Distributor, Index Provider and Exchange
(1) | Common stocks and other equity securities listed on any national or foreign exchange other than Nasdaq and the London Stock Exchange Alternative Investment Market (“AIM”) will be valued at the last sale price on the exchange on which they are principally traded, or the official closing price for Nasdaq and AIM securities. Portfolio securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, 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. |
(2) | Shares of open-end funds are valued at fair value which is based on NAV per share. |
(3) | Securities traded in the OTC market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. |
(4) | Exchange-traded options and futures contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, they will be fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. OTC options and futures contracts are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. |
(5) | Forward foreign currency contracts are fair valued at the current day’s interpolated foreign exchange rate, as calculated using the current day’s spot rate, and the 30, 60, 90 and 180-day forward rates provided by a pricing service or by certain independent dealers in such contracts. |
(1) | Fixed-income securities, convertible securities, interest rate swaps, credit default swaps, total return swaps, currency swaps, currency-linked notes, credit-linked notes and other similar instruments will be fair valued using a pricing service. |
(2) | Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discounts (amortized cost), provided |
the Advisor’s Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following: |
(i) | the credit conditions in the relevant market and changes thereto; |
(ii) | the liquidity conditions in the relevant market and changes thereto; |
(iii) | the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates); |
(iv) | issuer-specific conditions (such as significant credit deterioration); and |
(v) | any other market-based data the Advisor’s Pricing Committee considers relevant. In this regard, the Advisor’s Pricing Committee may use last-obtained market-based data to assist it when valuing portfolio securities using amortized cost. |
(3) | Repurchase agreements will be valued as follows: Overnight repurchase agreements will be fair valued at amortized cost when it represents the best estimate of fair value. Term repurchase agreements (i.e., those whose maturity exceeds seven days) will be fair valued by the Advisor’s Pricing Committee at the average of the bid quotations obtained daily from at least two recognized dealers. |
Published January 9, 2018
and are not intended to be exhaustive. The complete guidelines can be found at:
https://www.issgovernance.com/policy-gateway/voting-policies/
➤ | General Recommendation: Generally vote for director nominees, except under the following circumstances: |
➤ | Independent directors comprise 50 percent or less of the board; |
➤ | The non-independent director serves on the audit, compensation, or nominating committee; |
➤ | The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or |
➤ | The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee. |
➤ | Medical issues/illness; |
➤ | Family emergencies; and |
➤ | Missing only one meeting (when the total of all meetings is three or fewer). |
➤ | Sit on more than five public company boards; or |
➤ | Are CEOs of public companies who sit on the boards of more than two public companies besides their own— withhold only at their outside boards3. |
1 | In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company. |
2 | New nominees who served for only part of the fiscal year are generally exempted from the attendance policy. |
3 | Although all of a CEO’s subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships. |
➤ | The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. Factors that will be considered are: |
➤ | Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
➤ | Rationale provided in the proxy statement for the level of implementation; |
➤ | The subject matter of the proposal; |
➤ | The level of support for and opposition to the resolution in past meetings; |
➤ | Actions taken by the board in response to the majority vote and its engagement with shareholders; |
➤ | The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and |
➤ | Other factors as appropriate. |
➤ | The board failed to act on takeover offers where the majority of shares are tendered; |
➤ | At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote. |
➤ | The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are: |
➤ | The company's response, including: |
➤ | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
➤ | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
➤ | Disclosure of specific and meaningful actions taken to address shareholders' concerns; |
➤ | Other recent compensation actions taken by the company; |
➤ | Whether the issues raised are recurring or isolated; |
➤ | The company's ownership structure; and |
➤ | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
➤ | The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast. |
4 | A “new nominee” is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the nominee joined the board before or after the problematic action transpired, the nominee will be considered a “new nominee” if he or she joined the board within the 12 months prior to the upcoming shareholder meeting. |
➤ | The company has a poison pill that was not approved by shareholders5. However, vote case-by-case on nominees if the board adopts an initial pill with a term of one year or less, depending on the disclosed rationale for the adoption, and other factors as relevant (such as a commitment to put any renewal to a shareholder vote). |
➤ | The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval. |
➤ | A classified board structure; |
➤ | A supermajority vote requirement; |
➤ | Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections; |
➤ | The inability of shareholders to call special meetings; |
➤ | The inability of shareholders to act by written consent; |
➤ | A multi-class capital structure; and/or |
➤ | A non-shareholder-approved poison pill. |
➤ | The board's rationale for adopting the bylaw/charter amendment without shareholder ratification; |
➤ | Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
➤ | The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter; |
➤ | The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; |
➤ | The company's ownership structure; |
➤ | The company's existing governance provisions; |
➤ | The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and, |
➤ | Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders. |
➤ | Classified the board; |
➤ | Adopted supermajority vote requirements to amend the bylaws or charter; or |
5 | Public shareholders only, approval prior to a company’s becoming public is insufficient. |
➤ | Eliminated shareholders' ability to amend bylaws. |
➤ | The level of impairment of shareholders' rights; |
➤ | The disclosed rationale; |
➤ | The ability to change the governance structure (e.g., limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter); |
➤ | The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; |
➤ | Any reasonable sunset provision; and |
➤ | Other relevant factors. |
➤ | The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include, but are not limited to: outright prohibition on the submission of binding shareholder proposals, or share ownership requirements or time holding requirements in excess of SEC Rule 14a-8. Vote against on an ongoing basis. |
