Edgar Filing: FIRST TRUST SENIOR FLOATING RATE INCOME FUND II

As filed with the Securities and Exchange Commission on September 28, 2012
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1933 Act File No. 333-________
1940 Act File No. 811-21539

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-2

(Check appropriate box or boxes)

[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __
[ ] Post-Effective Amendment No. __

and

[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 6

First Trust Senior Floating Rate Income Fund II
Exact Name of Registrant as Specified in Declaration of Trust

120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)

(630) 765-8000
Registrant's Telephone Number, including Area Code

W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service

Copies of Communications to:

Eric F. Fess, Esq.
Chapman and Cutler LLP
111 West Monroe Street
Chicago, Illinois 60603

Approximate Date of Proposed Public Offering: From time to time after the
effective date of this Registration Statement

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If any of the securities being registered on this form are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [X]

It is proposed that this filing will become effective (check appropriate box)

[ ] when declared effective pursuant to section 8(c)

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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

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--------------------- ------------------ ------------------- ------------------- ----------------
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Offering Registration
Being Registered Registered Per Share(1) Price(1) Fee(2)
--------------------- ------------------ ------------------- ------------------- ----------------

Common Shares, 1,000 shares $15.60 $15,600 $1.79
$0.01 par value
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(1) Estimated pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, solely for the purpose of determining the registration fee, based
upon the average of high and low prices reported on September 27, 2012,
as reported on the NYSE.

(2) Transmitted prior to filing.

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
dates as the Commission, acting pursuant to said Section 8(a), may determine.

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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 2012

BASE PROSPECTUS

FIRST TRUST SENIOR FLOATING RATE INCOME FUND II

UP TO __________ COMMON SHARES

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The Fund. First Trust Senior Floating Rate Income Fund II (the "Fund") is a
diversified, closed-end management investment company which commenced operations
in May, 2004.

Investment Objectives and Policies. The Fund's primary investment objective
is to seek a high level of current income. As a secondary objective, the Fund
attempts to preserve capital. There can be no assurance that the Fund will
achieve its investment objectives.

The Fund pursues these objectives through investment in a portfolio of
senior secured floating rate corporate loans ("Senior Loans"). Under normal
market circumstances, the Fund invests at least 80% of its Managed Assets (as
defined below) in a diversified portfolio of Senior Loans. Investment in Senior
Loans involves credit risk and, during periods of generally declining credit
quality, it may be particularly difficult for the Fund to achieve its secondary
investment objective. Generally, at least 80% of the Fund's Managed Assets,
including Senior Loans, will be invested in lower grade debt instruments. Lower
grade debt instruments are commonly referred to as "high yield" or "junk bonds"
and are considered speculative with respect to the issuer's capacity to pay
interest and repay principal. The Fund may not be appropriate for all investors.
See "The Fund's Investments."

The Fund's currently outstanding common shares are, and the common shares
offered in this prospectus will be, subject to notice of issuance, listed on the
New York Stock Exchange under the trading or "ticker" symbol "FCT." The net
asset value of the Fund's common shares on August 31, 2012 was $14.77 per common
share, and the last sale price of the common shares on the New York Stock
Exchange on such date was $15.19.

THE FUND'S COMMON SHARES DO NOT REPRESENT A DEPOSIT OR OBLIGATION OF, AND
ARE NOT GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY
INSTITUTION, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.

The Fund may offer, on an immediate, continuous or delayed basis, up to
____________ of the Fund's common shares in one or more offerings. The Fund may
offer its common shares in amounts, at prices and on terms set forth in a
prospectus supplement to this prospectus. You should read this prospectus and
the related prospectus supplement carefully before you decide to invest in any
of the common shares.

The Fund may offer the common shares directly to one or more purchasers,
through agents that the Fund or the purchasers designate from time to time, or
to or through underwriters or dealers. The prospectus supplement relating to the
particular offering will identify any agents or underwriters involved in the
sale of the common shares, and will set forth any applicable purchase price,
fee, commission or discount arrangement between the Fund and such agents or
underwriters or among the underwriters or the basis upon which such amount may
be calculated. For more information about the manner in which the Fund may offer
the common shares, see "Plan of Distribution." The common shares may not be sold
through agents, underwriters or dealers without delivery of a prospectus
supplement.

INVESTING IN COMMON SHARES INVOLVES CERTAIN RISKS. YOU COULD LOSE SOME OR
ALL OF YOUR INVESTMENT. SEE "RISKS" BEGINNING ON PAGE [ ].

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
(continued on the following page)

(continued from previous page)

Investment Advisor. First Trust Advisors L.P. ("First Trust Advisors" or
the "Advisor") is the Fund's investment advisor and is responsible for the
day-to-day management of the Fund's investment portfolio, managing the Fund's
business affairs and providing certain clerical and bookkeeping and other
administrative services. The Advisor's Leveraged Finance Investment Team is
responsible for determining the Fund's overall investment strategy and
overseeing its implementation. First Trust Advisors serves as investment advisor
or portfolio supervisor to investment portfolios with approximately $58 billion
in assets which it managed or supervised as of August 31, 2012. See "Management
of the Fund" in this prospectus and "Investment Advisor" in the Fund's Statement
of Additional Information (the "SAI").

Use of Leverage. The Fund is currently engaged in leverage through the use
of a revolving credit facility and may in the future also engage in the use of
leverage through the issuance of preferred shares of beneficial interest
("Preferred Shares") or through commercial paper, notes, reverse repurchase
agreements and/or other borrowings (collectively "Borrowings"). The Fund limits
its use of leverage to an aggregate amount of up to 33-1/3% of the Fund's
Managed Assets after such issuance and/or Borrowings. "Managed Assets" means the
average daily gross asset value of the Fund (including assets attributable to
the Fund's Preferred Shares, if any, and the principal amount of Borrowings)
minus the sum of the Fund's accrued and unpaid dividends on any outstanding
Preferred Shares and accrued liabilities (other than the principal amount of any
Borrowings). As of August 31, 2012, the Fund's aggregate leverage through
Borrowings was approximately 29.9% of Managed Assets. The determination to use
leverage is subject to the approval of the Fund's Board of Trustees ("Board of
Trustees"). Through leveraging, the Fund seeks to obtain a higher return for the
holders of common shares than if the Fund did not use leverage. Leverage is a
speculative technique and investors should note that there are special risks and
costs associated with the leveraging of the common shares. There can be no
assurance that a leveraging strategy will be successful during any period in
which it is employed. See "Borrowings and Preferred Shares-Effects of Leverage,"
"Risks-Leverage Risk" and "Description of Shares."

You should read this prospectus and any prospectus supplement, which
contains important information about the Fund, before deciding whether to invest
in the common shares, and retain it for future reference. This prospectus,
together with any prospectus supplement, sets forth concisely the information
about the Fund that a prospective investor ought to know before investing. The
Statement of Additional Information (the "SAI"), dated ___________, 2012,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the SAI, the table
of contents of which is on page [ ] of this prospectus, annual and semi annual
reports to shareholders, and other information about the Fund, and make
shareholder inquiries by calling (800) 988-5891, by writing to the Fund or from
the Fund's or the Advisor's website (http://www.ftportfolios.com). The
information contained in the Fund's or the Advisor's website, whether currently
posted or posted in the future, is not part of this prospectus or the documents
incorporated by reference in this prospectus. You also may obtain a copy of the
SAI (and other information regarding the Fund) from the Securities and Exchange
Commission's web site (http://www.sec.gov).

Shares of common stock of closed-end investment companies, like the Fund,
frequently trade at discounts to their net asset values. If the Fund's common
shares trade at a discount to net asset value, the risk of loss may increase for
purchasers in any offering, especially for those investors who expect to sell
their common shares in a relatively short period after purchasing shares in such
offering. See "Risks Market Discount From Net Asset Value."

Prospectus dated , 2012

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CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

This prospectus, any accompanying prospectus supplement and the SAI,
including documents incorporated by reference, contain "forward looking
statements." Forward looking statements can be identified by the words "may,"
"will," "intend," "expect," "estimate," "continue," "plan," "anticipate," and
similar terms and the negative of such terms. By their nature, all forward
looking statements involve risks and uncertainties, and actual results could
differ materially from those contemplated by the forward looking statements.
Several factors that could materially affect the Fund's actual results are the
performance of the portfolio of securities held by the Fund, the conditions in
the U.S. and international financial and other markets, the price at which the
Fund's common shares trade in the public markets and other factors discussed in
the Fund's periodic filings with the Securities and Exchange Commission (the
"SEC").

Although we believe that the expectations expressed in these forward
looking statements are reasonable, actual results could differ materially from
those projected or assumed in these forward looking statements. The Fund's
future financial condition and results of operations, as well as any forward
looking statements, are subject to change and are subject to inherent risks and
uncertainties, such as those disclosed in the "Risks" section of this
prospectus. All forward looking statements contained or incorporated by
reference in this prospectus or any accompanying prospectus supplement are made
as of the date of this prospectus or the accompanying prospectus supplement, as
the case may be. We do not intend, and we undertake no obligation, to update any
forward looking statement. The forward looking statements contained in this
prospectus and any accompanying prospectus supplement are excluded from the safe
harbor protection provided by Section 27A of the Securities Act of 1933, as
amended (the "Securities Act").

Currently known risk factors that could cause actual results to differ
materially from the Fund's expectations include, but are not limited to, the
factors described in the "Risks" section of this prospectus. We urge you to
review carefully that section for a more detailed discussion of the risks of an
investment in the Fund's securities.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information that you should consider before
investing in the Fund's common shares. You should carefully read the entire
prospectus, any related prospectus supplement and the SAI, including the
documents incorporated by reference, particularly the section entitled "Risks"
beginning on page [ ].

The Fund First Trust Senior Floating Rate Income Fund II is a
diversified, closed-end management investment company
which commenced operations in May, 2004. The Fund's
primary investment objective is to seek a high level
of current income. As a secondary objective, the Fund
attempts to preserve capital. The Fund pursues its
objectives by investing in a portfolio of Senior
Loans. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund may
not be appropriate for all investors. The Fund
completed its initial public offering of common shares
in May, 2004, raising approximately $438.4 million in
equity after the payment of offering expenses. As of
August 31, 2012, the Fund had 25,362,005 common shares
outstanding and net assets applicable to common shares
of $374,575,564. The common shares of beneficial
interest offered by this prospectus are called "Common
Shares" and the holders of Common Shares are called
"Common Shareholders" in this prospectus. As used in
this prospectus, unless the context requires
otherwise, "common shares" refers to the Fund's common
shares of beneficial interest currently outstanding as
well as those Common Shares offered by this prospectus
and the holders of common shares are called "common
shareholders."

Investment Advisor First Trust Advisors L.P. ("First Trust Advisors" or
the "Advisor") is the Fund's investment advisor and is
responsible for the day-to-day management of the
Fund's investment portfolio, managing the Fund's
business affairs and providing certain clerical and
bookkeeping and other administrative services. The
Advisor's Leveraged Finance Investment team is
responsible for the day to day management of the
Fund's portfolio.

First Trust Advisors, a registered investment advisor,
is an Illinois limited partnership formed in 1991. It
serves as investment advisor or portfolio supervisor
to investment portfolios with approximately $58
billion in assets which it managed or supervised as of
August 31, 2012.

The Offering The Fund may offer, on an immediate, continuous or
delayed basis, up to _____ Common Shares on terms to
be determined at the time of the offering. The Common
Shares will be offered at prices and on terms to be
set forth in one or more prospectus supplements to
this prospectus. Offerings of the Common Shares will
be subject to the provisions of the Investment Company
Act of 1940, as amended (the "1940 Act") which
generally require that the public offering price of
common shares of a closed-end investment company
(exclusive of distribution commissions and discounts)
must equal or exceed the net asset value per share of
a company's common stock (calculated within 48 hours
of pricing), absent shareholder approval or under
certain other circumstances. See "Description of
Shares."

The Fund may offer the Common Shares directly to one
or more purchasers, through agents that the Fund or
the purchasers designate from time to time, or to or
through underwriters or dealers. The prospectus
supplement relating to the offering will identify any
agents or underwriters involved in the sale of the
Common Shares, and will set forth any applicable
purchase price, fee, commission or discount
arrangement between the Fund and such agents or
underwriters or among underwriters or the basis upon
which such amount may be calculated. See "Plan of
Distribution." The Common Shares may not be sold

through agents, underwriters or dealers without
delivery of a prospectus supplement describing the
method and terms of the offering of the Common Shares.

Use of Proceeds Unless otherwise specified in a prospectus supplement,
the Fund will use the net proceeds from the sale of
the Common Shares primarily to invest in accordance
with its investment objective and policies, or use
such proceeds for other general corporate purposes.

Distributions The Fund's present distribution policy, which may be
changed at any time by the Fund's Board of Trustees,
is to distribute monthly all or a portion of its net
investment income to common shareholders (after the
payment of interest and/or dividends in connection
with leverage). In addition, the Fund intends to
distribute any net long-term capital gains to common
shareholders as long-term capital gain dividends at
least annually. Unless an election is made to receive
dividends in cash, Common Shareholders will
automatically have all dividends and distributions
reinvested in Common Shares through the Fund's
Dividend Reinvestment Plan. See "Dividend Reinvestment
Plan."

If the Fund realizes a long-term capital gain, it will
be required to allocate such gain between the common
shares and the Preferred Shares, if any, issued by the
Fund in proportion to the total dividends paid to each
class of shares for the year in which the income is
realized. See "Distributions."

Investment Objectives
and Policies The Fund's primary investment objective is to seek a
high level of current income. As a secondary
objective, the Fund will attempt to preserve capital.
The Fund pursues these objectives through investment
in a portfolio of senior secured floating rate
corporate loans ("Senior Loans"). There can be no
assurance that the Fund will achieve its investment
objectives. Investment in Senior Loans involves credit
risk and, during periods of generally declining credit
quality, it may be particularly difficult for the Fund
to achieve its secondary investment objective. The
Fund may not be appropriate for all investors. See
"The Fund's Investments."

Under normal conditions, the Fund invests at least 80%
of its Managed Assets (as defined below) in a
diversified portfolio of Senior Loans. The Fund cannot
change this investment policy unless the Fund's
shareholders receive at least 60 days prior notice of
any such change. The portion of the Fund's assets
invested in Senior Loans will vary from time to time
consistent with the Fund's investment objectives,
changes in market prices for Senior Loans, changes in
interest rates and other economic and market factors.

Senior Loans generally hold one of the most senior
positions in the capital structure of a business
entity (the "Borrower"), are typically secured with
specific collateral and have a claim on the assets
and/or stock of the Borrower that is senior to that
held by subordinated debtholders and stockholders of
the Borrower. The proceeds of Senior Loans primarily
are used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock
repurchases, and, to a lesser extent, to finance
internal growth and for other corporate purposes.
Senior Loans have rates of interest which are
typically redetermined either monthly, quarterly or
semiannually by reference to a base lending rate, plus
a premium. This base lending rate is primarily the
London Inter Bank Offered Rate ("LIBOR"), and
secondarily the prime rate offered by one or more
major United States banks (the "Prime Rate") on the
certificate of deposit rate or other base lending rate
used by commercial lenders. The Senior Loans held by
the Fund typically will have a dollar weighted average
period until the next interest rate adjustment of
approximately 90 days or less. In the experience of

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the Fund's portfolio managers, over the last 15 years,
because of prepayments and refinancings, the average
life of a typical Senior Loan has been approximately
24 to 36 months. The Senior Loans in which the Fund
invests are primarily below investment grade, or "high
yield."

Under normal circumstances, the Fund may also invest
up to 10% of its Managed Assets through purchasing
revolving credit facilities, investment grade debtor
in possession financing, unsecured loans, other
floating rate debt securities, such as notes, bonds,
and asset backed securities (such as special purpose
trusts investing in bank loans), investment grade
loans and fixed income debt obligations,
publicly-traded high-yield debt securities and money
market instruments, such as commercial paper. On
December 12, 2011, the Fund's Board of Trustees
approved changes to the Fund's investment strategy,
effective on or about April 9, 2012, to permit the
purchase of publicly-traded high-yield debt
securities. See "The Fund's Investments."

The Fund may also invest up to 10% of its Managed
Assets in Senior Loans and, on limited occasions,
equity and debt securities acquired in connection
therewith, of (i) firms that, at the time of
acquisition, have defaulted on their debt obligations
and/or filed for protection under Chapter 11 of the
U.S. Bankruptcy Code or have entered into a voluntary
reorganization in conjunction with their creditors and
stakeholders in order to avoid a bankruptcy filing, or
(ii) firms prior to an event of default whose acute
operating and/or financial problems have resulted in
the markets valuing their respective securities and
debt at sufficiently discounted prices so as to be
yielding, should they not default, a significant
premium over comparable duration U.S. Treasury bonds.
Investing in the securities and debt of distressed
issuers ("Special Situation Investments") involves a
far greater level of risk than investing in issuers
whose debt obligations are being met and whose debt
trades at or close to its "par" value. While offering
a greater potential opportunity for capital
appreciation, Special Situation Investments are highly
speculative with respect to the issuer's ability to
continue to make interest payments and/or to pay its
principal obligations in full. Special Situation
Investments can be very difficult to properly value,
making them susceptible to a high degree of price
volatility and rendering them less liquid than
performing debt obligations. Those Special Situation
Investments involved in a bankruptcy proceeding can be
subject to a high degree of uncertainty with regard to
both the timing and the amount of the ultimate
settlement. Special Situation Investments include non
investment grade debtor in possession financing, sub
performing real estate loans and mortgages, privately
placed senior, mezzanine, subordinated and junior
debt, letters of credit, trade claims, convertible
bonds, and preferred and common stocks.

The Fund may invest up to 15% of its Managed Assets in
U.S. dollar denominated foreign investments,
predominantly in developed countries and territories
of those countries, but in no case will the Fund
invest in debt securities of issuers located in
emerging markets. The value of foreign investments is
affected by changes in foreign tax laws (including
withholding tax), government policies (in this country
or abroad) and relations between nations, and trading,
settlement, custodial, and other operational risks. In
addition, the costs of investing abroad are generally
higher than in the United States, and foreign
securities markets may be less liquid, more volatile,
and less subject to governmental supervision than
markets in the United States. Foreign investments
could also be affected by other factors not present in
the United States, including expropriation, armed
conflict, confiscatory taxation, lack of uniform

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accounting and auditing standards, less publicly
available financial and other information, and
potential difficulties in enforcing contractual
obligations.

It is anticipated that at least 80% of the Fund's
Managed Assets will be invested in lower grade debt
instruments, although from time to time all of the
Fund's Managed Assets may be invested in such lower
grade debt instruments. The Fund's investments in debt
instruments may have fixed or variable principal
payments and all types of interest rate and reset
terms, including, but not limited to, fixed rate,
adjustable rate, zero coupon, contingent, deferred,
payment-in-kind and auction rate features. The Fund
does not intend to purchase publicly-traded equity
securities but may receive such securities as a result
of a restructuring of the debt of the issuer or the
reorganization of a Senior Loan or as part of a
package of securities acquired together with the
Senior Loans of an issuer.

