CHAPMAN AND CUTLER LLP 111 WEST MONROE STREET
CHICAGO, ILLINOIS 60603
August 20, 2015
VIA EDGAR CORRESPONDENCE FILING
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Karen Rossotto, Esq.
Division of Investment Management
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: First Trust Dynamic Europe Equity Income Fund (the "Fund")
File Nos. 333-205681; 811-23072
Dear Ms. Rossotto:
We have received your comments regarding the Registration Statement for
the above captioned Fund in your letter of August 14, 2015. This letter serves
to respond to your comments. For your convenience, we have structured our
response to address each of your comments in the order in which they were
presented in your letter.
PROSPECTUS
Cover Page
1. IN INVESTMENT STRATEGIES AND POLICIES, IT STATES THAT THE FUND "WILL
SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING AT LEAST 80% OF ITS
MANAGED ASSETS ... IN A PORTFOLIO OF EQUITY SECURITIES OF EUROPEAN COMPANIES ...
.. " PLEASE EXPLAIN TO US HOW THE FUND'S DEFINITION OF MANAGED ASSETS IS
CONSISTENT WITH THE REQUIREMENTS OF RULE 35D-1 UNDER THE 1940 ACT.
Response: The definition of "Managed Assets" is consistent with the
requirements of Rule 35d-1 under the 1940 Act in that "average daily gross asset
value" minus "the sum of the Fund's accrued and unpaid dividends on any
outstanding preferred shares of beneficial interest, if any, and accrued
liabilities (other than liabilities representing leverage)" represents the
Fund's "net assets" (as used in Rule 35d-1) and that "assets attributable to the
Fund's leverage" included in "average daily gross asset value" represents
"borrowings for investment purposes" (as used in Rule 35d-1). In addition, as
indicated on page 3 of the Prospectus Summary, for purposes of determining
Managed Assets, the liquidation preference of the preferred shares of beneficial
interest of the Fund is not treated as a liability.
2. ALSO IN INVESTMENT STRATEGIES AND POLICIES, IT STATES THAT "EUROPEAN
COMPANIES ARE BROADLY DEFINED TO INCLUDE ANY COMPANY OF WHICH "ITS COUNTRY OF
ORGANIZATION IS LOCATED IN EUROPE." AS THE FUND HAS "EUROPE" IN ITS NAME, WITH
REGARD TO ITS COMPLIANCE WITH RULE 35D-1, PLEASE EXPLAIN TO US HOW A COMPANY IS
ECONOMICALLY TIED TO EUROPE SIMPLY BECAUSE IT IS ORGANIZED IN EUROPE.
IN THIS SECTION IT FURTHER STATES THAT "THE FUND CURRENTLY EXPECTS TO WRITE (OR
SELL) CALL OPTIONS ON ... CUSTOM BASKETS OF INDIVIDUAL SECURITIES AND ...
CERTAIN BROAD-BASED SECURITIES INDICES." PLEASE CLARIFY HERE, OR WHERE
APPROPRIATE WITHIN THE REGISTRATION STATEMENT, THE TYPES OF SECURITIES THAT ARE
INCLUDED IN THE CUSTOM BASKETS AND ALSO THE TYPES OF SECURITIES REPRESENTED IN
THE BROAD-BASED SECURITIES INDICES. IN ADDITION, PLEASE EXPLAIN TO US WHETHER
THE FUND WILL COUNT DERIVATIVES FOR THE PURPOSES OF THE FUND'S 80% TEST. IF SO,
HOW WILL THEY BE VALUED (I.E., AT MARKET OR NOTIONAL VALUE)? IN ADDITION, PLEASE
EXPLAIN TO US HOW THE FUND WILL MEET ITS OBLIGATIONS AS OUTLINED IN INVESTMENT
COMPANY ACT RELEASE NO. 10666 (APR. 18, 1979) WHILE INVESTING AT LEAST 80% OF
ITS MANAGED ASSETS IN EQUITY SECURITIES.
Response: The Fund will no longer apply the "country of organization" test
as a basis for identifying "European companies." The Fund also no longer intends
to write (or sell) call options on custom baskets of individual securities and,
accordingly, the references to "custom baskets" have been removed from the
Prospectus. The Prospectus has been revised to also disclose that "[t]he types
of securities represented in the broad-based securities indices upon which the
Fund may write options will typically include equity securities of European
companies, and examples of such indices include, but are not limited to, Euro
Stoxx 50(R), CAC 40 and DAX."
The Fund will not count derivatives for the purposes of the Fund's 80%
test.