➤ | The non-audit fees paid to the auditor are excessive; |
➤ | The company receives an adverse opinion on the company’s financial statements from its auditor; or |
➤ | There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
➤ | Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted. |
➤ | There is a significant misalignment between CEO pay and company performance (pay for performance) (see Primary Evaluation Factors for Executive Pay); |
➤ | The company maintains significant problematic pay practices (see Problematic Pay Practices); or |
➤ | The board exhibits a significant level of poor communication and responsiveness (see Compensation Committee Communications and Responsiveness) to shareholders. |
➤ | The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or |
➤ | The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions. |
➤ | The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity; |
➤ | The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume; |
➤ | Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time; |
➤ | Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and |
➤ | Any other relevant factors. |
➤ | Material failures of governance, stewardship, risk oversight6, or fiduciary responsibilities at the company; |
➤ | Failure to replace management as appropriate; or |
➤ | Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company. |
➤ | General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information. |
6 | Examples of failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlement; or hedging of company stock. |
➤ | General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors: |
➤ | Long-term financial performance of the company relative to its industry; |
➤ | Management’s track record; |
➤ | Background to the contested election; |
➤ | Nominee qualifications and any compensatory arrangements; |
➤ | Strategic plan of dissident slate and quality of the critique against management; |
➤ | Likelihood that the proposed goals and objectives can be achieved (both slates); and |
➤ | Stock ownership positions. |
➤ | General Recommendation: Generally vote for shareholder proposals requiring that the chairman’s position be filled by an independent director, taking into consideration the following: |
➤ | The scope of the proposal; |
➤ | The company's current board leadership structure; |
➤ | The company's governance structure and practices; |
➤ | Company performance; and |
➤ | Any other relevant factors that may be applicable. |
➤ | General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions: |
➤ | Ownership threshold: maximum requirement not more than three percent (3%) of the voting power; |
➤ | Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group; |
➤ | Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; |
➤ | Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
➤ | General Recommendation: Vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support. |
➤ | Past Board Performance: |
➤ | The company's use of authorized shares during the last three years |
➤ | The Current Request: |
➤ | Disclosure in the proxy statement of the specific purposes of the proposed increase; |
➤ | Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and |
➤ | The dilutive impact of the request as determined relative to an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total shareholder returns. |
A. | Most companies:100 percent of existing authorized shares. |
B. | Companies with less than 50 percent of existing authorized shares either outstanding or reserved for issuance:50 percent of existing authorized shares. |
C. | Companies with one- and three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end:50 percent of existing authorized shares. |
D. | Companies at which both conditions (B and C) above are both present:25 percent of existing authorized shares. |
➤ | General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including: |
➤ | Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
➤ | Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. |
➤ | Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
➤ | Negotiations and process - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
➤ | Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists. |
➤ | Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
1. | Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
2. | Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation; |
3. | Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
4. | Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; |
5. | Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices. |
➤ | General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation. |
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if: |
➤ | There is a significant misalignment between CEO pay and company performance (pay for performance) (see Primary Evaluation Factors for Executive Pay); |
➤ | The company maintains significant problematic pay practices (see Problematic Pay Practices); |
➤ | The board exhibits a significant level of poor communication and responsiveness (see Compensation Committee Communications and Responsiveness) to shareholders. |
➤ | There is no SOP on the ballot, and an against vote on an SOP is warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof; |
➤ | The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast; |
➤ | The company has recently practiced or approved problematic pay practices, including option repricing or option backdating; or |
➤ | The situation is egregious. |
7 | The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities. |
➤ | The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period. |
➤ | The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period. |
➤ | The multiple of the CEO's total pay relative to the peer group median in the most recent fiscal year. |
2. | Absolute Alignment9– the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years–i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
➤ | The ratio of performance- to time-based equity awards; |
➤ | The overall ratio of performance-based compensation; |
➤ | The completeness of disclosure and rigor of performance goals; |
➤ | The company's peer group benchmarking practices; |
➤ | Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers; |
➤ | Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
➤ | Realizable pay10 compared to grant pay; and |
➤ | Any other factors deemed relevant. |
➤ | Problematic practices related to non-performance-based compensation elements; |
➤ | Incentives that may motivate excessive risk-taking; and |
➤ | Options backdating. |
8 | The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant. |
9 | Only Russell 3000 Index companies are subject to the Absolute Alignment analysis. |
10 | ISS research reports include realizable pay for S&P1500 companies. |
➤ | Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options); |
➤ | Extraordinary perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting, or lifetime perquisites; |
➤ | New or extended agreements that provide for: |
➤ | Excessive CIC payments (generally exceeding 3 times base salary and average/target/most recent bonus); |
➤ | CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers); |
➤ | CIC payments with excise tax gross-ups (including "modified" gross-ups); |
➤ | Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
➤ | Liberal CIC definition combined with any single-trigger CIC benefits; |