Lower grade debt instruments are rated "Ba1" or lower
by Moody's Investors Service, Inc. ("Moody's"), "BB+"
or lower by Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies ("S&P"), or
comparably rated by another nationally recognized
statistical rating organization ("NRSRO") or, if
unrated, are of comparable credit quality. Lower grade
debt instruments are commonly referred to as "high
yield" or "junk bonds" and are considered speculative
with respect to the issuer's capacity to pay interest
and repay principal. They involve greater risk of
loss, are subject to greater price volatility and are
less liquid, especially during periods of economic
uncertainty or change, than higher rated debt
instruments. Lower grade debt instruments may also be
more susceptible to real or perceived adverse economic
and competitive industry conditions than higher rated
debt instruments. Unlike higher rated debt
instruments, which tend to react mainly to
fluctuations in the general level of interest rates,
the market values of lower grade debt instruments tend
to reflect to a greater extent individual developments
of the issuer, although movements in the general
direction of interest rates can be expected to impact
the market value of lower grade debt instruments. In
addition, lower grade debt instruments tend to be more
sensitive to economic conditions.

"Managed Assets" means the average daily gross asset
value of the Fund (including assets attributable to
the Fund's Preferred Shares, if any, and the principal
amount of borrowings) minus the sum of the Fund's
accrued and unpaid dividends on any outstanding
Preferred Shares and accrued liabilities (other than
the principal amount of any borrowings incurred or of
commercial paper or notes issued by the Fund). For
purposes of determining Managed Assets, the
liquidation preference of any Preferred Shares is not
treated as a liability. Percentage limitations
described in this prospectus with respect to portfolio
investments by the Fund (as opposed to the use of
leverage) are as of the time of investment by the Fund
and may be exceeded on a going forward basis as a
result of market value fluctuations of the Fund's
portfolio, with the exception of any limitations on
Borrowings or Preferred Shares it may issue.

Under normal market conditions, the Fund invests at
least 80% of its Managed Assets in Senior Loans to
meet its investment objectives. The Fund may invest
the remainder of its assets in other investments and
securities of various types. For temporary defensive
purposes, the Fund may depart from its principal
investment strategies and invest part or all of its
assets in securities with remaining maturities of less
than one year, cash equivalents, or may hold cash.
During such periods, the Fund may not be able to
achieve its investment objectives.

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Use of Leverage The Fund is currently engaged in leverage through the
use of a revolving credit facility to seek to enhance
the level of its current distributions to common
shareholders and may in the future also leverage its
assets through the use of repurchase agreements and
through the issuance of Preferred Shares or commercial
paper, notes and/or other Borrowings (each a "Leverage
Instrument" and collectively the "Leverage
Instruments") in an aggregate amount of up to 33-1/3%
of the Fund's Managed Assets after such issuance
and/or borrowing. Leverage creates a greater risk of
loss, as well as potential for more gain, for the
Common Shares than if leverage is not used. The Fund's
leveraging strategy may not be successful. See
"Risks-Leverage Risk." Investors should understand
that Leverage Instruments have seniority over the
Common Shares.

The Fund entered into a Revolving Credit and Security
Agreement on July 13, 2012 (the "Credit Facility")
with Liberty Street Funding LLC, as conduit lender
(the "Conduit Lender") and The Bank of Nova Scotia, as
secondary lender and agent for the secured parties
under the agreement, to be used as leverage for the
Fund. The Credit Facility currently has an expiration
date of July 12, 2013 and may be renewed annually. The
Credit Facility provides for a secured line of credit
for the Fund, where Fund assets are pledged against
advances made to the Fund. Under the requirements of
the 1940 Act, the Fund, immediately after any such
borrowings, must have an "asset coverage" of at least
300% (Borrowings cannot exceed 33-1/3% of the Fund's
total assets). The total commitment under the Credit
Facility is $175,000,000. At August 31, 2012, the
amount outstanding was $160,000,000. The loans under
the Credit Facility are funded by the Conduit Lender
and bear interest for each settlement period at a rate
per annum based on the commercial paper rate of the
Conduit Lender. The high and low annual interest rates
for the loans under the Credit Facility funded by the
Conduit Lender since the commencement of the Credit
Facility to August 31, 2012, were 0.238% and 0.235%,
respectively, with a weighted average interest rate of
0.237%. The annual interest rate in effect for such
loans at August 31, 2012 was 0.238%. The Fund also
pays additional borrowing costs, which includes a
utilization fee at a per annum rate of 0.40% of the
daily average of the aggregate outstanding principal
amount of the advances during the prior calendar
month, and a commitment fee at a per annum rate of the
product of (i) 0.40% of the daily average of the total
commitment in effect (or if terminated, the aggregate
outstanding principal amount of the advances funded or
maintained) during the preceding calendar month and
(ii) 1.02. See "Use of Leverage."

Preferred Shares, if issued, will generally pay
dividends based on short-term rates, which will be
reset frequently. So long as the rate of return, net
of applicable Fund expenses, on the Fund's portfolio
investments purchased with leverage exceeds the then
current interest rate or dividend rate on the Leverage
Instruments, the Fund will generate more return or
income than will be needed to pay such dividends or

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interest payments. In this event, the excess will be
available to pay higher dividends to common
shareholders. When leverage is employed, the NAV and
market prices of the common shares and the yield to
common shareholders will be more volatile.

Tax Matters Distributions with respect to the Common Shares will
constitute dividends to the extent of the Fund's
current and accumulated earnings and profits, as
calculated for U.S. federal income tax purposes. Such
dividends generally will be taxable as ordinary income
to common shareholders. Distributions of net capital
gain that are designated by the Fund as capital gain
dividends will be treated as long-term capital gains
in the hands of common shareholders receiving such
distributions. In addition, distributions generally
will not constitute "qualified dividends" for U.S.
federal income tax purposes and thus will not be
eligible for the lower tax rates on qualified
dividends. See "Tax Matters."

Listing The Fund's currently outstanding common shares are,
and the Common Shares offered in this prospectus and
any applicable prospectus supplement will be, subject
to notice of issuance, listed on the New York Stock
Exchange under the trading or "ticker" symbol "FCT."
The net asset value of the Fund's common shares at the
close of business on August 31, 2012 was $14.77 per
common share, and the last sale price of the common
shares on the New York Stock Exchange on such date was
$15.19.

Custodian,Administrator
and Transfer Agent BNY Mellon Investment Servicing (US) Inc. serves as
the Fund's Administrator, Fund Accountant, Transfer
Agent and Board Administrator in accordance with
certain fee arrangements. The Bank of New York Mellon
serves as the Fund's Custodian in accordance with
certain fee arrangements.

Closed-End Structure Closed-end funds differ from open-end management
investment companies (commonly referred to as mutual
funds) in that closed-end funds generally list their
shares for trading on a securities exchange and do not
redeem their shares at the option of the shareholder.
By comparison, mutual funds issue securities
redeemable at net asset value at the option of the
shareholder and typically engage in a continuous
offering of their shares. Mutual funds are subject to
continuous asset in flows and out flows that can
complicate portfolio management, whereas closed-end
funds generally can stay more fully invested in
securities consistent with the closed-end fund's
investment objective and policies. In addition, in
comparison to open-end funds, closed-end funds have
greater flexibility in their ability to make certain
types of investments, including investments in
illiquid securities.

Shares of closed-end investment companies listed for
trading on a securities exchange frequently trade at a
discount from net asset value, but in some cases trade
at a premium. See "Market and Net Asset Value
Information." The market price may be affected by net
asset value, dividend or distribution levels (which
are dependent, in part, on expenses), supply of and
demand for the shares, stability of dividends or
distributions, trading volume of the shares, general
market and economic conditions and other factors
beyond the control of the closed-end fund. The
foregoing factors may result in the market price of
the common shares of the Fund being greater than, less
than or equal to, net asset value. The Board of
Trustees has reviewed the structure of the Fund in
light of its investment objective and policies and has
determined that the closed-end structure is
appropriate. As described in this prospectus, however,
the Board of Trustees may review periodically the
trading range and activity of the Fund's common shares
with respect to their net asset value and may take
certain actions to seek to reduce or eliminate any

-6-

such discount. Such actions may include open market
repurchases or tender offers for the common shares at
net asset value or the possible conversion of the Fund
to an open-end investment company. There can be no
assurance that the Board of Trustees will decide to
undertake any of these actions or that, if undertaken,
such actions would result in the common shares trading
at a price equal to or close to net asset value per
common share. In addition, as noted above, the Board
of Trustees determined in connection with the initial
offering of common shares of the Fund that the closed
end structure is desirable, given the Fund's
investment objective and policies. Investors should
assume, therefore, that it is highly unlikely that the
Board of Trustees would vote to convert the Fund to an
open-end investment company. See "Structure of the
Fund; Common Share Repurchases and Change in Fund
Structure."

Special Risk
Considerations Risk is inherent in all investing. The following
discussion summarizes the principal risks that you
should consider before deciding whether to invest in
the Fund. For additional information about the risks
associated with investing in the Fund, see "Risks."

Management Risk. The Fund is subject to management
risk because it is an actively managed portfolio. The
Advisor applies investment techniques and risk
analyses in making investment decisions for the Fund,
but there can be no guarantee that these will produce
the desired results.

Credit Risk. The Fund's net asset value and ability to
pay dividends is dependent upon the performance of the
Fund's Managed Assets. That performance, in turn, is
subject to a number of risks, primarily the credit
risk of the Fund's underlying assets. Credit risk is
the risk of nonpayment of scheduled interest and/or
principal payments. Credit risk also is the risk that
one or more investments in the Fund's portfolio will
decline in price, or fail to pay interest or principal
when due, because the issuer of the security
experiences a decline in its financial status. The
value of Senior Loans or other securities owned by the
Fund is affected by the creditworthiness of the
Borrowers/issuers and by general economic and specific
industry conditions.

Senior Loans. In the event a Borrower fails to pay
scheduled interest or principal payments on a Senior
Loan held by the Fund, the Fund will experience a
reduction in its income and a decline in the market
value of the Senior Loan, which will likely reduce
dividends and lead to a decline in the net asset value
of the Fund's Common Shares. If the Fund acquires a
Senior Loan from another Lender, for example, by
acquiring a participation, the Fund may also be
subject to credit risks with respect to that Lender.
See "The Fund's Investments-Additional Information
Concerning Senior Loans."

Senior Loans generally involve less risk than
unsecured or subordinated debt and equity instruments
of the same issuer because the payment of principal
and interest on Senior Loans is a contractual
obligation of the issuer that, in most instances,
takes precedence over the payment of dividends, or the
return of capital, to the issuer's shareholders and
payments to bond holders. The Fund generally invests
in Senior Loans that are secured with specific
collateral. However, the value of the collateral may
not equal the Fund's investment when the Senior Loan
is acquired or may decline below the principal amount
of the Senior Loan subsequent to the Fund's
investment. Also, to the extent that collateral
consists of stock of the Borrower or its subsidiaries
or affiliates, the Fund bears the risk that the stock
may decline in value, be relatively illiquid, and/or
may lose all or substantially all of its value,
causing the Senior Loan to be under collateralized.

-7-

Therefore, the liquidation of the collateral
underlying a Senior Loan may not satisfy the issuer's
obligation to the Fund in the event of non-payment of
scheduled interest or principal, and the collateral
may not be readily liquidated.

In the event of the bankruptcy of a Borrower, the Fund
could experience delays and limitations on its ability
to realize the benefits of the collateral securing the
Senior Loan. Among the credit risks involved in a
bankruptcy are assertions that the pledge of
collateral to secure a Senior Loan constitutes a
fraudulent conveyance or preferential transfer that
would have the effect of nullifying or subordinating
the Fund's rights to the collateral.

If legislation or state or federal regulations impose
additional requirements or restrictions on the ability
of financial institutions to make loans, the
availability of Senior Loans for investment by the
Fund may be adversely affected. In addition, such
requirements or restrictions could reduce or eliminate
sources of financing for certain Borrowers. This would
increase the risk of default. If legislation or
federal or state regulations require financial
institutions to dispose of Senior Loans that are
considered highly leveraged transactions or subject
Senior Loans to increased regulatory scrutiny,
financial institutions may determine to sell such
Senior Loans. Such sales could result in prices that,
in the opinion of the Advisor, do not represent fair
value. If the Fund attempts to sell a Senior Loan at a
time when a financial institution is engaging in such
a sale, the price the Fund could get for the Senior
Loan may be adversely affected.

Illiquidity. Although the resale, or secondary market
for Senior Loans is growing, it is currently limited.
There is no organized exchange or board of trade on
which Senior Loans are traded. Instead, the secondary
market for Senior Loans is an unregulated inter-dealer
or inter-bank resale market.

Senior Loans usually trade in large denominations
(typically $1 million and higher) and trades can be
infrequent. The market has limited transparency so
that information about actual trades may be difficult
to obtain. Accordingly, some or many of the Senior
Loans in which the Fund invests will be relatively
illiquid.

In addition, Senior Loans in which the Fund invests
may require the consent of the Borrower and/or agent
prior to sale or assignment. These consent
requirements can delay or impede the Fund's ability to
sell Senior Loans and can adversely affect the price
that can be obtained. The Fund may have difficulty
disposing of Senior Loans if it needs cash to repay
debt, to pay dividends, to pay expenses or to take
advantage of new investment opportunities. In
addition, if the Fund purchases a relatively large
assignment of a Senior Loan to generate extra income
sometimes paid to large lenders, the limitations of
the secondary market may inhibit the Fund from selling
a portion of the Senior Loan and reducing its exposure
to the Borrower when the Advisor deems it advisable to
do so.

Risks Associated with Adverse Developments in the
Credit Markets. The Fund's results of operations are
materially affected by conditions in the markets for
Senior Loans, as well as the broader financial markets
and the economy generally. Beginning in 2007,
significant adverse changes in financial market
conditions resulted in a deleveraging of the entire
global financial system and the forced sale of large
quantities of financial assets. Concerns over economic
recession, geopolitical issues, unemployment and the
availability and cost of financing contributed to
increased volatility and diminished expectations for
the economy and markets. As a result of these
conditions, many investors suffered severe losses in

-8-

their portfolios and several major market participants
failed or have been impaired, resulting in a
significant contraction in market liquidity. This
illiquidity negatively affected both the terms and
availability of financing for Borrowers. Volatility
and deterioration in the markets for Senior Loans as
well as the broader financial markets may adversely
affect the performance and market value of the Fund's
portfolio. If these conditions exist, institutions
from which the Fund seeks financing for the Fund's
investments may tighten their lending standards or
become insolvent, which could make it more difficult
for the Fund to obtain financing on favorable terms or
at all. Adverse developments in the broader loan
market may adversely affect the value of the assets in
which the Fund invests.

Investment and Market Risk. An investment in Common
Shares is subject to investment risk, including the
possible loss of the entire principal amount that you
invest. Your investment in Common Shares represents an
indirect investment in the portfolio owned by the
Fund. The value of these investments, like other
investments, may move up or down, sometimes rapidly
and unpredictably. The value of the portfolio in which
the Fund invests will affect the value of the Common
Shares. Your Common Shares at any point in time may be
worth less than your original investment, even after
taking into account the reinvestment of Fund dividends
and distributions.

Government Intervention Risk. The recent instability
in the financial markets has led the U.S. Government
to take a number of unprecedented actions designed to
support certain financial institutions and segments of
the financial markets that have experienced extreme
volatility, and in some cases a lack of liquidity.
Federal, state and other governments, their regulatory
agencies or self regulatory organizations may take
additional actions that affect the regulation of the
securities in which the Fund invests, or the issuers
of such securities, in ways that are unforeseeable.
Issuers of corporate fixed income securities might
seek protection under the bankruptcy laws. Legislation
or regulation may also change the way in which the
Fund itself is regulated. Such legislation or
regulation could limit or preclude the Fund's ability
to achieve its investment objectives. The Advisor will
monitor developments and seek to manage the Fund's
portfolio in a manner consistent with achieving the
Fund's investment objectives, but there can be no
assurance that it will be successful in doing so.

Congress has enacted sweeping financial legislation,
the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the "Dodd-Frank Act"), signed
into law by President Obama on July 21, 2010, which
addresses, among other areas, the operation of
financial institutions. Many provisions of the
Dodd-Frank Act will be implemented through regulatory
rulemakings and similar processes over a period of
time. The impact of the Dodd-Frank Act, and of
follow-on regulation, on trading strategies and
operations is impossible to predict, and may be
adverse. Practices and areas of operation subject to
significant change based on the impact, direct or
indirect, of the Dodd-Frank Act and follow-on
regulation, may change in manners that are
unforeseeable, with uncertain effects. By way of
example and not limitation, direct and indirect
changes from the Dodd-Frank Act and follow-on
regulation may occur to a significant degree with
regard to, among other areas, the trading and use of
many derivative instruments, including swaps. There
can be no assurance that such legislation or
regulation will not have a material adverse effect on
the Fund.

-9-

Further, the Dodd-Frank Act created the Financial
Stability Oversight Council ("FSOC"), an interagency
body charged with identifying and monitoring systemic
risks to financial markets. The FSOC has the authority
to require that non-bank financial companies that are
"predominantly engaged in financial activities" whose
failure it determines would pose systemic risk, be
placed under the supervision of the Board of Governors
of the Federal Reserve System ("Federal Reserve"). The
FSOC has the authority to recommend that the Federal
Reserve adopt more stringent prudential standards and
reporting and disclosure requirements for non-bank
financial companies supervised by the Federal Reserve.
The FSOC also has the authority to make
recommendations to the Federal Reserve on various
other matters that may affect the Fund. The FSOC may
also recommend that other federal financial regulators
impose more stringent regulation upon, or ban
altogether, financial activities of any financial firm
that poses what it determines are significant risks to
the financial system.

The implementation of the Dodd-Frank Act could also
adversely affect the Advisor and the Fund by
increasing transaction and/or regulatory compliance
costs. In addition, greater regulatory scrutiny and
the implementation of enhanced and new regulatory
requirements may increase the Advisor's and the Fund's
exposure to potential liabilities, and in particular
liabilities arising from violating any such enhanced
and/or new regulatory requirements. Increased
regulatory oversight could also impose administrative
burdens on the Advisor and the Fund, including,
without limitation, responding to investigations and
implementing new policies and procedures. The ultimate
impact of the Dodd-Frank Act, and any resulting
regulation, is not yet certain and the Advisor and the
Fund may be affected by the new legislation and
regulation in ways that are currently unforeseeable.