In regards to your question on the Fund's asset segregation obligations,
please note the disclosure on page 7 of the prospectus, which states, with
respect to the Fund's Option Overlay Strategy, that "[t]he Fund will write a
call option on an individual security only if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration . . . upon conversion or exchange
of other securities held by the Fund" and "[t]he Fund will write a call option
on an index only if the Fund segregates or earmarks liquid assets with its
custodian in an amount equal to the contract value of the index." In addition,
with respect to forward contracts used for purposes of the Fund's currency
hedging, the prospectus has been revised to reflect that the Fund's custodian
will segregate liquid assets of the Fund having a value equal to the Fund's
commitment under any such forward contracts.
3. IN DISTRIBUTIONS ON PAGE II, THE DESCRIPTION OF THE FUND'S QUARTERLY
SPECIAL DISTRIBUTION, STARTING IN THE 5TH LINE AND CONTINUING FOR MOST OF THE
PARAGRAPH IS ONE SENTENCE THAT IS VERY DIFFICULT TO FOLLOW. PLEASE SIMPLIFY THIS
DISCUSSION.
Response: Pursuant to your request, the above-referenced sentence has been
revised as follows in an effort to simplify the disclosure:
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The aggregate amount payable for each quarterly special distribution
period is expected to be equal to 50% of the amount by which the NAV of
the Fund as of the applicable quarterly special distribution measurement
date (the "measurement NAV") exceeds the NAV of the Fund as of the most
recent prior quarterly special distribution measurement date for which a
quarterly special distribution was paid (the "benchmark NAV"). For
purposes of calculating the measurement NAV, the Fund will subtract from
the NAV as of the quarterly special distribution measurement date the
amount of any regular monthly distribution not reflected in the NAV on
such date but which is declared prior to or simultaneous with the
declaration of the quarterly special distribution during that month. In
addition, for purposes of calculating the benchmark NAV, the Fund will
subtract from the NAV as of the quarterly special distribution measurement
date for the applicable prior quarterly special distribution period the
amounts of any quarterly special distribution and regular monthly
distribution that had not been reflected in the NAV as of such date but
were declared by the end of the month in which such quarterly special
distribution measurement date occurred.
4. AT THE END OF THE DISTRIBUTIONS SECTION, IT STATES THAT "[T]HE BOARD OF
TRUSTEES WILL REVIEW THE QUARTERLY SPECIAL DISTRIBUTION PROGRAM FROM TIME TO
TIME AND MAY DETERMINE TO MODIFY, SUSPEND OR CANCEL THE PROGRAM." IF ANY
SHAREHOLDER NOTICE WILL BE PROVIDED BEFORE THE PROGRAM IS CHANGED IN ANY OF
THESE WAYS, PLEASE DISCLOSE SO HERE, OR WHERE APPROPRIATE.
Response: Pursuant to your request, the following sentence has been added
to the above-referenced section:
The Fund will provide Common Shareholders with advance notice in the event
of any such determination by the Board of Trustees to modify, suspend or
cancel the quarterly special distribution program.
Summary Prospectus
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5. IN INVESTMENT STRATEGIES AND POLICIES, IT STATES THAT THE FUND'S
PORTFOLIO OF EQUITY SECURITIES INCLUDES CONVERTIBLE SECURITIES. IN REGARD TO THE
FUND'S INVESTMENT IN THESE SECURITIES, WE HAVE THE FOLLOWING COMMENTS:
A. PLEASE CONFIRM TO US THAT ANY CONVERTIBLE SECURITIES INCLUDED IN THE
FUND'S 80% TEST MAY BE IMMEDIATELY CONVERTIBLE INTO EQUITY.
B. PLEASE DISCLOSE IN THIS SECTION THE TYPES OF CONVERTIBLE SECURITIES
THE FUND INVESTS IN AS A PRINCIPAL INVESTMENT STRATEGY (E.G.,
CONTINGENT, MANDATORY AND/OR SYNTHETIC CONVERTIBLE SECURITIES).
DISCLOSURE IN THE SUMMARY PROSPECTUS SUGGESTS INVESTMENT IN THESE
TYPES OF CONVERTIBLES. FOR EXAMPLE, ON PAGE 5, IN CONVERTIBLE
SECURITIES, IT STATES THAT THE FUND'S INVESTMENT IN CONVERTIBLE
SECURITIES INCLUDE "DEBT SECURITIES WITH WARRANTS OR COMMON STOCK
ATTACHED AND DERIVATIVES COMBINING THE FEATURES OF DEBT SECURITIES
AND EQUITY SECURITIES," SUGGESTING INVESTMENT IN SYNTHETIC
CONVERTIBLE SECURITIES, OR A SIMILAR INSTRUMENT. IN ADDITION, IN
CONVERTIBLE SECURITIES RISK ON PAGE 15, IT STATES THAT "CONVERTIBLE
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SECURITIES THAT MAY NOT BE CONVERTED UNLESS CERTAIN CONDITIONS ARE
MET MAY TRADE AT A SLIGHT DISCOUNT TO SIMILAR CONVERTIBLE SECURITIES
THAT DO NOT REQUIRE SUCH CONDITIONS TO BE MET PRIOR TO CONVERSION."