➤ | Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible; |
➤ | Any other provision or practice deemed to be egregious and present a significant risk to investors. |
➤ | Multi-year guaranteed awards; |
➤ | A single or common performance metric used for short- and long-term incentives; |
➤ | Lucrative severance packages; |
➤ | High pay opportunities relative to industry peers; |
➤ | Disproportionate supplemental pensions; or |
➤ | Mega equity grants that provide overly large upside opportunity. |
➤ | Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; |
➤ | Duration of options backdating; |
➤ | Size of restatement due to options backdating; |
➤ | Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and |
➤ | Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future. |
➤ | Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
➤ | Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
➤ | The company's response, including: |
➤ | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
➤ | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
➤ | Disclosure of specific and meaningful actions taken to address shareholders’ concerns; |
➤ | Other recent compensation actions taken by the company; |
➤ | Whether the issues raised are recurring or isolated; |
➤ | The company's ownership structure; and |
➤ | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
➤ | General Recommendation: Vote case-by-case on certain equity-based compensation plans11 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an "equity plan scorecard" (EPSC) approach with three pillars: |
➤ | Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
➤ | SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and |
➤ | SVT based only on new shares requested plus shares remaining for future grants. |
➤ | Plan Features: |
➤ | Discretionary or automatic single-triggered award vesting upon a change in control (CIC); |
➤ | Discretionary vesting authority; |
➤ | Liberal share recycling on various award types; |
➤ | Lack of minimum vesting period for grants made under the plan; |
➤ | Dividends payable prior to award vesting. |
➤ | Grant Practices: |
➤ | The company’s three year burn rate relative to its industry/market cap peers; |
➤ | Vesting requirements in most recent CEO equity grants (3-year look-back); |
➤ | The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years); |
➤ | The proportion of the CEO's most recent equity grants/awards subject to performance conditions; |
➤ | Whether the company maintains a claw-back policy; |
➤ | Whether the company has established post exercise/vesting share-holding requirements. |
➤ | Awards may vest in connection with a liberal change-of-control definition; |
➤ | The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it—for NYSE and Nasdaq listed companies—or by not prohibiting it when the company has a history of repricing—for non-listed companies); |
11 | Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case. |
➤ | The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; or |
➤ | Any other plan features are determined to have a significant negative impact on shareholder interests. |
➤ | General Recommendation: Generally vote case-by-case, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder value, and in addition the following will also be considered: |
➤ | If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation; |
➤ | If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal; |
➤ | Whether the proposal's request is unduly burdensome (scope or timeframe) or overly prescriptive; |
➤ | The company's approach compared with any industry standard practices for addressing the issue(s) raised by the proposal; |
➤ | If the proposal requests increased disclosure or greater transparency, whether or not reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and |
➤ | If the proposal requests increased disclosure or greater transparency, whether or not implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage. |
➤ | General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering: |
➤ | Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
➤ | The company’s level of disclosure compared to industry peers; and |
➤ | Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate change-related performance. |
➤ | The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
➤ | The company's level of disclosure is comparable to that of industry peers; and |
➤ | There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions. |
➤ | Whether the company provides disclosure of year-over-year GHG emissions performance data; |
➤ | Whether company disclosure lags behind industry peers; |
➤ | The company's actual GHG emissions performance; |
➤ | The company's current GHG emission policies, oversight mechanisms, and related initiatives; and |
➤ | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions. |
➤ | General Recommendation: Generally vote for requests for reports on a company's efforts to diversify the board, unless: |
➤ | The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and |
➤ | The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company. |
➤ | The degree of existing gender and racial minority diversity on the company’s board and among its executive officers; |
➤ | The level of gender and racial minority representation that exists at the company’s industry peers; |
➤ | The company’s established process for addressing gender and racial minority board representation; |
➤ | Whether the proposal includes an overly prescriptive request to amend nominating committee charter language; |
➤ | The independence of the company’s nominating committee; |
➤ | Whether the company uses an outside search firm to identify potential director nominees; and |
➤ | Whether the company has had recent controversies, fines, or litigation regarding equal employment practices. |
➤ | General Recommendation: Generally vote case-by-case on requests for reports on a company's pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account: |
➤ | The company's current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices; |
➤ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender pay gap issues; and |
➤ | Whether the company's reporting regarding gender pay gap policies or initiatives is lagging its peers. |
➤ | General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures, considering: |
➤ | The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information access and management, and Internet censorship; |
➤ | Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of information on the Internet; |
➤ | The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other telecommunications; |
➤ | Applicable market-specific laws or regulations that may be imposed on the company; and |
➤ | Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship. |
➤ | General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering: |
➤ | The company’s current disclosure of relevant lobbying policies, and management and board oversight; |
➤ | The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and |
➤ | Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities. |
➤ | General Recommendation: Generally vote for proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities, considering: |
➤ | The company's policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes; |
➤ | The company's disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and |
➤ | Recent significant controversies, fines, or litigation related to the company's political contributions or political activities. |