Potential Conflicts of Interest Risk. First Trust
Advisors and the portfolio managers have interests
which may conflict with the interests of the Fund. In
particular, First Trust Advisors may manage and/or
advise other investment funds or accounts with the
same or similar investment objective and strategies as
the Fund. As a result, First Trust Advisors and the
Fund's portfolio managers may devote unequal time and
attention to the management of the Fund and those
other funds and accounts, and may not be able to
formulate as complete a strategy or identify equally
attractive investment opportunities as might be the
case if they were to devote substantially more
attention to the management of the Fund. First Trust
Advisors and the Fund's portfolio managers may
identify a limited investment opportunity that may be
suitable for multiple funds and accounts, and the
opportunity may be allocated among these several funds
and accounts, which may limit the Fund's ability to
take full advantage of the investment opportunity.
Additionally, transaction orders may be aggregated for
multiple accounts for purpose of execution, which may
cause the price or brokerage costs to be less
favorable to the Fund than if similar transactions
were not being executed concurrently for other
accounts. At times, a portfolio manager may determine
that an investment opportunity may be appropriate for
only some of the funds and accounts for which he or
she exercises investment responsibility, or may decide
that certain of the funds and accounts should take
differing positions with respect to a particular
security. In these cases, the portfolio manager may
place separate transactions for one or more funds or
accounts which may affect the market price of the
security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds
and accounts. For example, a portfolio manager may
determine that it would be in the interest of another

-10-

account to sell a security that the Fund holds,
potentially resulting in a decrease in the market
value of the security held by the Fund.

The portfolio managers may also engage in cross trades
between funds and accounts, may select brokers or
dealers to execute securities transactions based in
part on brokerage and research services provided to
First Trust Advisors which may not benefit all funds
and accounts equally and may receive different amounts
of financial or other benefits for managing different
funds and accounts. Finally, First Trust Advisors or
its affiliates may provide more services to some types
of funds and accounts than others.

There is no guarantee that the policies and procedures
adopted by First Trust Advisors and the Fund will be
able to identify or mitigate the conflicts of interest
that arise between the Fund and any other investment
funds or accounts that First Trust Advisors may manage
or advise from time to time. For further information
on potential conflicts of interest, see "Investment
Advisor" in the SAI.

Valuation Difficulties. The Fund will value its Senior
Loans daily. However, because the secondary market for
Senior Loans is limited, it may be difficult to value
some loans. Market quotations may not be readily
available for some Senior Loans and valuation may
require more research than for liquid securities. In
addition, elements of judgment may play a greater role
in valuation of Senior Loans than for securities with
a secondary market, because there is less reliable
objective data available.

Interest Rate Risk. During normal market conditions,
changes in market interest rates will affect the Fund
in certain ways. The principal effect will be that the
yield on the Fund's Common Shares will tend to rise or
fall as market interest rates rise and fall. This is
because Senior Loans, the majority of the assets in
which the Fund invests, pay interest at rates which
float in response to changes in market rates. However,
because the rates of interest paid on the Senior Loans
in which the Fund invests will have a weighted average
reset period that is typically less than 90 days,
changes in prevailing interest rates can be expected
to cause some fluctuation in the Fund's Net Asset
Value ("NAV"). Similarly, a sudden and significant
increase in market interest rates may cause a decline
in the Fund's NAV. See "Risks-Interest Rate Risk."

Changes to Net Asset Value. The NAV of the Fund is
expected to change in response to a variety of
factors, primarily in response to changes in the
creditworthiness of the Borrowers on the Senior Loans
in which the Fund invests. Changes in market interest
rates may also have a moderate impact on the Fund's
NAV. Another factor which can affect the Fund's NAV is
changes in the pricing obtained for the Fund's assets.
See "Net Asset Value."

Lower Grade and Below Investment Grade Debt Risk. The
Fund may invest up to 100% of its Managed Assets in
lower grade debt securities, which may also be
referred to as below investment grade debt securities.
Below investment grade debt securities are rated below
"Baa" by Moody's, below "BBB" by S&P, comparably rated
by another NRSRO or, if unrated, determined to be of
comparable credit quality by the Advisor. Below
investment grade debt instruments are commonly
referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's
capacity to pay interest and repay principal and are
susceptible to default or decline in market value due
to adverse economic and business developments. The
market values for high-yield securities tend to be
very volatile, and these securities are less liquid

-11-

than investment grade debt securities. For these
reasons, your investment in the Fund is subject to the
following specific risks:

o increased price sensitivity to changing
interest rates and to a deteriorating economic
environment;

o greater risk of loss due to default or
declining credit quality;

o adverse company specific events more likely to
render the issuer unable to make interest
and/or principal payments; and

o negative perception of the high-yield market
which may depress the price and liquidity of
high-yield securities.

The secondary market for high-yield securities may not
be as liquid as the secondary market for more highly
rated securities, a factor which may have an adverse
effect on the Fund's ability to dispose of a
particular security. There are fewer dealers in the
market for high-yield securities than for investment
grade obligations. The prices quoted by different
dealers may vary significantly and the spread between
the bid and asked price is generally much larger than
for higher quality instruments. Under adverse market
or economic conditions, the secondary market for
high-yield securities could contract further,
independent of any specific adverse changes in the
condition of a particular issuer, and these securities
may become illiquid. As a result, the Fund could find
it more difficult to sell these securities or may be
able to sell the securities only at prices lower than
if such securities were widely traded. Prices realized
upon the sale of such lower rated or unrated
securities, under these circumstances, may be less
than the prices used in calculating the Fund's NAV.

The Senior Loans in which the Fund invests are
generally lower grade. These lower grade debt
instruments may become the subject of bankruptcy
proceedings or otherwise subsequently default as to
the repayment of principal and/or payment of interest
or be downgraded to ratings in the lower rating
categories ("Ca" or lower by Moody's, "CC" or lower by
S&P or comparably rated by another NRSRO). The value
of these securities is affected by the
creditworthiness of the issuers of the securities and
by general economic and specific industry conditions.
Issuers of lower grade debt instruments are not
perceived to be as strong financially as those with
higher credit ratings, so the securities are usually
considered speculative investments. These issuers are
generally more vulnerable to financial setbacks and
recession than more creditworthy issuers which may
impair their ability to make interest and principal
payments. Lower grade debt instruments tend to be less
liquid than higher grade debt instruments. See
"Risks-Credit Risk."

Investment decisions will be based largely on the
credit analysis performed by the Advisor, and not on
rating agency evaluation. This analysis may be
difficult to perform. Information about a Senior Loan
and its issuer generally is not in the public domain.
Moreover, Senior Loans may not be rated by any NRSRO.
Many issuers have not issued securities to the public
and are not subject to reporting requirements under
federal securities laws. Generally, however, issuers
are required to provide financial information to
lenders and information may be available from other
Senior Loan participants, agents or others that invest
in, trade in, originate or administer Senior Loans.

Fixed-Income Securities Risk. In addition to the risks
discussed above, debt securities, including high-yield
securities such as the publicly-traded high-yield debt
securities in which the Fund invests, are subject to
certain risks, including:

-12-

o Issuer/Credit Risk. The value of fixed-income
securities may decline for a number of reasons
which directly relate to the issuer, such as
management performance, financial leverage,
reduced demand for the issuer's goods and
services, and failure.

o Interest Rate Risk. Interest rate risk is the
risk that fixed-income securities will decline
in value because of changes in market interest
rates. When market interest rates rise, the
market value of such securities generally will
fall. During periods of rising interest rates,
the average life of certain types of securities
may be extended because of slower than expected
prepayments. This may lock in a below market
yield, increase the security's duration and
reduce the value of the security. Investments
in debt securities with long-term maturities
may experience significant price declines if
long-term interest rates increase. Market
interest rates in the United States currently
are near historically low levels. An increase
in the interest payments on the Fund's
Borrowings or dividends on any Preferred Shares
relative to the interest it earns on its
investment securities may adversely affect the
Fund's performance.

o Reinvestment Risk. Reinvestment risk is the
risk that income from the Fund's portfolio will
decline if the Fund invests the proceeds from
matured, traded or called bonds at market
interest rates that are below the Fund's
portfolio's current earnings rate. A decline in
income could affect the common shares' market
price, level of distributions or the overall
return of the Fund.

o Prepayment Risk. During periods of declining
interest rates, the issuer of a security may
exercise its option to prepay principal earlier
than scheduled, forcing the Fund to reinvest
the proceeds from such prepayment in lower
yielding securities. This is known as call or
prepayment risk. Debt securities frequently
have call features that allow the issuer to
repurchase the security prior to its stated
maturity. An issuer may redeem an obligation if
the issuer can refinance the debt at a lower
cost due to declining interest rates or an
improvement in the credit standing of the
issuer.

Economic Sector Risk. Under normal market conditions,
the Fund is 80% invested in Senior Loans. This may
make the Fund more susceptible to adverse economic,
political or regulatory events that affect the value
of Senior Loans, and increase the potential for
fluctuation in the net asset value of the Fund's
Common Shares.

Market Discount From Net Asset Value. The Fund's
common shares have been publicly traded since May 28,
2004 and have traded both at a premium and at a
discount relative to net asset value. There is no
assurance that any premium of the public offering
price for the Common Shares over net asset value with
respect to any offering hereunder will continue after
such offering or that the common shares will not again
trade at a discount. Shares of closed-end investment
companies frequently trade at a discount from their
NAV. This characteristic is a risk separate and
distinct from the risk that the Fund's NAV could
decrease as a result of its investment activities and
may be greater for investors expecting to sell their
Common Shares in a relatively short period following
completion of this offering. Although the value of the
Fund's net assets is generally considered by market
participants in determining whether to purchase or
sell Common Shares, whether investors will realize
gains or losses upon the sale of the Common Shares
will depend entirely upon whether the market price of

-13-

the Common Shares at the time of sale is above or
below the investor's purchase price for the Common
Shares. Because the market price of the Common Shares
will be determined by factors such as NAV, dividend
and distribution levels (which are dependent, in part,
on expenses), supply of and demand for the Common
Shares, stability of dividends or distributions,
trading volume of the Common Shares, general market
and economic conditions and other factors beyond the
control of the Fund, the Fund cannot predict whether
the Common Shares will trade at, below or above NAV or
at, below or above the public offering price with
respect to any offering hereunder.

Leverage Risk. The Fund may borrow an amount up to 33
1/3% (or such other percentage as permitted by law) of
its Managed Assets (including the amount borrowed)
less all liabilities other than Borrowings. The Fund
may also issue Preferred Shares in an amount up to 50%
of the Fund's Managed Assets (including the proceeds
from Leverage Instruments). Under normal
circumstances, the Fund anticipates utilizing leverage
in an amount up to 33-1/3% of the Fund's Managed
Assets. The Fund currently leverages its assets
through the use of the Credit Facility. The Fund may
use leverage for investment purposes, to finance the
repurchase of its Common Shares and to meet cash
requirements. Although the use of leverage by the Fund
may create an opportunity for increased return for the
Common Shares, it also results in additional risks and
can magnify the effect of any losses. If the income
and gains earned on the securities and investments
purchased with leverage proceeds are greater than the
cost of the leverage, the Common Shares' return will
be greater than if leverage had not been used.
Conversely, if the income and gains from the
securities and investments purchased with such
proceeds does not cover the cost of leverage, the
return to the Common Shares will be less than if
leverage had not been used. There is no assurance that
a leveraging strategy will be successful. Leverage
involves risks and special considerations for Common
Shareholders including:

o the likelihood of greater volatility of NAV and
market price of the Common Shares than a
comparable portfolio without leverage;

o the risk that fluctuations in interest rates on
repurchase agreements, Borrowings and other
short-term debt or in the dividend rates on any
Preferred Shares that the Fund may pay will
reduce the return to the Common Shareholders or
will result in fluctuations in the dividends
paid on the Common Shares;

o the effect of leverage in a declining market,
which is likely to cause a greater decline in
the NAV of the Common Shares than if the Fund
were not leveraged, which may result in a
greater decline in the market price of the
Common Shares; and

o when the Fund uses leverage, the investment
advisory fee payable to the Advisor will be
higher than if the Fund did not use leverage.

The Advisor, in its judgment, nevertheless may
determine to continue to use leverage if it expects
that the benefits to the Fund's shareholders of
maintaining the leveraged position will outweigh the
current reduced return.

In order to reduce the variability of leverage
borrowing costs, the Fund may enter into interest rate
swaps with the effect of fixing net borrowing costs
for longer periods of time.

-14-

The value of the Fund's interest rate swaps could
increase or decrease, with a corresponding impact on
the NAV of the Fund. To the extent there is a decline
in interest rates, the value of the interest rate swap
could decrease, and could result in a decrease in the
Fund's NAV. In addition, if the counterparty to an
interest rate swap defaults, the Fund would be
obligated to make the payments that it had intended to
avoid. Depending on whether the Fund would be entitled
to receive net payments from the counterparty on the
swap, which in turn would depend on the general state
of short-term interest rates and the returns on the
Fund's portfolio securities at that point in time, a
default could adversely affect the NAV of the Common
Shares.

Strategic Transactions. The Fund may use various other
investment management techniques that also involve
certain risks and special considerations, including
engaging in hedging and risk management transactions,
including credit default swaps, credit linked notes,
interest rate options, futures, swaps, caps, floors,
and collars and other derivative transactions. These
strategic transactions may be entered into to seek to
manage the risks of the Fund's portfolio securities,
but may have the effect of limiting the gains from
favorable market movements. Certain of these strategic
transactions may provide investment leverage to the
Fund's portfolio and result in many of the same risks
of leverage to Common Shareholders as discussed above
under "-Leverage Risk." See "Additional Information
About the Fund's Investments" in the SAI for more
information about these techniques.

The derivatives markets have become subject to
comprehensive statutes, regulations and margin
requirements. In particular, in the United States the
Dodd-Frank Wall Street Reform and Consumer Protection
Act (the "Dodd-Frank Act") was signed into law in July
2010 and could impact and restrict the Fund's ability
to use certain Strategic Transactions. For instance,
the Dodd-Frank Act requires most over-the-counter
derivatives to be executed on a regulated market and
cleared through a central counterparty, which may
result in increased margin requirements and costs for
the Fund. Further, the Commodity Futures Trading
Commission (the "CFTC") has recently rescinded certain
exemptions from registration requirements under the
U.S. Commodity Exchange Act (the "CEA") that have been
previously available under the CFTC Rule 4.5 to
investment advisers registered with the SEC under the
Investment Advisers Act of 1940. The status of these
amended rules is unclear because of litigation against
the CFTC challenging the amendments. In the event that
the Fund's investment in derivative instruments
regulated under the CEA, including futures, swaps and
options, exceeds a certain threshold, the Advisor may
be required to register as a "commodity pool operator"
and/or "commodity trading advisor" with the CFTC. In
the event the Advisor is required to register with the
CFTC, it will become subject to additional
recordkeeping and reporting requirements with respect
to the Fund. The Fund currently intends to limit its
investments in derivative instruments so as not to
require the Advisor to register as a commodity pool
operator under the amended rules.

The SEC has also indicated that it may adopt new
policies on the use of derivatives by registered
investment companies. Such policies could affect the
nature and extent of derivative use by the Fund.

Portfolio Turnover Risk. The Fund's annual portfolio
turnover rate may vary greatly from year to year.
Although the Fund cannot accurately predict its annual
portfolio turnover rate, it is not expected to exceed
100% under normal circumstances. For the fiscal year
ended May 31, 2012, portfolio turnover was
approximately 63%. However, portfolio turnover rate is
not considered a limiting factor in the execution of

-15-

investment decisions for the Fund. High portfolio
turnover may result in the Fund's recognition of gains
that will be taxable as ordinary income to the Fund. A
high portfolio turnover may increase the Fund's
current and accumulated earnings and profits,
resulting in a greater portion of the Fund's
distributions being treated as a dividend for U.S.
federal income tax purposes to the Fund's Common
Shareholders. In addition, a higher portfolio turnover
rate results in correspondingly greater brokerage
commissions and other transactional expenses that are
borne by the Fund. See "The Fund's
Investments-Investment Practices-Portfolio Turnover"
and "Tax Matters."

Market Disruption Risk. Ongoing U.S. military action
and related events throughout the world, as well as
the continuing threat of terrorist attacks, could have
significant adverse effects on the U.S. economy, the
stock market and world economies and markets
generally. The Fund cannot predict the effects of such
events in the future on the U.S. and world economies,
the value of the Common Shares or the NAV of the Fund.

Certain Affiliations. Certain broker-dealers may be
considered to be affiliated persons of the Fund or
First Trust Advisors. Absent an exemption from the SEC
or other regulatory relief, the Fund is generally
precluded from effecting certain principal
transactions with affiliated brokers, and its ability
to utilize affiliated brokers for agency transactions
is subject to restrictions. This could limit the
Fund's ability to engage in securities transactions
and take advantage of market opportunities.

Anti-Takeover Provisions. The Fund's Declaration of
Trust includes provisions that could limit the ability
of other entities or persons to acquire control of the
Fund or convert the Fund to open-end status. These
provisions could have the effect of depriving the
common shareholders of opportunities to sell their
common shares at a premium over the then current
market price of the common shares. See "Certain
Provisions in the Declaration of Trust and By-Laws"
and "Risks-Anti-Takeover Provisions."

Secondary Market for the Fund's Shares. The issuance
of common shares through the Fund's Dividend
Reinvestment Plan may have an adverse effect on the
secondary market for the Fund's common shares. The
increase in the number of outstanding common shares
resulting from issuances pursuant to the Fund's
Dividend Reinvestment Plan and the discount to the
market price at which such common shares may be
issued, may put downward pressure on the market price
for the common shares. Common shares will not be
issued pursuant to the Fund's Dividend Reinvestment
Plan at any time when common shares are trading at a
lower price than the Fund's NAV per common share. When
the Fund's common shares are trading at a premium, the
Fund may also issue common shares that may be sold
through private transactions effected on the NYSE or
through broker-dealers. The increase in the number of
outstanding common shares resulting from these
offerings may put downward pressure on the market
price for common shares.

-16-

SUMMARY OF FUND EXPENSES

The following table and example contains information about the costs and
expenses that common shareholders will bear directly or indirectly. In
accordance with Securities and Exchange Commission requirements, the table below
shows the Fund's expenses as a percentage of the Fund's net assets as of August
31, 2012, and not as a percentage of gross assets or Managed Assets. By showing
expenses as a percentage of net assets, expenses are not expressed as a
percentage of all the assets the Fund invests. The table and example are based
on the Fund's capital structure as of August 31, 2012. As of that date, the Fund
had $160,000,000 of leverage outstanding pursuant to the Credit Facility. Such
leverage represented 29.9% of Managed Assets as of August 31, 2012.

Shareholder Transaction Expenses:

Sales Load (as a percentage of offering price) - %*
Offering Expenses Borne by
the Fund (as a percentage of offering price)(1) - %*
Dividend Reinvestment Plan Fees None(2)

Percentage of Net Assets
Attributable to Common Shares,
(Assumes 29.9% Leverage is Outstanding
--------------------------------------
Annual Expenses:
Management Fees(3) 1.07%
Interest and Fees on Leverage(4) 0.48%
Other Expenses 0.26%
Total Annual Expenses 1.81%

--------------------------------------------------------------------------------

* The applicable prospectus supplement to be used in connection with any sales
of Common Shares will set forth any applicable sales load and the estimated
offering expenses borne by the Fund.

(1) The Fund will pay all offering costs other than
sales load.

(2) You will pay brokerage charges if you direct BNY Mellon Investment Servicing
(US) Inc., as agent for the Common Shareholders Dividend Reinvestment Plan,
to sell your Common Shares held in a dividend reinvestment account.

(3) Represents the aggregate fee payable to the Advisor.