C. IN DISCLOSING THE FUND'S INVESTMENTS IN DIFFERENT TYPES OF
CONVERTIBLE SECURITIES, PLEASE DESCRIBE WHAT THESE SECURITIES ARE
AND HOW THEY ARE DIFFERENT FROM THE TYPES OF SECURITIES COMMONLY
CONSIDERED TO BE CONVERTIBLE SECURITIES.
Response: Any convertible securities included by the Fund for purposes of
the 80% test will be immediately convertible into an equity security. The Fund,
however, will not invest in convertible securities as a principal part of its
investment strategy and, as such, the discussion of convertible securities and
their associated investment risks has been removed from the prospectus. Instead,
the SAI identifies and describes the different types of convertible securities
in which the Fund may invest (on a non-principal basis), including how they may
differ from the types of securities commonly considered to be convertible
securities.
6. IN INVESTMENT STRATEGIES AND POLICIES, IN THE LAST PARAGRAPH ON PAGE 2,
PLEASE DISCLOSE SPECIFICALLY THAT SOME EUROPEAN COUNTRIES ARE CONSIDERED TO BE
EMERGING MARKETS.
Response: Pursuant to your request, the above-referenced section has been
revised to disclose that some of the countries of the European companies in
which the Fund may invest are considered to be emerging market countries. In
addition, a definition of "emerging market countries" will be added to the
prospectus in order to clarify the list of countries considered by the Fund to
be emerging market countries.
7. ON PAGE 3, IN INVESTMENT STRATEGIES AND POLICIES, IN THE DISCUSSION OF
THE FUND'S DYNAMIC CURRENCY HEDGING PROCESS, IT STATES THAT "THE AMOUNT THE FUND
MAY INVEST IN [FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS] WILL BE LIMITED TO
THE EXTENT OF ITS FOREIGN INVESTMENTS." AS THE FUND WILL INVEST AT LEAST 80% OF
ITS ASSETS IN EUROPEAN COMPANIES, WHICH ARE FOREIGN INVESTMENTS, AND MAY INVEST
ALL OF ITS ASSETS IN FOREIGN SECURITIES, THE FUND MAY, IN FACT, HEDGE 100% OF
ITS PORTFOLIO. TO STATE THAT THE FUND IS "LIMITED" IN ITS USE OF FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS SEEMS MISLEADING AS IT DOES NOT APPEAR THAT THE FUND
WILL BE LIMITED AT ALL IN ITS INVESTMENT OF THESE SECURITIES. PLEASE CLARIFY THE
DISCLOSURE.
Response: Pursuant to your request, the above-referenced sentence has been
removed from the prospectus and has been replaced with the following:
The portfolio managers of the Fund will adjust the extent to which the
Fund may utilize currency hedging transactions on an ongoing basis based
on, among other things, their view of market conditions, currency exchange
rates and the currency exposure of the Fund's portfolio investments.
4
Please note, as disclosed in the prospectus, that the Fund's currency exchange
transactions will be limited in that such transactions will not be used for
purposes of speculating on currency exchange rate movements.
8. IN THE FOLLOWING PARAGRAPH IN THIS SECTION, ON PAGE 3, IT STATES THAT
THE FUND MAY ALSO INVEST IN "DOMESTIC AND FOREIGN FIXED INCOME SECURITIES". IF
THE FUND MAY INVEST IN FIXED INCOME SECURITIES OF ISSUERS FROM EMERGING MARKETS,
DISCLOSE SO IN THIS SECTION AND DISCLOSE ANY ASSOCIATED RISKS WHERE APPROPRIATE.
Response: The Fund will not invest in fixed income securities of issuers
from emerging markets as a principal part of its investment strategy.
9. ON PAGE 8, IN USE OF LEVERAGE, IT STATES THAT "IT IS EXPECTED THAT THE
FUND'S INITIAL STRUCTURAL LEVERAGE THROUGH THE USE OF BORROWINGS WILL BE
APPROXIMATELY 25% OF THE FUND'S MANAGED ASSETS." PLEASE ALSO DISCLOSE HERE THAT
THE FUND'S USE OF LEVERAGE WILL VARY AND THAT IT MAY BORROW UP TO 40% OF ITS
MANAGED ASSETS.