(4) Interest and fees on leverage in the table reflect the cost to the Fund of
Borrowings, expressed as a percentage of the Fund's net assets as of August
31, 2012, based on interest rates and fees in effect as of August 31, 2012.
The table assumes total Borrowings of $160 million, which reflects leverage
in an amount representing 29.9% of Managed Assets. The Borrowings bear
interest at variable rates.

The purpose of the table above and the example below is to help you
understand all fees and expenses that you, as a holder of Common Shares, would
bear directly or indirectly. The expenses shown in the table under "Other
Expenses" and "Total Annual Expenses" are based on estimated amounts for the
Fund's twelve months of operations after August 31, 2012 unless otherwise
indicated and assumes that the Fund has not issued any additional common shares.

Example:

The following examples illustrate the expenses that you would pay on a
$1,000 investment in Common Shares, assuming: (i) total annual expenses of 1.81%
of net assets attributable to Common Shares through year 10 and (ii) a 5% annual
return and (iii) all distributions are reinvested at net asset value(1):

1 Year 3 years 5 Years 10 Years
$18 $57 $98 $213

--------------------------------------------------------------------------------

(1) This example should not be considered a representation of future expenses.
Actual expenses may be greater or less than those shown. This example
assumes that the estimated "Other expenses" set forth in the Annual Expenses
table are accurate, all dividends and distributions are reinvested at net
asset value and that the Fund is engaged in leverage of 29.9% of Managed
Assets, assuming interest and fees on leverage of 0.48%. Moreover, the
Fund's actual rate of return may be greater or less than the hypothetical 5%
return shown in the example.

-17-

FINANCIAL HIGHLIGHTS

The information in this table for the years ended May 31, 2012 and 2011 is
derived from the Fund's financial statements audited by Deloitte & Touche LLP,
whose report on certain of such financial statements is contained in the Fund's
2012 Annual Report. Such report is incorporated by reference into the Fund's
SAI, which is available from the Fund upon request.

FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD

YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
5/31/2012 5/31/2011 (a) 5/31/2010 5/31/2009 5/31/2008
--------- ------------- --------- --------- ---------

Net asset value, beginning of period ................... $ 14.76 $ 13.96 $ 11.79 $ 16.42 $ 18.91
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ........................... 0.91 0.73 0.47 0.87 1.45
Net realized and unrealized gain (loss) ................ (0.31) 0.77 2.15 (4.63) (2.37)
Distributions paid to AMP (b) Shareholders from:
Net investment income ............................. -- -- (0.02) (0.09) (0.20)
--------- --------- --------- --------- ---------
Total from investment operations ....................... 0.60 1.50 2.60 (3.85) (1.12)
--------- --------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .................................. (0.87) (0.70) (0.43) (0.78) (1.37)
--------- --------- --------- --------- ---------
Total distributions to Common Shareholders.............. (0.87) (0.70) (0.43) (0.78) (1.37)
--------- --------- --------- --------- ---------
Net asset value, end of period ......................... $ 14.49 $ 14.76 $ 13.96 $ 11.79 $ 16.42
========= ========= ========= ========= =========
Market value, end of period ............................ $ 14.34 $ 14.82 $ 12.65 $ 10.04 $ 14.76
========= ========= ========= ========= =========
Total return based on net asset value (c)............... 4.45% 11.19% 22.99% (22.07)% (5.19)%
========= ========= ========= ========= =========
Total return based on market value (c).................. 2.95% 23.20% 30.76% (26.11)% (14.32)%
========= ========= ========= ========= =========

-----------------------

RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON SHARES:

Ratio of total expenses to average net assets .......... 1.88% 1.98% 2.42% 3.40% 3.63%
Ratio of total expenses to average net assets excluding
interest expense .................................. 1.33% 1.31% 1.39% 1.62% 1.54%
Ratio of net investment income (loss) to average net
assets ............................................ 6.38% 5.09% 3.49% 7.34% 8.52%
Ratio of net investment income (loss) to average net
assets net of AMP Shares dividends (d)............. N/A N/A 3.37% 6.60% 7.34%
SUPPLEMENTAL DATA:
Portfolio turnover rate ................................ 63% 95% 52% 15% 31%
Net assets, end of period (in 000's).................... $ 367,172 $ 373,902 $ 353,106 $ 298,097 $ 415,187
Ratio of total expenses to total average Managed
Assets (e) ........................................ 1.31% 1.39% 1.77% 2.02% 2.22%
Ratio of total expenses to total average Managed Assets
excluding interest expense (e)..................... 0.93% 0.92% 1.01% 0.96% 0.94%
PREFERRED SHARES AND LOAN OUTSTANDING
Total AMP Shares outstanding (f)........................ N/A N/A N/A 3,200 4,000
Liquidation and market value per AMP share (g).......... N/A N/A N/A $ 25,018 $ 25,039
Asset coverage per share................................ N/A N/A N/A $ 118,155 (h) $ 128,797 (h)
Total loan outstanding (in 000's) ...................... $ 158,000 $ 160,000 $ 153,500 $ 57,050 $ 175,000
Asset coverage per $1,000 of loan outstanding (i)..... $ 3,324 $ 3,337 $ 3,300 $ 7,627 $ 3,944

-----------------------

(a) From inception to October 12, 2010, Four Corners Capital Management, LLC
served as the Fund's sub-advisor. Effective October 12, 2010, the
Leveraged Finance Investment Team of First Trust Advisors L.P. assumed the
day-to-day responsibility for management of the Fund's portfolio.

(b) Auction Market Preferred ("AMP") Shares.

(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.

(d) Ratio reflects the effect of distributions to AMP Shareholders.

(e) Managed Assets are calculated by taking the Fund's total asset value
(which includes assets attributable to the Fund's AMP Shares, if AMP
Shares are outstanding, and the principal amount of borrowings), minus the
sum of the Fund's accrued and unpaid dividends on any outstanding AMP
Shares, if AMP Shares are outstanding, and liabilities, other than the
principal amount of borrowing.

(f) As of November 18, 2009, the Fund no longer has any Series A or Series B
AMP Shares outstanding.

(g) Includes accumulated and unpaid distributions to AMP Shareholders.

(h) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value), and dividing
by the number of AMP Shares outstanding.

(i) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value and the loan
outstanding) and dividing by the outstanding loan balance in 000's.

N/A Not applicable.

-18-

MARKET AND NET ASSET VALUE INFORMATION

The Fund's currently outstanding common shares are, and the Common Shares
offered by this prospectus and the applicable prospectus supplement, subject to
notice of issuance, will be, listed on the New York Stock Exchange. The Fund's
common shares commenced trading on the New York Stock Exchange on May 28, 2004.

The Fund's common shares have traded both at a premium and at a discount in
relation to net asset value. Shares of closed-end investment companies
frequently trade at a discount from net asset value. The Fund's issuance of the
Common Shares may have an adverse effect on prices in the secondary market for
the Fund's common shares by increasing the number of common shares available,
which may put downward pressure on the market price for the Fund's common
shares. See "Risks Market Discount from Net Asset Value."

The following table sets forth for each of the periods indicated the high
and low closing market prices for common shares of the Fund on the New York
Stock Exchange, the net asset value per share and the premium or discount to net
asset value per share at which the Fund's common shares were trading. Net asset
value is determined daily as of the close of regular trading on the New York
Stock Exchange(normally 4:00 p.m. eastern time). See "Net Asset Value" for
information as to the determination of the Fund's net asset value.

PREMIUM/(DISCOUNT)
MARKET PRICE(1) NET ASSET VALUE(2) TO NET ASSET VALUE(3)
Quarter Ended High Low High Low High Low

June 30, 2004(*) $20.08 $20.00 $19.04 $19.04 5.46% 5.04%
September 30, 2004 $20.20 $19.12 $19.10 $19.05 5.76% 0.37%
December 30, 2004 $19.41 $18.00 $18.98 $19.11 2.27% -5.81%
March 31, 2005 $19.29 $18.42 $19.14 $19.07 0.78% -3.41%
June 30, 2005 $18.76 $17.17 $19.09 $18.99 -1.73% -9.58%
September 30, 2005 $17.98 $17.16 $19.06 $19.18 -5.67% -10.53%
December 30, 2005 $17.49 $16.55 $19.10 $18.90 -8.43% -12.43%
March 31, 2006 $17.97 $16.84 $19.03 $18.88 -5.57% -10.81%
June 30, 2006 $17.93 $17.39 $19.00 $18.98 -5.63% -8.38%
September 30, 2006 $17.95 $17.58 $18.87 $18.84 -4.88% -6.69%
December 30, 2006 $18.05 $17.64 $18.79 $18.73 -3.94% -5.82%
March 31, 2007 $18.95 $17.99 $18.87 $18.72 0.42% -3.90%
June 29, 2007 $19.08 $18.43 $18.84 $18.84 1.27% -2.18%
September 28, 2007 $18.69 $15.19 $18.65 $17.60 0.21% -13.69%
December 31, 2007 $16.29 $14.81 $17.82 $17.23 -8.59% -14.05%
March 31, 2008 $15.45 $13.04 $17.18 $15.03 -10.07% -13.24%
June 30, 2008 $15.10 $13.65 $16.17 $15.35 -6.62% -11.07%
September 30, 2008 $14.01 $10.04 $16.23 $14.30 -13.68% -29.79%
December 31, 2008 $10.63 $ 5.51 $13.83 $ 8.01 -23.14% -31.21%
March 31, 2009 $ 8.61 $ 6.74 $ 9.59 $ 9.23 -10.22% -26.98%
June 30, 2009 $10.10 $ 7.99 $11.99 $ 9.69 -15.76% -17.54%
September 30, 2009 $11.32 $ 9.78 $13.39 $12.49 -15.46% -21.70%
December 31, 2009 $11.90 $10.68 $13.71 $13.37 -13.20% -20.12%
March 31, 2010 $13.16 $11.96 $14.25 $13.72 -7.65% -12.83%
June 30, 2010 $13.69 $12.03 $14.32 $14.02 -4.40% -14.19%
September 30, 2010 $13.30 $12.30 $14.04 $13.74 -5.27% -10.48%
December 30, 2010 $13.98 $13.10 $14.58 $14.24 -4.12% -8.01%
March 31, 2011 $14.95 $13.91 $14.75 $14.59 1.36% -4.66%
June 30, 2011 $15.57 $14.15 $14.76 $14.63 5.49% -3.28%
September 30, 2011 $14.47 $12.25 $14.65 $13.29 -1.23% -7.83%
December 31, 2011 $13.85 $12.71 $14.24 $13.41 -2.74% -5.22%
March 31, 2012 $15.00 $13.41 $14.68 $14.12 2.18% -5.03%
June 30, 2012 $14.97 $13.79 $14.75 $14.30 1.49% -3.57%

-19-

The last reported sale price, net asset value per share and percentage
premium to net asset value per share of the common shares as of August 31, 2012
were $15.19, $14.77 and 2.84%, respectively. As of August 31, 2012, the Fund had
25,362,005 common shares outstanding and net assets of the Fund were
$374,575,564.

-----------------------------------------

(1) Based on high and low closing market price for the respective quarter.

(2) Based on the net asset value calculated daily as of the close of regular
trading on the NYSE (normally 4:00 p.m. eastern time).

(3) Calculated based on the information presented.

* The Fund commenced operations on March 25, 2004.

THE FUND

The Fund is a diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized on March 25, 2004 as a
Massachusetts business trust pursuant to a Declaration of Trust (the
"Declaration of Trust"). On May 28, 2004, the Fund issued an aggregate of
23,000,000 common shares in its initial public offering. The Fund's currently
outstanding common shares are, and the Common Shares offered in this prospectus
and applicable prospectus supplement will be, listed on the New York Stock
Exchange under the symbol "FCT." The Fund's principal office is located at 120
East Liberty Drive, Suite 400, Wheaton, Illinois 60187. Investment in the Fund
involves certain risks and special considerations, including risks associated
with the Fund's use of leverage. See "Risks."

The following table provides information about the Fund's outstanding
securities as of August 31, 2012:

Amount Held by
Amount the Fund or for Amount
Title of Class Authorized Its Account Outstanding
Common shares Unlimited 0 25,362,005

USE OF PROCEEDS

Unless otherwise specified in a prospectus supplement, the Fund will
invest the net proceeds from any sales of Common Shares in accordance with the
Fund's investment objective and policies as stated below, or use such proceeds
for other general corporate purposes. Pending any such use, the proceeds may be
invested in cash, cash equivalents or other securities.

THE FUND'S INVESTMENTS

Investment Objectives and Policies

The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund will attempt to preserve capital. The
Fund pursues these objectives through investment in a portfolio of Senior Loans.
Under normal conditions, the Fund invests at least 80% of its Managed Assets in
a diversified portfolio of Senior Loans. Under normal circumstances, the Fund
may also invest up to 10% of its Managed Assets through purchasing revolving
credit facilities, investment grade debtor in possession financing, unsecured
loans, other floating rate debt securities, such as notes, bonds, and asset
backed securities (such as special purpose trusts investing in bank loans),
investment grade loans and fixed income debt obligations, publicly-traded
high-yield debt securities and money market instruments, such as commercial
paper. The Fund may also invest up to 15% of its Managed Assets in U.S. dollar
denominated foreign investments, predominantly in developed countries and
territories of those countries, but in no case will the Fund invest in debt
securities of issuers located in emerging markets. There can be no assurance
that the Fund will achieve its investment objectives.

The Fund may invest up to 10% of its Managed Assets in Senior Loans and, on
limited occasions, equity and debt securities acquired in connection therewith,
of (i) firms that, at the time of acquisition, have defaulted on their debt
obligations and/or filed for protection under Chapter 11 of the U.S. Bankruptcy
Code or have entered into a voluntary reorganization in conjunction with their
creditors and stakeholders in order to avoid a bankruptcy filing, or (ii) firms

-20-

prior to an event of default whose acute operating and/or financial problems
have resulted in the markets valuing their respective securities and debt at
sufficiently discounted prices so as to be yielding, should they not default, a
significant premium over comparable duration U.S. Treasury bonds. Investing in
the securities and debt of distressed issuers ("Special Situation Investments")
involves a far greater level of risk than investing in issuers whose debt
obligations are being met and whose debt trades at or close to its "par" value.
While offering a greater potential opportunity for capital appreciation, Special
Situation Investments are highly speculative with respect to the issuer's
ability to continue to make interest payments and/or to pay its principal
obligations in full. Special Situation Investments can be very difficult to
properly value, making them susceptible to a high degree of price volatility and
rendering them less liquid than performing debt obligations. Those Special
Situation Investments involved in a bankruptcy proceeding can be subject to a
high degree of uncertainty with regard to both the timing and the amount of the
ultimate settlement. Special Situation Investments include non investment grade
debtor in possession financing, sub performing real estate loans and mortgages,
privately placed senior, mezzanine, subordinated and junior debt, letters of
credit, trade claims, convertible bonds, and preferred and common stocks.

Corporate debt obligations, such as the Senior Loans, are subject to the
risk of non-payment of scheduled interest or principal. Such non-payment would
result in a reduction of income to the Fund, a reduction in the value of the
investment and a potential decrease in the Fund's NAV. There can be no assurance
that the liquidation of collateral securing a Senior Loan or bond, if any, would
satisfy the Borrower's obligation in the event of non-payment of scheduled
interest or principal payments, or that such collateral could be readily
liquidated. In the event of a bankruptcy of a Borrower, the Fund could
experience delays or limitations with respect to its ability to realize the
benefits of the collateral, if any, securing a corporate debt obligation. To the
extent that a corporate debt obligation is collateralized by stock in the
Borrower or its subsidiaries, such stock may lose all or substantially all of
its value in the event of a bankruptcy of such Borrower. Some corporate debt
obligations, including Senior Loans, are subject to the risk that a court,
pursuant to fraudulent conveyance or other similar laws, could subordinate such
corporate debt obligations to presently existing or future indebtedness of the
Borrower or take other action detrimental to the holders, including, in certain
circumstances, invalidating such corporate debt obligations or causing interest
previously paid to be refunded to the Borrower. If interest were required to be
refunded, it could negatively affect the Fund's performance.

The Fund may invest in corporate debt obligations which are not rated by an
NRSRO, are not registered with the Securities and Exchange Commission or any
state securities commission and are not listed on any national securities
exchange. In evaluating the creditworthiness of corporate debt obligors, the
Advisor will consider, and may rely in part on, analyses performed by others.
Substantially all of the corporate debt obligations in which the Fund invests
are lower grade debt instruments. Lower grade debt instruments are rated "Ba1"
or lower by Moody's, "BB+" or lower by S&P or comparably rated by another NRSRO.
In the event corporate debt obligations are not rated, they are likely to be the
equivalent of lower grade quality. Debt instruments which are unsecured and
lower grade are viewed by the NRSROs as having speculative characteristics and
are commonly referred to as "junk bonds." A description of the ratings of
corporate bonds by Moody's and S&P is included as Appendix A to the SAI. The
Advisor does not view ratings as the determinative factor in its investment
decisions and relies more upon its credit analysis abilities than upon ratings.

No active trading market may exist for some corporate debt obligations in
which the Fund invests and some of those debt obligations may be subject to
restrictions on resale. A secondary market may be subject to irregular trading
activity, wide bid/ask spreads and extended trade settlement periods, which may
impair the Fund's ability to realize full value and thus cause a material
decline in the Fund's NAV.

When interest rates decline, the value of a portfolio invested in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Fund's NAV will vary, the Fund's management expects that
investing a significant portion of the Fund's Managed Assets in Senior Loans
will reduce fluctuations in NAV as a result of changes in market interest rates.

-21-

However, because the rates of interest paid on the Senior Loans in which the
Fund invests will have a weighted average reset period that is typically less
than 90 days, changes in prevailing interest rates may cause some fluctuation in
the Fund's NAV. Other economic factors (such as a large downward movement in
stock prices, a disparity in supply and demand of certain securities or market
conditions that can reduce liquidity) can also adversely impact the markets for
debt obligations. Ratings downgrades of holdings or their issuers will generally
reduce the value of such holdings.

The Fund may enter into various credit default swaps (including credit
linked notes) for hedging and investment purposes. The Fund also may use
interest rate swaps for risk management purposes and not as a speculative
investment and would typically use such transactions to shorten the average
interest rate reset time of the Fund's holdings. The use of credit default swaps
(including credit linked notes) and interest rate hedging transactions are
highly specialized activities which involve investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If the Advisor is incorrect in its forecasts of market values, interest rates
and other applicable factors, the investment performance of the Fund would be
unfavorably affected. The Fund may also acquire equity securities as an incident
to the purchase or ownership of a Senior Loan or in connection with a
reorganization of a Borrower. Investments in equity securities incidental to
investment in Senior Loans entail certain risks in addition to those associated
with investments in Senior Loans. See "Risks-Strategic Transactions" and
"Additional Information About the Fund's Investments" in the SAI.