Response: Pursuant to your request, the above-referenced section has been
revised to state that the Fund's "effective leverage will vary from time to
time, based upon changes in market conditions and variations in the value of the
portfolio's holdings; however, the Fund's effective leverage will not exceed 40%
of the Fund's Managed Assets."
10. ON PAGE 11, IN CONVERSION RISK, PLEASE DISCLOSE SPECIFICALLY THAT,
UPON CONVERSION, THE FUND'S SHARES, IN ADDITION TO NO LONGER BEING LISTED, WOULD
BE PURCHASED AND REDEEMED AT NAV, RATHER THAN MARKET PRICE.
Response: Pursuant to your request, the above referenced section has been
revised to indicate the following:
In the event of conversion to an open-end management investment company,
the Common Shares would cease to be listed on the NYSE or other national
securities exchange, and such Common Shares would thereafter be redeemable
at NAV at the option of the Common Shareholder, rather than traded in the
secondary market at market price, which, for closed-end fund shares, may
at times be at a premium to NAV.
11. ON PAGE 15, CONVERTIBLE SECURITIES RISK, PER COMMENT #5 ABOVE, PLEASE
EXPAND THIS DISCLOSURE TO DESCRIBE THE SPECIFIC RISKS ASSOCIATED WITH THE
DIFFERENT TYPES OF CONVERTIBLE SECURITIES THE FUND INVESTS IN AS A PRINCIPAL
INVESTMENT STRATEGY. IN PARTICULAR, IF THE FUND INVESTS IN CONTINGENT
CONVERTIBLE SECURITIES, PLEASE DESCRIBE THE RISKS OF THESE INVESTMENTS,
INCLUDING THE TRIGGER EVENTS FOR THEIR CONVERSION, THE POTENTIAL FOR INCREASED
VOLATILITY AND RISK OF LOSS IN DECLINING MARKETS.
IN ADDITION, CONSIDER INCLUDING HERE DISCLOSURE FROM THE END OF THE SECOND
PARAGRAPH ON PAGE 4 OF THE SAI:
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IF A CONVERTIBLE SECURITY HELD BY THE FUND IS CALLED FOR REDEMPTION OR
CONVERSION, THE FUND COULD BE REQUIRED TO TENDER IT FOR REDEMPTION,
CONVERT IT INTO THE UNDERLYING COMMON STOCK OR SELL IT TO A THIRD PARTY,
WHICH MAY HAVE AN ADVERSE EFFECT ON THE FUND'S ABILITY TO ACHIEVE ITS
INVESTMENT OBJECTIVE.
Response: As noted in the response to Comment #5 above, the Fund will not
invest in convertible securities as a principal part of its investment strategy
and, as such, the discussion of convertible securities and their associated
investment risks has been moved from the prospectus to the SAI, which contains
additional disclosure regarding the various types of convertible securities in
which the Fund may invest (on a non-principal basis).
12. ALSO IN CONVERTIBLE SECURITIES RISK, IN THE SECOND PARAGRAPH, IT
STATES THAT "[C]ONVERTIBLE SECURITIES ARE OFTEN RATED BELOW INVESTMENT GRADE."
PLEASE REFERENCE HERE THAT SECURITIES RATED BELOW INVESTMENT GRADE ARE COMMONLY
KNOWN AS "JUNK BONDS".
Response: As noted in the response to Comment #5 above, the discussion of
convertible securities has been removed from the prospectus. Pursuant to your
request, the discussion of convertible securities in the SAI has been revised to
indicate that securities rated below investment grade are commonly known as
"high yield" or "junk" securities.
13. ON PAGE 19, WITH RESPECT TO THE DISCLOSURE IN DERIVATIVE TRANSACTIONS
RISK, IN GENERAL, PLEASE REVIEW THE ADEQUACY OF THE DISCLOSURE CONCERNING
DERIVATIVES IN THIS SECTION AND THROUGHOUT THE REGISTRATION STATEMENT, AND MAKE
APPROPRIATE REVISIONS, IN LIGHT OF THE OBSERVATIONS SET FORTH IN THE LETTER FROM
BARRY MILLER, ASSOCIATE DIRECTOR, DIVISION OF INVESTMENT MANAGEMENT, TO KARRIE
MCMILLAN, GENERAL COUNSEL, INVESTMENT COMPANY INSTITUTE, JULY 30, 2010 (AT
HTTP://WWW.SEC.GOV/DIVISIONS/INVESTMENT/GUIDANCE/ICI07010.PDF).