Senior Loan Characteristics

Senior Loans are loans that typically are made to business Borrowers to
finance leveraged buy outs, recapitalizations, mergers, stock repurchases and to
finance internal growth. Senior Loans generally hold one of the most senior
positions in the capital structure of a Borrower and are usually secured by
liens on the assets of the Borrowers, including tangible assets such as cash,
accounts receivable, inventory, real estate, property, plant and equipment,
common and/or preferred stock of subsidiaries and other companies, and
intangible assets including trademarks, copyrights, patent rights, and franchise
value. The Fund may also receive guarantees as a form of collateral.

By virtue of their senior position and collateral, Senior Loans typically
provide lenders with the first right to cash flows or proceeds from the sale of
a Borrower's collateral if the Borrower becomes insolvent (subject to the
limitations of bankruptcy law, which may provide higher priority to certain
claims such as, for example, employee salaries, employee pensions, and taxes).
This means Senior Loans are generally repaid before unsecured bank loans,
corporate bonds, subordinated debt, trade creditors, and preferred or common
stockholders.

Senior Loans typically pay interest at least quarterly at rates which equal
a fixed percentage spread over a base rate such as LIBOR. For example, if LIBOR
were 4.00% and the Borrower were paying a fixed spread of 3.00%, the total
interest rate paid by the Borrower would be 7.00%. Base rates and, therefore,
the total rates paid on Senior Loans float, i.e., they change as market rates of
interest change. The fixed spread over the base rate on a Senior Loan typically
does not change.

Although a base rate such as LIBOR can change every day, loan agreements for
Senior Loans typically allow the Borrower the ability to choose how often the
base rate for the loan will change. Such periods can range from one month to one
year, with most Borrowers choosing monthly or quarterly reset periods. During
periods of rising interest rates, Borrowers will tend to choose longer reset
periods, and during periods of declining interest rates, Borrowers will tend to
choose shorter reset periods.

Senior Loans generally are arranged through private negotiations between a
Borrower and several financial institutions represented by an agent who is
usually one of the originating lenders. In larger transactions, it is common to
have several agents. Generally, however, only one such agent has primary
responsibility for on going administration of a Senior Loan. Agents are
typically paid fees by the Borrower for their services. The agent is primarily
responsible for negotiating the loan agreement which establishes the terms and
conditions of the Senior Loan and the rights of the Borrower and the lenders.
The agent is also responsible for monitoring collateral and for exercising
remedies available to the lenders such as foreclosure upon collateral.

Loan agreements may provide for the termination of the agent's agency status
in the event that it fails to act as required under the relevant loan agreement,
becomes insolvent, enters FDIC receivership, or if not FDIC insured, enters into

-22-

bankruptcy. Should such an agent, lender or assignor with respect to an
assignment interpositioned between the Fund and the Borrower become insolvent or
enter FDIC receivership or bankruptcy, any interest in the Senior Loan of such
person and any loan payment held by such person for the benefit of the Fund
should not be included in such person's or entity's bankruptcy estate. If,
however, any such amount were included in such person's or entity's bankruptcy
estate, the settlement of open contracts in Senior Loans could be subject to
contest in bankruptcy proceedings, potentially causing the Fund to incur certain
costs and delays in realizing payment.

The Fund acquires Senior Loans from lenders such as banks, insurance
companies, finance companies, other investment companies and private investment
funds. The Fund may also acquire Senior Loans from U.S. branches of foreign
banks that are regulated by the Federal Reserve System or appropriate state
regulatory authorities.

See "Net Asset Value" for information about the valuation of Senior Loans.

Additional Information Concerning Senior Loans

The Fund's investments in Senior Loans may take one of several forms
including: acting as one of the group of lenders originating a Senior Loan,
purchasing an assignment of a portion of a Senior Loan from a third party, or
acquiring a participation in a Senior Loan. When the Fund is a member of the
originating syndicate for a Senior Loan, it may share in a fee paid to the
syndicate. The Fund will act as lender, or purchase an assignment or
participation, with respect to a Senior Loan only if the agent is determined by
the Advisor to be creditworthy.

Except for rating agency guidelines imposed on the Fund's portfolio while it
has outstanding Preferred Shares, there is no minimum rating or other
independent evaluation of a Borrower limiting the Fund's investments and most
Senior Loans that the Fund may acquire, if rated, will be rated lower grade,
meaning below investment grade quality. See "Risks-Credit Risk."

Original Lender. When the Fund is one of the original lenders, it will have
a direct contractual relationship with the Borrower and can enforce compliance
by the Borrower with terms of the loan agreement. It also may have negotiated
rights with respect to any funds acquired by other lenders through set off.
Original lenders also negotiate voting and consent rights under the loan
agreement. Actions subject to lender vote or consent generally require the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan. Certain decisions, such as reducing the
amount of, or increasing the time for payment of interest on, or repayment of
principal of, a Senior Loan, or releasing collateral therefor, frequently
require the unanimous vote or consent of all lenders affected.

Assignments. When the Fund is a purchaser of an assignment, it typically
succeeds to all the rights and obligations under the loan agreement of the
assigning lender and becomes a lender under the loan agreement with the same
rights and obligations as the assigning lender. Assignments are, however,
arranged through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
assignment may be more limited than those held by the assigning lender.

Participations. The Fund may also invest in participations in Senior Loans.
The rights of the Fund when it acquires a participation are likely to be more
limited than the rights of an original lender or an investor who acquired an
assignment. Participation by the Fund in a lender's portion of a Senior Loan
typically means that the Fund has a contractual relationship only with the
lender, not with the Borrower. This means that the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only from
the lender selling the participation and only upon receipt by the lender of
payments from the Borrower.

With a participation, the Fund may have limited rights to enforce compliance
by the Borrower with the terms of the loan agreement or any rights with respect
to any funds acquired by other lenders through set off against the Borrower. In
addition, the Fund may not directly benefit from the collateral supporting the
Senior Loan because it may be treated as a general creditor of the lender
instead of the Borrower. As a result, the Fund may be subject to delays,
expenses and risks that are greater than those that exist when the Fund is the
original lender or holds an assignment. This means the Fund must assume the
credit risk of both the Borrower and the lender selling the participation. The
Fund will consider a purchase of participations only in those situations where
the Fund considers the participating lender to be creditworthy.

-23-

In the event of a bankruptcy or insolvency of a Borrower, the obligation of
the Borrower to repay the Senior Loan may be subject to certain defenses that
can be asserted by such Borrower against the Fund as a result of improper
conduct of the lender selling the participation. A participation in a Senior
Loan will be deemed to be a Senior Loan for the purposes of the Fund's
investment objectives and policies.

Senior Loan Market. As of August 31, 2012, the approximate size of the U.S.
Senior Loan market, as measured by the S&P/LSTA Leverage Loan Index, was U.S.
$529.19 billion par amount outstanding. Year to date 2012 new issue volume was
approximately $151.81 billion through August 31, 2012; compared to 2011 new
issue volume, which totaled approximately $231.84 billion for the entirety of
the year.

Market Indices. The Fund may invest in Senior Loan market indices that
synthetically reflect a composite of performance of the Senior Loan market based
on the aggregate performance of a diversified pool of underlying actively traded
"par" Senior Loans. The Fund may take long positions in these indices primarily
as a means of investing its portfolio following the closing of the offering of
the Fund's Common Shares and the receipt of the proceeds from the leveraging of
the Fund through the issuance of Preferred Shares or other debt. From time to
time, the Fund may invest in these indices as a means of managing portfolio
exposure or increasing portfolio yield. In the event the Fund invests in these
indices, the Fund expects to reduce its exposure to these indices by acquiring
individual Senior Loans in the primary and secondary markets following the
receipt of the aforementioned proceeds from the offerings of the Common Shares.
Senior Loan market indices are available in unfunded and funded format, the
former making use of credit default swaps and the latter making use of credit
linked notes. Descriptions of credit default swaps and credit linked notes may
be found in the SAI. Any investment by the Fund in a Senior Loan market index
will not be included in the limits set forth in the SAI for credit default swaps
and credit linked notes. In the event that the Fund were to invest in an
unfunded Senior Loan market index, the Fund would segregate assets in the form
of cash and cash equivalents in an amount equal to the aggregate market value of
the unfunded index investment.

Other Investment Companies. The Fund may invest its Managed Assets in
securities of other open or closed-end investment companies that invest
primarily in securities of the types in which the Fund may invest directly. In
addition, the Fund may invest a portion of its Managed Assets in pooled
investment vehicles (other than investment companies) that invest primarily in
securities of the types in which the Fund may invest directly. The Fund
generally expects that it may invest in other investment companies and/or pooled
investment vehicles including market indices either during periods when it has
large amounts of uninvested cash, such as the period shortly after the Fund
receives the proceeds of the offering of the Common Shares, or during periods
when there is a shortage of attractive securities of the types in which the Fund
may invest in directly available in the market. As an investor in an investment
company, the Fund will bear its ratable share of that investment company's
expenses, and would remain subject to payment of the Fund's advisory and
administrative fees with respect to assets so invested. Common shareholders
would therefore be subject to duplicative expenses to the extent the Fund
invests in other investment companies. The Advisor will take expenses into
account when evaluating the investment merits of an investment in the investment
company relative to available securities of the types in which the Fund may
invest directly. In addition, the securities of other investment companies also
may be leveraged and therefore will be subject to the same leverage risks
described herein. As described in the section entitled "Risks-Leverage Risk,"
the net asset value and market value of leveraged shares will be more volatile
and the yield to shareholders will tend to fluctuate more than the yield
generated by unleveraged shares. The Fund will treat its investments in such
investment companies as investments in Senior Loans for all purposes, such as
for purposes of determining compliance with the requirement set forth above that
at least 80% of the Fund's Managed Assets be invested under normal market
circumstances in Senior Loans.

Portfolio Turnover. The Fund's annual portfolio turnover rate may vary
greatly from year to year. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is not expected to exceed 100% under normal
circumstances. For the fiscal year ended May 31, 2012, the portfolio turnover
rate was 63%. Portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the Fund. There 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. A higher portfolio
turnover rate results in correspondingly greater brokerage commissions and other
transactional expenses that are borne by the Fund. High portfolio turnover may
result in the realization of net short-term capital gains by the Fund which,
when distributed to Common Shareholders, will be taxable as ordinary income. See
"Tax Matters."

-24-

High-Yield Debt Securities

On December 12, 2011, the Fund's Board of Trustees approved changes to the
Fund's investment strategy, effective on or about April 9, 2012, to purchase
publicly-traded high-yield debt securities for a portion of its portfolio. These
purchases are subject to the limitation to invest, under normal market
circumstances, no more than 10% of Managed Assets in revolving credit
facilities, investment grade debtor-in-possession financing, unsecured loans,
other floating rate debt securities (such as notes, bonds and asset backed
securities, which include special purchase trusts investing in bank loans),
investment grade loans, fixed income debt obligations, publicly-traded high-
yield debt securities and money market instruments (such as commercial paper).
As of August 31, 2012, 0.00% of the Fund's Managed Assets was invested in
publicly-traded high-yield debt securities. High-yield debt securities in which
the Fund may invest include, but are not limited to:

o Corporate Bonds. Corporate bonds are debt obligations issued by
corporations. Corporate bonds may be either secured or unsecured.
Collateral used for secured debt includes, but is not limited to, real
property, machinery, equipment, accounts receivable, stocks, bonds or
notes. If a bond is unsecured, it is known as a debenture.
Bondholders, as creditors, have a prior legal claim over common and
preferred stockholders as to both income and assets of the corporation
for the principal and interest due them and may have a prior claim
over other creditors if liens or mortgages are involved. Interest on
corporate bonds may be fixed or floating, or the bonds may be zero
coupon bonds which pay no interest. Interest on corporate bonds is
typically paid semi-annually and is fully taxable to the bondholder.
Corporate bonds contain elements of both interest-rate risk and credit
risk. The market value of a corporate bond generally may be expected
to rise and fall inversely with interest rates and may also be
affected by the credit rating of the corporation, the corporation's
performance and perceptions of the corporation in the marketplace.
Corporate bonds usually yield more than government or agency bonds due
to the presence of credit risk.

o Convertible Securities. Convertible securities include bonds,
debentures, notes, preferred stocks and other securities that entitle
the holder to acquire common stock or other equity securities of the
same or a different issuer. Convertible securities have general
characteristics similar to both debt and equity securities. A
convertible security generally entitles the holder to receive interest
or preferred dividends paid or accrued until the convertible security
matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to non-convertible
debt obligations. Convertible securities rank senior to common stock
in a corporation's capital structure and, therefore, generally entail
less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a debt
obligation. A convertible security may be subject to redemption at the
option of the issuer at a predetermined price. If a convertible
security held by the Fund is called for redemption, the Fund would be
required to permit the issuer to redeem the security and convert it to
underlying common stock, or would sell the convertible security to a
third party, which may have an adverse effect on the Fund's ability to
achieve its investment objectives. The price of a convertible security
often reflects variations in the price of the underlying common stock
in a way that non-convertible debt may not. The value of a convertible
security is a function of (i) its yield in comparison to the yields of
other securities of comparable maturity and quality that do not have a
conversion privilege and (ii) its worth if converted into the
underlying common stock.

USE OF LEVERAGE

The Fund is currently engaged in leverage through the use of a revolving
credit facility to seek to enhance the level of its current distributions to
common shareholders. The Fund may borrow (by use of commercial paper, notes,
reverse repurchase agreements and/or other Borrowings) an amount up to 33-1/3%
(or such other percentage to the extent permitted by the 1940 Act) of its
Managed Assets (including the amount borrowed) less all liabilities other than
Borrowings. The Fund may also issue Preferred Shares in an amount up to 50% of
the Fund's Managed Assets (including the proceeds of the Preferred Shares and
any Borrowings). As of August 31, 2012, the Fund utilized leverage in an amount
equal to approximately 29.9% of the Fund's Managed Assets. Reverse repurchase
agreements, commercial paper, notes or other Borrowings and Preferred Shares are
each considered a "Leverage Instrument" and collectively, the "Leverage
Instruments." Leverage Instruments have seniority in liquidation and

-25-

distribution rights over the Fund's common shares. Any use of Leverage
Instruments by the Fund will, however, be consistent with the provisions of the
1940 Act.

The Fund entered into a Revolving Credit and Security Agreement on
July 13, 2012 (the "Credit Facility") with Liberty Street Funding LLC, as
conduit lender (the "Conduit Lender") and The Bank of Nova Scotia, as secondary
lender and agent for the secured parties under the agreement, to be used as
leverage for the Fund. The Credit Facility currently has an expiration date of
July 12, 2013 and may be renewed annually. The Credit Facility provides for a
secured line of credit for the Fund, where Fund assets are pledged against
advances made to the Fund. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, must have an "asset coverage" of at least
300% (33-1/3% of the Fund's total assets after borrowings). The total commitment
under the Credit Facility is $175,000,000. At August 31, 2012, the amount
outstanding was $160,000,000. The loans under the Credit Facility are funded by
the Conduit Lender and bear interest for each settlement period at a rate per
annum based on the commercial paper rate of the Conduit Lender. The high and low
annual interest rates for the loans under the Credit Facility funded by the
Conduit Lender since the commencement of the Credit Facility to August 31, 2012,
were 0.238% and 0.235%, respectively, with a weighted average interest rate of
0.237%. The annual interest rate in effect for such loans at August 31, 2012 was
0.238%. The Fund also pays additional borrowing costs, which includes a
utilization fee at a per annum rate of 0.40% of the daily average of the
aggregate outstanding principal amount of the advances during the prior calendar
month, and a commitment fee at a per annum rate of the product of (i) 0.40% of
the daily average of the total commitment in effect (or if terminated, the
aggregate outstanding principal amount of the advances funded or maintained)
during the preceding calendar month and (ii) 1.02.

The Fund, from time to time, engages in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
all times at least equal to the total amount of the repurchase obligation,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral investments, including the risk of a possible decline
in the value of the underlying investments during the period while the Fund
seeks to assert its rights. The Advisor reviews the value of the collateral and
the creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements to evaluate potential risks. As of May 31, 2012, the Fund
had no open repurchase agreements.

Any Leverage Instruments would have complete priority upon distribution of
the Fund's assets over common shares. The issuance of Leverage Instruments would
leverage the common shares. Although the timing and other terms of the offering
of Leverage Instruments and the terms of the Leverage Instruments would be
determined by the Fund's Board of Trustees, the Fund expects to invest the
proceeds derived from any Leverage Instrument offering in securities consistent
with the Fund's investment objectives and policies. If Preferred Shares are
issued, they would pay adjustable rate dividends based on shorter term interest
rates, which would be re determined periodically by an auction process. The
adjustment period for Preferred Share dividends could be as short as one day or
as long as a year or more. So long as the Fund's portfolio is invested in
securities that provide a higher rate of return than the dividend rate or
interest rate of the Leverage Instruments, after taking expenses into
consideration, the leverage will cause common shareholders to receive a higher
rate of income than if the Fund were not leveraged.

Leverage creates risk for the common shareholders, including the likelihood
of greater volatility of NAV and market price of the common shares, and the risk
that fluctuations in interest rates on reverse repurchase agreements, Borrowings
and other debt or in the dividend rates on any Preferred Shares may affect the
return to the common shareholders or will result in fluctuations in the
dividends paid on the common shares. To the extent total return exceeds the cost
of leverage, the Fund's return will be greater than if leverage had not been
used. Conversely, if the total return derived from securities purchased with
funds received from the use of leverage is less than the cost of leverage, the
Fund's return will be less than if leverage had not been used, and therefore the
amount available for distribution to common shareholders as dividends and other
distributions will be reduced. In the latter case, the Advisor in its best
judgment nevertheless may determine to maintain the Fund's leveraged position if
it expects that the benefits to the Fund's common shareholders of maintaining
the leveraged position will outweigh the current reduced return. Under normal
market conditions, the Fund anticipates that it will be able to invest the

-26-

proceeds from leverage at a higher rate than the costs of leverage, which would
enhance returns to common shareholders. The fees paid to the Advisor will be
calculated on the basis of the Managed Assets including proceeds from reverse
repurchase agreements and other Borrowings for leverage and the issuance of
Preferred Shares. During periods in which the Fund is utilizing leverage, the
investment advisory fee payable to the Advisor will be higher than if the Fund
did not utilize a leveraged capital structure. The use of leverage creates risks
and involves special considerations. See "Risks-Leverage Risk."

The Fund's Declaration of Trust authorizes the Fund, without prior approval
of the common shareholders, to borrow money. In this connection, the Fund may
enter into reverse repurchase agreements, issue notes or other evidence of
indebtedness (including bank Borrowings or commercial paper) and may secure any
such Borrowings by mortgaging, pledging or otherwise subjecting as security the
Fund's assets. In connection with such borrowing, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any such requirements will increase the
cost of borrowing over the stated interest rate. Under the requirements of the
1940 Act, the Fund, immediately after any such Borrowings, must have an "asset
coverage" of at least 300% (33-1/3% of Managed Assets after Borrowings). With
respect to such Borrowing, asset coverage means the ratio which the value of the
total assets of the Fund, less all liabilities and indebtedness not represented
by senior securities (as defined in the 1940 Act), bears to the aggregate amount
of such borrowing represented by senior securities issued by the Fund.