Response: The above-referenced letter has been reviewed in connection with
the preparation of the disclosure regarding the Fund's derivative transactions.
14. IN SPECIAL RISK CONSIDERATIONS, PLEASE CONSIDER INCLUDING DISCLOSURE
DESCRIBING THE RISKS OF WARRANTS AND RIGHTS, AS THESE INSTRUMENTS APPEAR TO BE
PART OF THE FUND'S PRINCIPAL INVESTMENT STRATEGY. FOR EXAMPLE, ON PAGE 4, IN
PORTFOLIO COMPOSITION, IT STATES THAT COMMON STOCK, A PRINCIPAL INVESTMENT OF
THE FUND, "REPRESENTS AN EQUITY OWNERSHIP INTEREST IN ISSUERS AND INCLUDE RIGHTS
OR WARRANTS TO PURCHASE COMMON STOCK." IN ADDITION, THE FUND'S INVESTMENT IN
CONVERTIBLE SECURITIES INCLUDE "DEBT SECURITIES WITH WARRANTS OR COMMON STOCK
ATTACHED ... " AND THAT THE PRICES OF THESE SECURITIES "MAY, TO SOME DEGREE,
REFLECT THE PERFORMANCE OF THE UNDERLYING STOCK."
Response: The Fund will not invest in warrants and rights as a principal
part of its investment strategy and, as such, the references to warrants and
rights has been removed from the prospectus. Instead, a discussion of such
investments and their associated investment risks has been added to the SAI.
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Summary of Fund Expenses
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15. IN SHAREHOLDER TRANSACTION EXPENSES, WITH RESPECT TO THE LINE ITEM
"OFFERING EXPENSES OF BORROWINGS EXPECTED TO BE BORNE BY THE FUND." PLEASE
CLARIFY THAT THE EXPENSES BORNE BY THE FUND ARE BORNE (INDIRECTLY) BY FUND
SHAREHOLDERS.
Response: The Prospectus has been revised to remove the line item
"Offering expenses expected to be borne by the Fund." Offering expenses will be
reflected in the line item "Offering expenses borne by Common Shareholders (as a
percentage of offering price).
Portfolio Turnover
------------------
16. ON PAGE 38, IT STATES THAT "[T]HERE ARE NO LIMITS ON THE RATE OF
PORTFOLIO TURNOVER, AND INVESTMENTS MAY BE SOLD WITHOUT REGARD TO LENGTH OF TIME
HELD WHEN THE FUND'S INVESTMENT STRATEGY SO DICTATES." IF THE FUND EXPECTS ITS
ANNUAL PORTFOLIO TURNOVER RATE TO EXCEED 100% UNDER NORMAL CIRCUMSTANCES, PLEASE
DISCLOSE IN THE SUMMARY PROSPECTUS FREQUENT TRADING AS A PRINCIPAL INVESTMENT
STRATEGY OF THE FUND. PLEASE ALSO DISCLOSE THE RISKS ASSOCIATED WITH FREQUENT
TRADING IN SPECIAL RISK CONSIDERATIONS.
Response: The Fund does not expect that its annual portfolio turnover will
exceed 100% under normal circumstances.
Investment Management Agreement
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17. ON PAGE 48, IN THE DISCLOSURE REQUIRED BY ITEM 9.1.B.(4) OF FORM N-2,
PLEASE SPECIFY THE FUND'S ANNUAL OR SEMI-ANNUAL REPORT TO SHAREHOLDERS AND
PROVIDE THE PERIOD COVERED BY THE REPORT.
Response: Please refer to page 49 of the prospectus, which states the
following:
A discussion regarding the basis for approval by the Board of Trustees of
the Fund's Investment Management Agreement with the Advisor, the Fund's
Sub-Advisory Agreement with the Advisor and the Sub-Advisor and the Fund's
Sub-Sub-Advisory Agreement with the Advisor, the Sub-Advisor and the
Sub-Sub-Advisor will be available in the Fund's Annual Report to
Shareholders for the year ended December 31, 2015.
* * * * * * * *
We appreciate your prompt attention to this Registration Statement. If you
have any questions or comments or would like to discuss our responses to your
questions, please feel free to contact Eric F. Fess at (312) 845-3781 or the
undersigned at (312) 845-3273.
Very truly yours,
CHAPMAN AND CUTLER LLP
By /s/ Walter Draney
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Walter Draney
Enclosures
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