The rights of lenders to the Fund to receive interest on and repayment of
principal of any such Borrowings will be senior to those of the common
shareholders, and the terms of any such Borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
common shareholders in certain circumstances. Further, the 1940 Act does (in
certain circumstances) grant to the lenders to the Fund certain voting rights in
the event of default in the payment of interest on or repayment of principal. In
the event that such provisions would impair the Fund's status as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"), the Fund intends to repay the Borrowings. Any borrowing will likely be
ranked senior or equal to all other existing and future Borrowings of the Fund.

Certain types of Borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies, which may
issue ratings for the short-term corporate debt securities or Preferred Shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the 1940
Act. It is not anticipated that these covenants or guidelines will impede the
Advisor from managing the Fund's portfolio in accordance with the Fund's
investment objectives and policies.

If Preferred Shares are issued, they would generally pay adjustable rate
dividends based on shorter term interest rates. The adjustment period for
Preferred Shares dividends could be as short as one day or as long as a year or
more. Under the 1940 Act, the Fund is not permitted to issue Preferred Shares
unless immediately after such issuance the value of the Fund's Managed Assets is
at least 200% of the liquidation value of the outstanding Preferred Shares
(i.e., the liquidation value may not exceed 50% of the Fund's Managed Assets).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its common shares unless, at the time of such declaration, the
value of the Fund's Managed Assets is at least 200% of such liquidation value.
If Preferred Shares are issued, the Fund intends, to the extent possible, to
purchase or redeem Preferred Shares from time to time to the extent necessary in
order to maintain coverage of any Preferred Shares of at least 200%. In
addition, as a condition to obtaining ratings on the Preferred Shares, the terms
of any Preferred Shares issued are expected to include asset coverage
maintenance provisions which will require the redemption of the Preferred Shares
in the event of non compliance by the Fund and may also prohibit dividends and
other distributions on the common shares in such circumstances. In order to meet
redemption requirements, the Fund may have to liquidate portfolio securities.
Such liquidations and redemptions would cause the Fund to incur related
transaction costs and could result in capital losses to the Fund. Prohibitions
on dividends and other distributions on the common shares could impair the
Fund's ability to qualify as a regulated investment company under the Code. If
the Fund has Preferred Shares outstanding, two of the Fund's trustees will be
elected by the holders of Preferred Shares as a class. The remaining trustees of
the Fund will be elected by holders of common shares and Preferred Shares voting
together as a single class. In the event the Fund failed to pay dividends on
Preferred Shares for two years, holders of Preferred Shares would be entitled to
elect a majority of the trustees of the Fund.

-27-

The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.

Effects of Leverage

Assuming that the Leverage Instruments will represent approximately 29.9% of
the Fund's Managed Assets and pay dividends or interest at an annual combined
average rate of 1.03%, the income generated by the Fund's portfolio (net of
estimated expenses) must exceed .34% in order to cover the dividend or interest
payments specifically related to the Leverage Instruments. Of course, these
numbers are merely estimates used for illustration. Actual dividend or interest
rates on the Leverage Instruments will vary frequently and may be significantly
higher or lower than the rate estimated above.

The following table is furnished in response to requirements of the SEC. It
is designed to illustrate the effect of leverage on common share total return,
assuming investment portfolio total returns (comprised of income and changes in
the value of securities held in the Fund's portfolio) of (10%), (5%), 0%, 5% and
10%. These assumed investment portfolio returns are hypothetical figures and are
not necessarily indicative of the investment portfolio returns experienced or
expected to be experienced by the Fund. See "Risks."

The table further assumes leverage representing 29.9% of the Fund's Managed
Assets, net of expenses, and the Fund's current annual interest and fee rate of
1.03%.

Assumed Portfolio Total Return (Net of Expenses) (10%) (5%) 0% 5% 10%
Common Share Total Return (14.75)% (7.61)% (0.48)% 6.66% 13.79%

Common share total return is composed of two elements: the common share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends or interest on its Leverage
Instruments) and gains or losses on the value of the securities the Fund owns.
As required by SEC rules, the table above assumes that the Fund is more likely
to suffer capital losses than to enjoy capital appreciation. For example, to
assume a total return of 0% the Fund must assume that the interest it receives
on its debt security investments is entirely offset by losses in the value of
those investments.

While the Fund is using leverage, the amount of the fees paid to the Advisor
for investment advisory and management services are higher than if the Fund did
not use leverage because the fees paid are calculated based on the Fund's
Managed Assets, which include assets purchased with leverage. Therefore, the
Advisor has a financial incentive to leverage the Fund, which may create a
conflict of interest between the Advisor on the one hand and the common
shareholders on the other. Because payments on any leverage would be paid by the
Fund at a specified rate, only the Fund's common shareholders would bear the
Fund's management fees and other expenses.

RISKS

General

Risk is inherent in all investing. The following discussion summarizes the
principal risks that you should consider before deciding whether to invest in
the Fund. For additional information about the risks associated with investing
in the Fund, see "Additional Information About the Fund's Investments and
Investment Risks" in the SAI.

Management Risk

The Fund is subject to management risk because it is an actively managed
portfolio. The Advisor applies investment techniques and risk analyses in making
investment decisions for the Fund, but there can be no guarantee that these will
produce the desired results.

-28-

interest and/or principal payments. Credit risk also is the risk that one or
more investments in the Fund's portfolio will decline in price, or fail to pay
interest or principal when due, because the issuer of the security experiences a
decline in its financial status. The value of Senior Loans or other securities
owned by the Fund is affected by the creditworthiness of the Borrowers/issuers
and by general economic and specific industry conditions.

Senior Loans. In the event a Borrower fails to pay scheduled interest or
principal payments on a Senior Loan held by the Fund, the Fund will experience a
reduction in its income and a decline in the market value of the Senior Loan,
which will likely reduce dividends and lead to a decline in the net asset value
of the Fund's Common Shares. If the Fund acquires a Senior Loan from another
Lender, for example, by acquiring a participation, the Fund may also be subject
to credit risks with respect to that Lender. See "The Fund's
Investments-Additional Information Concerning Senior Loans."

Senior Loans generally involve less risk than unsecured or subordinated debt
and equity instruments of the same issuer because the payment of principal and
interest on Senior Loans is a contractual obligation of the issuer that, in most
instances, takes precedence over the payment of dividends, or the return of
capital, to the issuer's shareholders and payments to bond holders. The Fund
generally invests in Senior Loans that are secured with specific collateral.
However, the value of the collateral may not equal the Fund's investment when
the Senior Loan is acquired or may decline below the principal amount of the
Senior Loan subsequent to the Fund's investment. Also, to the extent that
collateral consists of stock of the Borrower or its subsidiaries or affiliates,
the Fund bears the risk that the stock may decline in value, be relatively
illiquid, and/or may lose all or substantially all of its value, causing the
Senior Loan to be under collateralized. Therefore, the liquidation of the
collateral underlying a Senior Loan may not satisfy the issuer's obligation to
the Fund in the event of non-payment of scheduled interest or principal, and the
collateral may not be readily liquidated.

In the event of the bankruptcy of a Borrower, the Fund could experience
delays and limitations on its ability to realize the benefits of the collateral
securing the Senior Loan. Among the credit risks involved in a bankruptcy are
assertions that the pledge of collateral to secure a Senior Loan constitutes a
fraudulent conveyance or preferential transfer that would have the effect of
nullifying or subordinating the Fund's rights to the collateral.

Because the Advisor may wish to invest in the publicly-traded securities
of an obligor, the Fund may not have access to material non-public information
regarding the obligor to which other investors have access.

Illiquidity. Although the resale, or secondary market for Senior Loans is
growing, it is currently limited. There is no organized exchange or board of
trade on which Senior Loans are traded. Instead, the secondary market for Senior
Loans is an unregulated inter-dealer or inter-bank resale market.

Senior Loans usually trade in large denominations (typically $1 million and
higher) and trades can be infrequent. The market has limited transparency so
that information about actual trades may be difficult to obtain. Accordingly,
some or many of the Senior Loans in which the Fund invests will be relatively
illiquid.

In addition, Senior Loans in which the Fund invests may require the
consent of the Borrower and/or agent prior to sale or assignment. These consent
requirements can delay or impede the Fund's ability to sell Senior Loans and can
adversely affect the price that can be obtained. The Fund may have difficulty
disposing of Senior Loans if it needs cash to repay debt, to pay dividends, to
pay expenses or to take advantage of new investment opportunities. In addition,
if the Fund purchases a relatively large assignment of a Senior Loan to generate
extra income sometimes paid to large lenders, the limitations of the secondary
market may inhibit the Fund from selling a portion of the Senior Loan and
reducing its exposure to the Borrower when the Advisor deems it advisable to do
so.

Risks Associated with Adverse Developments in the Credit Markets

The Fund's results of operations are materially affected by conditions in
the markets for Senior Loans, as well as the broader financial markets and the
economy generally. Beginning in 2007, significant adverse changes in financial
market conditions resulted in a deleveraging of the entire global financial
system and the forced sale of large quantities of financial assets. Concerns
over economic recession, geopolitical issues, unemployment and the availability
and cost of financing contributed to increased volatility and diminished
expectations for the economy and markets. As a result of these conditions, many
investors suffered severe losses in their portfolios and several major market
participants failed or have been impaired, resulting in a significant
contraction in market liquidity. This illiquidity negatively affected both the

-29-

terms and availability of financing for Borrowers. Volatility and deterioration
in the markets for Senior Loans as well as the broader financial markets may
adversely affect the performance and market value of the Fund's portfolio. If
these conditions exist, institutions from which the Fund seeks financing for the
Fund's investments may tighten their lending standards or become insolvent,
which could make it more difficult for the Fund to obtain financing on favorable
terms or at all. Adverse developments in the broader loan market may adversely
affect the value of the assets in which the Fund invests.

Investment and Market Risk

An investment in Common Shares is subject to investment risk, including the
possible loss of the entire principal amount that you invest. Your investment in
Common Shares represents an indirect investment in the portfolio owned by the
Fund. The value of these investments, like other market investments, may move up
or down, sometimes rapidly and unpredictably. The value of the portfolio in
which the Fund invests will affect the value of the Common Shares. Your Common
Shares at any point in time may be worth less than your original investment,
even after taking into account the reinvestment of Fund dividends and
distributions.

Government Intervention Risk

The recent instability in the financial markets has led the U.S. Government
to take a number of unprecedented actions designed to support certain financial
institutions and segments of the financial markets that have experienced extreme
volatility, and in some cases a lack of liquidity. Federal, state and other
governments, their regulatory agencies or self regulatory organizations may take
additional actions that affect the regulation of the securities in which the
Fund invests, or the issuers of such securities, in ways that are unforeseeable.
Issuers of corporate fixed income securities might seek protection under the
bankruptcy laws. Legislation or regulation may also change the way in which the
Fund itself is regulated. Such legislation or regulation could limit or preclude
the Fund's ability to achieve its investment objectives. The Advisor will
monitor developments and seek to manage the Fund's portfolio in a manner
consistent with achieving the Fund's investment objectives, but there can be no
assurance that it will be successful in doing so.

Congress has enacted sweeping financial legislation, the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), signed
into law by President Obama on July 21, 2010, which addresses, among other
areas, the operation of financial institutions. Many provisions of the
Dodd-Frank Act will be implemented through regulatory rulemakings and similar
processes over a period of time. The impact of the Dodd-Frank Act, and of
follow-on regulation, on trading strategies and operations is impossible to
predict, and may be adverse. Practices and areas of operation subject to
significant change based on the impact, direct or indirect, of the Dodd-Frank
Act and follow-on regulation, may change in manners that are unforeseeable, with
uncertain effects. By way of example and not limitation, direct and indirect
changes from the Dodd-Frank Act and follow-on regulation may occur to a
significant degree with regard to, among other areas, the trading and use of
many derivative instruments, including swaps. There can be no assurance that
such legislation or regulation will not have a material adverse effect on the
Fund.

Further, the Dodd-Frank Act created the Financial Stability Oversight
Council ("FSOC"), an interagency body charged with identifying and monitoring
systemic risks to financial markets. The FSOC has the authority to require that
non-bank financial companies that are "predominantly engaged in financial
activities" whose failure it determines would pose systemic risk, be placed
under the supervision of the Board of Governors of the Federal Reserve System
("Federal Reserve"). The FSOC has the authority to recommend that the Federal
Reserve adopt more stringent prudential standards and reporting and disclosure
requirements for non-bank financial companies supervised by the Federal Reserve.
The FSOC also has the authority to make recommendations to the Federal Reserve
on various other matters that may affect the Fund. The FSOC may also recommend
that other federal financial regulators impose more stringent regulation upon,
or ban altogether, financial activities of any financial firm that poses what it
determines are significant risks to the financial system.

-30-

from violating any such enhanced and/or new regulatory requirements. Increased
regulatory oversight could also impose administrative burdens on the Advisor and
the Fund, including, without limitation, responding to investigations and
implementing new policies and procedures. The ultimate impact of the Dodd-Frank
Act, and any resulting regulation, is not yet certain and the Advisor and the
Fund may be affected by the new legislation and regulation in ways that are
currently unforeseeable.

Potential Conflicts of Interest Risk

First Trust Advisors and the portfolio managers have interests which may
conflict with the interests of the Fund. In particular, First Trust Advisors may
manage and/or advise other investment funds or accounts with the same or similar
investment objective and strategies as the Fund. As a result, First Trust
Advisors and the Fund's portfolio managers may devote unequal time and attention
to the management of the Fund and those other funds and accounts, and may not be
able to formulate as complete a strategy or identify equally attractive
investment opportunities as might be the case if they were to devote
substantially more attention to the management of the Fund. First Trust Advisors
and the Fund's portfolio managers may identify a limited investment opportunity
that may be suitable for multiple funds and accounts, and the opportunity may be
allocated among these several funds and accounts, which may limit the Fund's
ability to take full advantage of the investment opportunity. Additionally,
transaction orders may be aggregated for multiple accounts for purpose of
execution, which may cause the price or brokerage costs to be less favorable to
the Fund than if similar transactions were not being executed concurrently for
other accounts. At times, a portfolio manager may determine that an investment
opportunity may be appropriate for only some of the funds and accounts for which
he or she exercises investment responsibility, or may decide that certain of the
funds and accounts should take differing positions with respect to a particular
security. In these cases, the portfolio manager may place separate transactions
for one or more funds or accounts which may affect the market price of the
security or the execution of the transaction, or both, to the detriment or
benefit of one or more other funds and accounts. For example, a portfolio
manager may determine that it would be in the interest of another account to
sell a security that the Fund holds, potentially resulting in a decrease in the
market value of the security held by the Fund.

The portfolio managers may also engage in cross trades between funds and
accounts, may select brokers or dealers to execute securities transactions based
in part on brokerage and research services provided to First Trust Advisors
which may not benefit all funds and accounts equally and may receive different
amounts of financial or other benefits for managing different funds and
accounts. Finally, First Trust Advisors or its affiliates may provide more
services to some types of funds and accounts than others.

There is no guarantee that the policies and procedures adopted by First
Trust Advisors and the Fund will be able to identify or mitigate the conflicts
of interest that arise between the Fund and any other investment funds or
accounts that First Trust Advisors may manage or advise from time to time. For
further information on potential conflicts of interest, see "Investment Advisor"
in the SAI.

Valuation Difficulties. The Fund will value its Senior Loans daily. However,
because the secondary market for Senior Loans is limited, it may be difficult to
value some loans. Market quotations may not be readily available for some Senior
Loans and valuation may require more research than for liquid securities. In
addition, elements of judgment may play a greater role in valuation of Senior
Loans than for securities with a secondary market, because there is less
reliable objective data available.

Interest Rate Risk. During normal market conditions, changes in market
interest rates will affect the Fund in certain ways. The principal effect will
be that the yield on the Fund's Common Shares will tend to rise or fall as
market interest rates rise and fall. This is because Senior Loans, the majority
of the assets in which the Fund invests, pay interest at rates which float in
response to changes in market rates. However, because the rates of interest paid
on the Senior Loans in which the Fund invests will have a weighted average reset
period that is typically less than 90 days, changes in prevailing interest rates
can be expected to cause some fluctuation in the Fund's Net Asset Value ("NAV").
Similarly, a sudden and significant increase in market interest rates may cause
a decline in the Fund's NAV. See "Risks-Interest Rate Risk."

-31-

Changes in market interest rates may also have a moderate impact on the Fund's
NAV. Another factor which can affect the Fund's NAV is changes in the pricing
obtained for the Fund's assets. See "Net Asset Value."

Lower Grade and Below Investment Grade Debt Risk.

The Fund may invest up to 100% of its Managed Assets in lower grade debt
securities, which may also be referred to as below investment grade debt
securities. Below investment grade debt securities are rated below "Baa" by
Moody's, below "BBB" by S&P, comparably rated by another NRSRO or, if unrated,
determined to be of comparable credit quality by the Advisor. Below investment
grade debt instruments are commonly referred to as "high-yield" or "junk" bonds
and are considered speculative with respect to the issuer's capacity to pay
interest and repay principal and are susceptible to default or decline in market
value due to adverse economic and business developments. The market values for
high-yield securities tend to be very volatile, and these securities are less
liquid than investment grade debt securities. For these reasons, your investment
in the Fund is subject to the following specific risks:

o increased price sensitivity to changing interest rates and to a
deteriorating economic environment;

o greater risk of loss due to default or declining credit quality;

o adverse company specific events more likely to render the issuer
unable to make interest and/or principal payments; and

o negative perception of the high-yield market which may depress the
price and liquidity of high-yield securities.

The secondary market for high-yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Fund's ability to dispose of a particular security. There
are fewer dealers in the market for high-yield securities than for investment
grade obligations. The prices quoted by different dealers may vary significantly
and the spread between the bid and asked price is generally much larger than for
higher quality instruments. Under adverse market or economic conditions, the
secondary market for high-yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer, and
these securities may become illiquid. As a result, the Fund could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's NAV.

The Senior Loans in which the Fund invests are generally lower grade. These
lower grade debt instruments may become the subject of bankruptcy proceedings or
otherwise subsequently default as to the repayment of principal and/or payment
of interest or be downgraded to ratings in the lower rating categories ("Ca" or
lower by Moody's, "CC" or lower by S&P or comparably rated by another NRSRO).
The value of these securities is affected by the creditworthiness of the issuers
of the securities and by general economic and specific industry conditions.
Issuers of lower grade debt instruments are not perceived to be as strong
financially as those with higher credit ratings, so the securities are usually
considered speculative investments. These issuers are generally more vulnerable
to financial setbacks and recession than more creditworthy issuers which may
impair their ability to make interest and principal payments. Lower grade debt
instruments tend to be less liquid than higher grade debt instruments. See
"Management Risk-Credit Risk."

Investment decisions will be based largely on the credit analysis performed
by the Advisor, and not on rating agency evaluation. This analysis may be
difficult to perform. Information about a Senior Loan and its issuer generally
is not in the public domain. Moreover, Senior Loans may not be rated by any
NRSRO. Many issuers have not issued securities to the public and are not subject
to reporting requirements under federal securities laws. Generally, however,
issuers are required to provide financial information to lenders and information
may be available from other Senior Loan participants, agents or others that
invest in, trade in, originate or administer Senior Loans.

-32-

Fixed-Income Securities Risk

In addition to the risks discussed above, debt securities, including
high-yield securities such as the publicly-traded high-yield debt securities in
which the Fund invests, are subject to certain risks, including:

o Issuer/Credit Risk. The value of fixed-income securities may decline
for a number of reasons which directly relate to the issuer, such as
management performance, financial leverage, reduced demand for the
issuer's goods and services, and failure.

o Interest Rate Risk. Interest rate risk is the risk that fixed-income
securities will decline in value because of changes in market interest
rates. When market interest rates rise, the market value of such
securities generally will fall. During periods of rising interest
rates, the average life of certain types of securities may be extended
because of slower than expected prepayments. This may lock in a below
market yield, increase the security's duration and reduce the value of
the security. Investments in debt securities with long-term maturities
may experience significant price declines if long-term interest rates
increase. Market interest rates in the United States currently are
near historically low levels. An increase in the interest payments on
the Fund's Borrowings or dividends on any Preferred Shares relative to
the interest it earns on its investment securities may adversely
affect the Fund's performance.

o Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's portfolio will decline if the Fund invests the proceeds from
matured, traded or called bonds at market interest rates that are
below the Fund's portfolio's current earnings rate. A decline in
income could affect the common shares' market price, level of
distributions or the overall return of the Fund.

o Prepayment Risk. During periods of declining interest rates, the
issuer of a security may exercise its option to prepay principal
earlier than scheduled, forcing the Fund to reinvest the proceeds from
such prepayment in lower yielding securities. This is known as call or
prepayment risk. Debt securities frequently have call features that
allow the issuer to repurchase the security prior to its stated
maturity. An issuer may redeem an obligation if the issuer can
refinance the debt at a lower cost due to declining interest rates or
an improvement in the credit standing of the issuer.

Economic Sector Risk

Under normal market conditions, the Fund is 80% invested in Senior Loans.
This may make the Fund more susceptible to adverse economic, political or
regulatory events that affect the value of Senior Loans, and increase the
potential for fluctuation in the net asset value of the Fund's Common Shares.

Market Discount From Net Asset Value

The Fund's common shares have been publicly traded since May 28, 2004 and
have traded both at a premium and at a discount relative to net asset value.
There is no assurance that any premium of the public offering price for the
Common Shares over net asset value with respect to any offering hereunder will
continue after such offering or that the common shares will not again trade at a
discount. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This characteristic is a risk separate and
distinct from the risk that the Fund's NAV could decrease as a result of its
investment activities and may be greater for investors expecting to sell their
Common Shares in a relatively short period following completion of this
offering. The NAV of the Common Shares will be reduced immediately following the
offering as a result of the payment of certain offering costs. Although the
value of the Fund's net assets is generally considered by market participants in
determining whether to purchase or sell Common Shares, whether investors will
realize gains or losses upon the sale of the Common Shares will depend entirely
upon whether the market price of the Common Shares at the time of sale is above
or below the investor's purchase price for the Common Shares. Because the market
price of the Common Shares will be determined by factors such as net asset
value, dividend and distribution levels (which are dependent, in part, on
expenses), supply of and demand for the Common Shares, stability of dividends or
distributions, trading volume of the Common Shares, general market and economic
conditions and other factors beyond the control of the Fund, the Fund cannot
predict whether the Common Shares will trade at, below or above NAV or at, below
or above the initial public offering price.

-33-

Leverage Risk

The Fund may borrow an amount up to 33-1/3% (or such other percentage as
permitted by law) of its Managed Assets (including the amounts borrowed pursuant
to reverse repurchase agreements) less all liabilities other than Borrowings.
The Fund may also issue Preferred Shares in an amount up to 50% of the Fund's
Managed Assets (including the proceeds from Leverage Instruments). Under normal
circumstances, the Fund expects to utilize leverage in an amount up to 33-1/3%
of the Fund's Managed Assets. The Fund currently leverages its assets through
the use of the Credit Facility. Borrowings, repurchase agreement and the
issuance of Preferred Shares are referred to in this prospectus collectively as
"leverage." The Fund may leverage its assets for investment purposes, to finance
the repurchase of its Common Shares, and to meet cash requirements. Although the
use of leverage by the Fund may create an opportunity for increased return for
the Common Shares, it also results in additional risks and can magnify the
effect of any losses. If the income and gains earned on the securities and
investments purchased with leverage proceeds are greater than the cost of the
leverage, the Common Shares' return will be greater than if leverage had not
been used. Conversely, if the income and gains from the securities and
investments purchased with such proceeds does not cover the cost of leverage,
the return to the Common Shares will be less than if leverage had not been used.
There is no assurance that a leveraging strategy will be successful. Leverage
involves risks and special considerations for Common Shareholders including:

o the likelihood of greater volatility of NAV and market price of the
Common Shares than a comparable portfolio without leverage;

o the risk that fluctuations in interest rates on reverse repurchase
agreements, Borrowings and short-term debt or in the dividend rates on
any Preferred Shares that the Fund may pay will reduce the return to
the Common Shareholders or will result in fluctuations in the
dividends paid on the Common Shares;

o the effect of leverage in a declining market, which is likely to cause
a greater decline in the NAV of the Common Shares than if the Fund
were not leveraged, which may result in a greater decline in the
market price of the Common Shares; and

o when the Fund uses leverage, the investment advisory fee payable to
the Advisor will be higher than if the Fund did not use leverage.

The Advisor, in its judgment, nevertheless may determine to continue to use
leverage if it expects that the benefits to the Fund's shareholders of
maintaining the leveraged position will outweigh the current reduced return.

The funds borrowed pursuant to a leverage borrowing program (such as a
reverse repurchase agreement, credit line or commercial paper program), or
obtained through the issuance of Preferred Shares, constitute a substantial lien
and burden by reason of their prior claim against the income of the Fund and
against the net assets of the Fund in liquidation. The rights of lenders to
receive payments of interest on and repayments of principal on any Borrowings
made by the Fund under a leverage borrowing program are senior to the rights of
Common Shareholders and the holders of Preferred Shares, with respect to the
payment of dividends or upon liquidation. The Fund may not be permitted to
declare dividends or other distributions, including dividends and distributions
with respect to Common Shares or Preferred Shares or purchase Common Shares or
Preferred Shares, unless at the time thereof the Fund meets certain asset
coverage requirements and no event of default exists under any leverage program.
In addition, the Fund may not be permitted to pay dividends on Common Shares
unless all dividends on the Preferred Shares and/or accrued interest on
Borrowings have been paid, or set aside for payment. In an event of default
under a leverage borrowing program, the lenders have the right to cause a
liquidation of collateral (i.e., sell securities and other assets of the Fund)
and, if any such default is not cured, the lenders may be able to control the
liquidation as well. Certain types of leverage may result in the Fund being
subject to covenants relating to asset coverage and Fund composition
requirements. The Fund may be subject to certain restrictions on investments
imposed by guidelines of one or more rating agencies, which may issue ratings
for the Preferred Shares or other leverage securities issued by the Fund. These
guidelines may impose asset coverage or Fund composition requirements that are
more stringent than those imposed by the 1940 Act. The Advisor does not believe
that these covenants or guidelines will impede it from managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies.

While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and NAV associated with leverage, there

-34-

can be no assurance that the Fund will actually reduce leverage in the future or
that any reduction, if undertaken, will benefit the Common Shareholders. Changes
in the future direction of interest rates are very difficult to predict
accurately. If the Fund were to reduce leverage based on a prediction about
future changes to interest rates, and that prediction turned out to be
incorrect, the reduction in leverage would likely operate to reduce the income
and/or total returns to Common Shareholders relative to the circumstance if the
Fund had not reduced leverage. The Fund may decide that this risk outweighs the
likelihood of achieving the desired reduction to volatility in income and Common
Share price if the prediction were to turn out to be correct, and determine not
to reduce leverage as described above.

Strategic Transactions

The Fund may use various other investment management techniques that also
involve certain risks and special considerations, including engaging in hedging
and risk management transactions, including credit default swaps, credit linked
notes, interest rate options, futures, swaps, caps, floors, and collars and
other derivative transactions. These strategic transactions may be entered into
to seek to manage the risks of the Fund's portfolio securities, but may have the
effect of limiting the gains from favorable market movements. Certain of these
strategic transactions may provide investment leverage to the Fund's portfolio
and result in many of the same risks of leverage to Common Shareholders as
discussed above under "-Leverage Risk." See "Additional Information About the
Fund's Investments" in the SAI for more information about these techniques.

The derivatives markets have become subject to comprehensive statutes,
regulations and margin requirements. In particular, in the United States the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")
was signed into law in July 2010 and could impact and restrict the Fund's
ability to use certain Strategic Transactions. For instance, the Dodd-Frank Act
requires most over-the-counter derivatives to be executed on a regulated market
and cleared through a central counterparty, which may result in increased margin
requirements and costs for the Fund. Further, the Commodity Futures Trading
Commission (the "CFTC") has recently rescinded certain exemptions from
registration requirements under the U.S. Commodity Exchange Act (the "CEA") that
have been previously available under the CFTC Rule 4.5 to investment advisers
registered with the SEC under the Investment Advisers Act of 1940. The status of
these amended rules is unclear because of litigation against the CFTC
challenging the amendments. In the event that the Fund's investments in
derivative instruments regulated under the CEA, including futures, swaps and
options, exceeds a certain threshold, the Advisor may be required to register as
a "commodity pool operator" and/or "commodity trading advisor" with the CFTC. In
the event the Advisor is required to register with the CFTC, it will become
subject to additional recordkeeping and reporting requirements with respect to
the Fund. The Fund currently intends to limit its investments in derivative
instruments so as not to require the Advisor to register as a commodity pool
operator under the amended rules.

The SEC has also indicated that it may adopt new policies on the use of
derivatives by registered investment companies. Such policies could affect the
nature and extent of derivative use by the Fund.

Portfolio Turnover Risk

The Fund's annual portfolio turnover rate may vary greatly from year to
year. Although the Fund cannot accurately predict its annual portfolio turnover
rate, it is not expected to exceed 100% under normal circumstances. For the
fiscal year ended May 31, 2012, portfolio turnover was approximately 63%.
However, portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the Fund. High portfolio turnover may
result in the Fund's recognition of gains that will be taxable as ordinary
income to the Fund. A high portfolio turnover may increase the Fund's current
and accumulated earnings and profits, resulting in a greater portion of the
Fund's distributions being treated as a dividend for U.S. federal tax income
purposes to the Fund's Common Shareholders. In addition, a higher portfolio
turnover rate results in correspondingly greater brokerage commissions and other
transactional expenses that are borne by the Fund. See "The Fund's
Investments-Investment Practices-Portfolio Turnover" and "Tax Matters."

-35-

Market Disruption Risk

Ongoing U.S. military action and related events throughout the world, as
well as the continuing threat of terrorist attacks, could have significant
adverse effects on the U.S. economy, the stock market and world economies and
markets generally. The Fund cannot predict the effects of such events in the
future on the U.S. and world economies, the value of the Common Shares or the
NAV of the Fund.

Certain Affiliations

Certain broker-dealers may be considered to be affiliated persons of the
Fund or First Trust Advisors. Absent an exemption from the SEC or other
regulatory relief, the Fund is generally precluded from effecting certain
principal transactions with affiliated brokers, and its ability to utilize
affiliated brokers for agency transactions is subject to restrictions. This
could limit the Fund's ability to engage in securities transactions and take
advantage of market opportunities.

Anti-Takeover Provisions

The Fund's Declaration of Trust includes provisions that could limit the
ability of other entities or persons to acquire control of the Fund or convert
the Fund to open-end status. These provisions could have the effect of depriving
the common shareholders of opportunities to sell their common shares at a
premium over the then current market price of the common shares. See "Certain
Provisions in the Declaration of Trust and By-Laws."

Secondary Market for the Fund's Shares

The issuance of common shares through the Fund's Dividend Reinvestment Plan
may have an adverse effect on the secondary market for the Fund's common shares.
The increase in the number of outstanding common shares resulting from issuances
pursuant to the Fund's Dividend Reinvestment Plan and the discount to the market
price at which such common shares may be issued, may put downward pressure on
the market price for the common shares. Common shares will not be issued
pursuant to the Fund's Dividend Reinvestment Plan at any time when common shares
are trading at a lower price than the Fund's NAV per Common Share. When the
Fund's common shares are trading at a premium, the Fund may also issue common
shares that may be sold through private transactions effected on the NYSE or
through broker-dealers. The increase in the number of outstanding common shares
resulting from these offerings may put downward pressure on the market price for
common shares.

MANAGEMENT OF THE FUND

Trustees and Officers

The Board of Trustees is responsible for the general supervision of the
duties performed by the Advisor. There are five trustees of the Fund, one of
whom is an "interested person" (as defined in the 1940 Act) and four of whom are
not "interested persons." The names and business addresses of the trustees and
officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under "Management of the Fund" in the
SAI.

Investment Advisor

First Trust Advisors, 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187, is the investment advisor to the Fund. First Trust Advisors serves as
investment advisor or portfolio supervisor to investment portfolios with
approximately $51 billion in assets which it managed or supervised as of June
30, 2011.

First Trust Advisors is also responsible for the day to day management of
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and other administrative services.

The First Trust Leveraged Finance Investment Team began managing Fund's
portfolio on October 12, 2010. The experienced professionals comprising the
First Trust Leveraged Finance Investment Team currently manage assets that total
approximately $[____] million as of August 31, 2012. The team's experience

-36-

includes managing Senior Loans in both the U.S. and Europe, managing high-yield
debt and corporate restructuring expertise. The team, led by William Housey and
Scott D. Fries, has managed institutional separate accounts, commingled funds,
structured products and retail funds

Mr. Housey joined First Trust in June 2010 as Senior Portfolio Manager and
has 16 years of investment experience. Prior to joining First Trust, Mr.
Housey was at Morgan Stanley/Van Kampen Funds, Inc. for 11 years and served as
Executive Director and Co-Portfolio Manager. Mr. Housey has extensive experience
in portfolio management of both leveraged and unleveraged credit products,
including Senior Loans, high-yield bonds, credit derivatives and corporate
restructurings. Mr. Housey received a BS in Finance from Eastern Illinois
University and an MBA in Finance as well as Management and Strategy from
Northwestern University's Kellogg School of Business. Mr. Housey holds the
Chartered Financial Analyst designation.

Mr. Fries joined First Trust in June 2010 as Portfolio Manager in the
Leveraged Finance Investment Team and has 18 years of investment industry
experience. Prior to joining First Trust, Mr. Fries spent 15 years and served as
Co-Portfolio Manager of Institutional Separately Managed Accounts for Morgan
Stanley/Van Kampen Funds, Inc. Mr. Fries received a BA in International Business
from Illinois Wesleyan University and an MBA in Finance from DePaul University.
Mr. Fries holds the Chartered Financial Analyst designation.

First Trust Advisors, a registered investment advisor, is an Illinois
limited partnership formed in 1991 and an investment advisor registered with the
Securities and Exchange Commission under the Investment Advisors Act of 1940
(the "Advisers Act"). First Trust Advisors is a limited partnership with one
limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one
general partner, The Charger Corporation. Grace Partners is a limited
partnership with one general partner, The Charger Corporation, and a number of
limited partners. Grace Partners' and The Charger Corporation's primary business
is investment advisory and broker dealer services through their ownership
interests in various entities.

The Charger Corporation is an Illinois corporation that was previously
controlled by the Robert Donald Van Kampen family. On August 24, 2010, members
of the Robert Donald Van Kampen family entered into a stock purchase agreement
with James A. Bowen, the President of the Advisor, to sell 100% of the common
stock of The Charger Corporation to Mr. Bowen (who holds the interest through a
limited liability company of which he is the sole member) (the "Advisor
Transaction"). The Advisor Transaction was completed in accordance with its
terms on October 12, 2010.

Four Corners Capital Management, LLC ("Four Corners") served as the Fund's
investment sub advisor and managed the Fund's portfolio subject to First Trust
Advisor's supervision until October 12, 2010. Effective October 12, 2010, the
Leveraged Finance Investment Team of First Trust assumed the day to day
responsibility for management of the Fund's portfolio. Additionally, effective
October 12, 2010, the Fund's name was changed from First Trust/Four Corners
Senior Floating Rate Income Fund II to "First Trust Senior Floating Rate Income
Fund II."

For additional information concerning First Trust Advisors, including a
description of the services provided, see "Investment Advisor" in the SAI.

Investment Management Agreement

Pursuant to an investment management agreement between the Advisor and the
Fund (the "Investment Management Agreement"), the Fund has agreed to pay a fee
for the services and facilities provided by the Advisor at the annual rate of
0.75% of Managed Assets.

For purposes of calculation of the management fee, the Fund's "Managed
Assets" means the average daily gross asset value of the Fund (which includes
assets attributable to the Fund's Preferred Shares, if any, and the principal
amount of Borrowings), minus the sum of the Fund's accrued and unpaid dividends
on any outstanding Preferred Shares and accrued liabilities (other than the
principal amount of any Borrowings incurred, commercial paper or notes issued by
the Fund).

In addition to the management fee, the Fund pays all other costs and
expenses of its operations, including the compensation of its trustees (other
than those affiliated with the Advisor), custodian, transfer agency,
administrative, accounting and dividend disbursing expenses, legal fees,
leverage expenses, rating agency fees, listing fees and expenses, expenses of
the independent registered public accounting firm, expenses of repurchasing
Common Shares, expenses of preparing, printing and distributing shareholder
reports, notices, proxy statements and reports to governmental agencies and
taxes, if any.

-37-

Because the fee paid to the Advisor will be calculated on the basis of the
Fund's Managed Assets, which include the proceeds of leverage, the dollar amount
of the Advisor's fees will be higher (and the Advisor will be benefited to that
extent) when leverage is utilized. In this regard, if the Fund uses leverage in
the amount equal to 29.9% of the Fund's Managed Assets (after the issuance of
leverage), the Fund's management fee would be 1.07% of net assets attributable
to Common Shares. See "Summary of Fund Expenses."

NET ASSET VALUE

The NAV of the Common Shares of the Fund is computed based upon the value of
the Fund's portfolio securities and other assets. The NAV will be determined as
of the close of regular trading on the New York Stock Exchange ("NYSE")
(normally 4:00 p.m. New York City time) on each day the NYSE is open for
trading. The Fund calculates NAV per Common Share by subtracting the Fund's
liabilities (including accrued expenses, dividends payable and all Borrowings of
the Fund) and the liquidation value of any outstanding Preferred Shares from the
Fund's Managed Assets (the value of the 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 in accordance with valuation
procedures adopted by the Fund's Board of Trustees, and in accordance with
provisions of the 1940 Act. The Senior Loans in which the Fund invests are not
listed on any securities exchange or board of trade. Senior Loans are typically
bought and sold by institutional investors in individually negotiated private
transactions that function in many respects like an over the counter secondary
market, although typically no formal market makers exist. This market, while
having grown substantially since its inception, generally has fewer trades and
less liquidity than the secondary market for other types of securities. Some
Senior Loans have few or no trades, or trade infrequently, and information
regarding a specific Senior Loan may not be widely available or may be
incomplete. Accordingly, determinations of the market value of Senior Loans may
be based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically, Senior
Loans are valued using information provided by a third party pricing service.

Common stocks and other securities listed on any national or foreign
exchange (excluding the NASDAQ National Market ("NASDAQ") and the London Stock
Exchange Alternative Investment Market ("AIM")), are valued at the last sale
price on the exchange on which they are principally traded. If there are no
transactions on the valuation day, the securities are valued at the mean between
the most recent bid and asked prices. Securities listed on the NASDAQ or the AIM
are valued at the official closing price. If there is no official closing price
on the valuation day, the securities are valued at the mean between the most
recent bid and asked prices. Securities traded in the over the counter market
are valued at their closing bid prices.

Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and accretion
of discounts.

In the event that market quotations are not readily available, the pricing
service does not provide a valuation, or the valuations received are deemed
unreliable, the Fund's Board of Trustees has designated the Advisor to use a
fair value method to value the Fund's securities. Additionally, if events occur
after the close of the principal markets for certain securities (e.g., domestic
debt securities and foreign securities) that could materially affect the Fund's
NAV, First Trust may use a fair value method to value the Fund's securities. The
use of fair value pricing is governed by valuation procedures adopted by the
Fund's Board of Trustees, and in accordance with the provisions of the 1940 Act.
As a general principle, the fair value of a security is the amount which the
Fund might reasonably expect to receive for the security upon its current sale.
However, in light of the judgment involved in fair valuations, there can be no
assurance that a fair value assigned to a particular security will be the amount
which the Fund might be able to receive upon its current sale. Fair valuation of
a security is based on the consideration of all available information,
including, but not limited to, the following:

o the fundamental business data relating to the issuer;

o an evaluation of the forces which influence the market in which the
securities of the issuer are purchased and sold;

-38-

o the type, size and cost of the security;

o the financial statements of the issuer;

o the credit quality and cash flow of the issuer, based on the Advisor's
external analysis;

o the information as to any transactions in or offers for the security;

o the price and extent of public trading in similar securities (or
equity securities) of the issuer, or comparable companies;

o the coupon payments;

o the quality, value and saleability of collateral, if any, securing the
security;

o the business prospects of the issuer, including any ability to obtain
money or resources from a parent or affiliate and an assessment of the
issuer's management;

o the prospects for the issuer's industry, and multiples (of earnings
and/or cash flow) being paid for similar businesses in that industry;

o the issuer's competitive position within the industry;

o the issuer's ability to access additional liquidity through public and
private markets; and

o other relevant factors.

DISTRIBUTIONS

The Fund's present policy, which may be changed at any time by the Fund's
Board of Trustees, is to distribute to common shareholders monthly dividends of
all or a portion of its net income after payment of dividends and interest in
connection with leverage used by the Fund. The Fund expects that all or a
portion of any capital gains will be distributed at least annually.

Various factors will affect the level of the Fund's income, including the
asset mix, the average maturity of the Fund's portfolio, the amount of leverage
utilized by the Fund and the Fund's use of hedging. To permit the Fund to
maintain a more stable monthly distribution, the Fund may from time to time
distribute less than the entire amount of income earned in a particular period.
The undistributed income would be available to supplement future distributions.
As a result, the distributions paid by the Fund for any particular monthly
period may be more or less than the amount of income actually earned by the Fund
during that period. Undistributed income will add to the Fund's NAV and,
correspondingly, distributions from undistributed income will decrease the
Fund's NAV. Shareholders will automatically have all dividends and distributions
reinvested in common shares issued by the Fund or purchased in the open market
in accordance with the Fund's dividend reinvestment plan unless an election is
made to receive cash. See "Dividend Reinvestment Plan."

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, unless you elect to receive cash distributions, all
dividends and distributions on your common shares will be automatically
reinvested by the Plan Agent, BNY Mellon Investment Servicing (U.S.) Inc., in
additional common shares under the Dividend Reinvestment Plan (the "Plan"). If
you elect to receive cash distributions, you will receive all distributions in
cash paid by check mailed directly to you by BNY Mellon Investment Servicing
(U.S.) Inc., as dividend paying agent.

You are automatically enrolled in the Plan when you become a shareholder of
the Fund. As a participant in the Plan, the number of common shares you will
receive will be determined as follows:

(1) If the common shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at a price equal to the greater of
(i) net asset value per common share on that date or (ii) 95% of the market
price on that date.

(2) If common shares are trading below net asset value 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

-39-

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 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.
See "Tax Matters."

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. Consult your financial advisor for more information.

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 from BNY Mellon Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.

PLAN OF DISTRIBUTION

The Fund may sell the Common Shares being offered under this prospectus in
any one or more of the following ways:

o directly to purchasers;

o through agents;

o to or through underwriters; or

o through dealers.

The Fund may distribute the Common Shares from time to time in one or more
transactions at:

o a fixed price or prices, which may be changed;

o market prices prevailing at the time of sale;

o prices related to prevailing market prices; or

o negotiated prices.

The Fund may directly solicit offers to purchase Common Shares, or the Fund
may designate agents to solicit such offers. The Fund will, in a prospectus
supplement relating to such offering, name any agent that could be viewed as an
underwriter under the Securities Act and describe any commissions the Fund must
pay. Any such agent will be acting on a best efforts basis for the period of its
appointment or, if indicated in the applicable prospectus supplement or other
offering materials, on a firm commitment basis. Agents, dealers and underwriters
may be customers of, engage in transactions with, or perform services for the
Fund in the ordinary course of business.

-40-

If any underwriters or agents are utilized in the sale of Common Shares in
respect of which this prospectus is delivered, the Fund will enter into an
underwriting agreement or other agreement with them at the time of sale to them,
and the Fund will set forth in the prospectus supplement relating to such
offering their names and the terms of the Fund's agreement with them.

If a dealer is utilized in the sale of Common Shares in respect of which
this prospectus is delivered, the Fund will sell such Common Shares to the
dealer, as principal. The dealer may then resell such Common Shares to the
public at varying prices to be determined by such dealer at the time of resale.

The Fund may engage in at the market offerings to or through a market maker
or into an existing trading market, on an exchange or otherwise, in accordance
with Rule 415(a)(4). An at the market offering may be through an underwriter or
underwriters acting as principal or agent for the Fund.

Agents, underwriters and dealers may be entitled under agreements which they
may enter into with the Fund to indemnification by the Fund against certain
civil liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for the Fund in
the ordinary course of business.

In order to facilitate the offering of the Common Shares, any underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares or any other Common Shares the prices of which may be
used to determine payments on the Common Shares. Specifically, any underwriters
may over allot in connection with the offering, creating a short position for
their own accounts. In addition, to cover over allotments or to stabilize the
price of the Common Shares or of any such other Common Shares, the underwriters
may bid for, and purchase, the Common Shares or any such other Common Shares in
the open market. Finally, in any offering of the Common Shares through a
syndicate of underwriters, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Shares in the offering if the syndicate repurchases previously distributed
Common Shares in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Shares above independent market
levels. Any such underwriters are not required to engage in these activities and
may end any of these activities at any time.

The Fund may enter into derivative transactions with third parties, or sell
Common Shares not covered by this prospectus to third parties in privately
negotiated transactions. If the applicable prospectus supplement indicates, in
connection with those derivatives, the third parties may sell Common Shares
covered by this prospectus and the applicable prospectus supplement or other
offering materials, including in short sale transactions. If so, the third
parties may use Common Shares pledged by the Fund or borrowed from the Fund or
others to settle those sales or to close out any related open borrowings of
stock, and may use Common Shares received from the Fund in settlement of those
derivatives to close out any related open borrowings of stock. The third parties
in such sale transactions will be underwriters and, if not identified in this
prospectus, will be identified in the applicable prospectus supplement or other
offering materials (or a post effective amendment).

The Fund or one of the Fund's affiliates may loan or pledge Common Shares to
a financial institution or other third party that in turn may sell the Common
Shares using this prospectus. Such financial institution or third party may
transfer its short position to investors in our Common Shares or in connection
with a simultaneous offering of other Common Shares offered by this prospectus
or otherwise.

The maximum commission or discount to be received by any member of the
Financial Industry Regulatory Authority will not be greater than eight percent
of the initial gross proceeds from the sale of any security being sold.

Any underwriter, agent or dealer utilized in the initial offering of Common
Shares will not confirm sales to accounts over which it exercises discretionary
authority without the prior specific written approval of its customer.

DESCRIPTION OF SHARES

Common Shares

The Declaration of Trust authorizes the issuance of an unlimited number of
common shares. The Common Shares being offered in this offering have a par value
of $0.01 per share and, subject to the rights of holders of Preferred Shares, if
any, have equal rights to the payment of dividends and the distribution of
assets upon liquidation. As of August 31, 2012, the Fund had 25,362,005 common
shares outstanding. The Common Shares being offered by this prospectus will,
when issued, be fully paid and, subject to matters discussed in "Certain
Provisions in the Declaration of Trust and By-Laws," non assessable, and

-41-

currently have no preemptive or conversion rights (except as may otherwise be
determined by the Trustees in their sole discretion) or rights to cumulative
voting.

The Fund's currently outstanding common shares are, and the Common
Shares offered in this prospectus will be, subject to notice of issuance, listed
on the New York Stock Exchange under the trading or "ticker" symbol "FCT."

Unlike open-end funds, closed-end funds like the Fund do not continuously offer
shares and do not provide daily redemptions. Rather, if a shareholder determines
to buy additional common shares or sell shares already held, the shareholder may
conveniently do so by trading on the exchange through a broker or otherwise.
Shares of closed-end investment companies may frequently trade on an exchange at
prices lower than net asset value. Shares of closed-end investment companies
like the Fund have during some periods traded at prices higher than net asset
value and during other periods have traded at prices lower than net asset value.
Because the market value of the common shares may be influenced by such factors
as dividend levels (which are in turn affected by expenses), dividend stability,
portfolio credit quality, net asset value, relative demand for and supply of
such shares in the market, general market and economic conditions, and other
factors beyond the control of the Fund, the Fund cannot assure you that the
common shares will trade at a price equal to or higher than net asset value in
the future. The common shares are designed primarily for long-term investors,
and investors in the common shares should not view the Fund as a vehicle for
trading purposes. See "Structure of the Fund; Common Share Repurchases and
Change in Fund Structure."

Preferred Shares

The Declaration of Trust provides that the Fund's Board of Trustees may
authorize and issue Preferred Shares with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the Common
Shareholders. Common Shareholders have no preemptive right to purchase any
Preferred Shares that might be issued.

The Fund may elect to issue Preferred Shares as part of its leverage
strategy. The Fund may issue Leverage Instruments, which may include Preferred
Shares, representing up to 33-1/3% of the Fund's Managed Assets immediately
after the Leverage Instruments are issued. The Board of Trustees also reserves
the right to issue Preferred Shares to the extent permitted by the 1940 Act,
which currently limits the aggregate liquidation preference of all outstanding
Preferred Shares plus the principal amount of any outstanding leverage
consisting of debt to 50% of the value of the Fund's Managed Assets less
liabilities and indebtedness of the Fund (other than leverage consisting of
debt). We cannot assure you, however, that any Preferred Shares will be issued.
Although the terms of any Preferred Shares, including dividend rate, liquidation
preference and redemption provisions, will be determined by the Board of
Trustees, subject to applicable law and the Declaration of Trust, it is likely
that the Preferred Shares will be structured to carry a relatively short-term
dividend rate reflecting interest rates on short-term bonds, by providing for
the periodic redetermination of the dividend rate at relatively short intervals
through an auction, remarketing or other procedure. The Fund also believes that
it is likely that the liquidation preference, voting rights and redemption
provisions of the Preferred Shares will be similar to those stated below.

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per Preferred Share plus
accrued and unpaid dividends, whether or not declared, before any distribution
of assets is made to Common Shareholders. After payment of the full amount of
the liquidating distribution to which they are entitled, the holders of
Preferred Shares will not be entitled to any further participation in any
distribution of assets by the Fund.

Voting Rights. The 1940 Act requires that the holders of any Preferred
Shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
Common Shares and Preferred Shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any Preferred Shares have the
right to elect a majority of the trustees of the Fund at any time two years'
dividends on any Preferred Shares are unpaid. The 1940 Act also requires that,
in addition to any approval by shareholders that might otherwise be required,
the approval of the holders of a majority of any outstanding Preferred Shares,
voting separately as a class, would be required to (1) adopt any plan of
reorganization that would adversely affect the Preferred Shares, and (2) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Fund's subclassification as a
closed-end investment company or changes in its fundamental investment

-42-

restrictions. See "Certain Provisions in the Declaration of Trust and By-Laws."
As a result of these voting rights, the Fund's ability to take any such actions
may be impeded to the extent that there are any Preferred Shares outstanding.
The Board of Trustees presently intends that, except as otherwise indicated in
this prospectus and except as otherwise required by applicable law or the
Declaration of Trust, holders of Preferred Shares will have equal voting rights
with Common Shareholders (one vote per share, unless otherwise required by the
1940 Act) and will vote together with Common Shareholders as a single class.

The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.

Redemption, Purchase and Sale of Preferred Shares by the Fund. The terms of
any Preferred Shares issued are expected to provide that (1) they are redeemable
by the Fund in whole or in part at the original purchase price per share plus
accrued dividends per share, (2) the Fund may tender for or purchase Preferred
Shares and (3) the Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of Preferred Shares by the Fund will
reduce the leverage applicable to the Common Shares, while any resale of shares
by the Fund will increase that leverage.

The discussion above describes the possible offering of Preferred Shares by
the Fund. If the Board of Trustees determines to proceed with such an offering,
the terms of the Preferred Shares may be the same as, or different from, the
terms described above, subject to applicable law and the Fund's Declaration of
Trust. The Board of Trustees, without the approval of the Common Shareholders,
may authorize an offering of Preferred Shares or may determine not to authorize
such an offering, and may fix the terms of the Preferred Shares to be offered.

Description of Borrowings

The Fund's Declaration of Trust authorizes the Fund, without prior approval
of the common shareholders, to borrow money. In this connection, the Fund may
use repurchase agreements or issue notes or other evidence of indebtedness
(including bank Borrowings or commercial paper) and may secure any such
Borrowings by mortgaging, pledging or otherwise subjecting as security the
Fund's assets. In connection with such Borrowing, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or
other fee to maintain a line of credit. Any such requirements will increase the
cost of Borrowing over the stated interest rate. Under the requirements of the
1940 Act, the Fund, immediately after any such Borrowings, must have an "asset
coverage" of at least 300% (331/3% of Managed Assets after Borrowings). With
respect to such Borrowing, asset coverage means the ratio which the value of the
Managed Assets of the Fund, less all liabilities and indebtedness not
represented by senior securities (as defined in the 1940 Act), bears to the
aggregate amount of such Borrowing represented by senior securities issued by
the Fund.

The rights of lenders to the Fund to receive interest on and repayment of
principal of any such Borrowings will be senior to those of the common
shareholders, and the terms of any such Borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
common shareholders in certain circumstances. Further, the 1940 Act does (in
certain circumstances) grant to the lenders to the Fund certain voting rights in
the event of default in the payment of interest on or repayment of principal. In
the event that the Fund elects to be treated as a regulated investment company,
and that such provisions would impair the Fund's status as a regulated
investment company under the Internal Revenue Code, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
Borrowings. Any borrowing will likely be ranked equal to all other existing and
future Borrowings of the Fund.

-43-

CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS

Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
of Trust contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Board of Trustees. The Declaration of Trust further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Fund believes that the likelihood of such circumstances is remote.

The Declaration of Trust and By-Laws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. The number of trustees is currently five,
but by action of two thirds of the trustees, the Board of Trustees may from time
to time be increased or decreased. The Board of Trustees is divided into three
classes of trustees serving staggered three year terms, with the terms of one
class expiring at each annual meeting of shareholders. If the Fund issues
Preferred Shares, the Fund may establish a separate class for the trustees
elected by the holders of the Preferred Shares. Subject to applicable provisions
of the 1940 Act, vacancies on the Board of Trustees may be filled by a majority
action of the remaining trustees. Such provisions may work to delay a change in
the majority of the Board of Trustees. The provisions of the Declaration of
Trust relating to the election and removal of trustees may be amended only by a
vote of two thirds of the trustees then in office. Generally, the Declaration of
Trust requires a vote by holders of at least two thirds of the common shares and
Preferred Shares, if any, voting together as a single class, except as described
below and in the Declaration of Trust, to authorize: (1) a conversion of the
Fund from a closed-end to an open-end investment company; (2) a merger or
consolidation of the Fund with any corporation, association, trust or other
organization, including a series or class of such other organization (subject to
a limited exception if the acquiring fund is not an operating entity immediately
prior to the transaction); (3) a sale, lease or exchange of all or substantially
all of the Fund's assets (other than in the regular course of the Fund's
investment activities, in connection with the termination of the Fund, and other
limited circumstances set forth in the Declaration of Trust); (4) in certain
circumstances, a termination of the Fund; (5) a removal of trustees by common
shareholders; or (6) certain transactions in which a Principal Shareholder (as
defined in the Declaration of Trust) is a party to the transaction. However,
with respect to (1) above, if there are Preferred Shares outstanding, the
affirmative vote of the holders of two thirds of the Preferred Shares voting as
a separate class shall also be required. With respect to (2) above, except as
otherwise may be required, if the transaction constitutes a plan of
reorganization which adversely affects Preferred Shares, if any, then an
affirmative vote of two thirds of the Preferred Shares voting together as a
separate class is required as well. With respect to (1) through (3), if such
transaction has already been authorized by the affirmative vote of two thirds of
the trustees, then the affirmative vote of the majority of the outstanding
voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"),
is required, provided that when only a particular class is affected (or, in the
case of removing a trustee, when the trustee has been elected by only one
class), only the required vote of the particular class will be required. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Fund's shares otherwise required by law or any agreement between
the Fund and any national securities exchange. Approval of Fund shareholders is
not required, however, for any transaction, whether deemed a merger,
consolidation, reorganization, exchange of shares or otherwise whereby the Fund
issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two thirds of the common shares and Preferred Shares, if any, outstanding and
entitled to vote. See the SAI under "Certain Provisions in the Declaration of
Trust and By-Laws."

The provisions of the Declaration of Trust and By-Laws described above could
have the effect of depriving the common shareholders of opportunities to sell
their common shares at a premium over the then current market price of the
common shares by discouraging a third party from seeking to obtain control of
the Fund in a tender offer or similar transaction. The overall effect of these
provisions is to render more difficult the accomplishment of a merger or the
assumption of control by a third party. They provide, however, the advantage of
potentially requiring persons seeking control of the Fund to negotiate with its
management regarding the price to be paid and facilitating the continuity of the
Fund's investment objective and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Fund and its common shareholders.

Reference should be made to the Declaration of Trust on file with the SEC
for the full text of these provisions.

-44-

STRUCTURE OF THE FUND; COMMON
SHARE REPURCHASES AND CHANGE IN FUND STRUCTURE

Closed-End Structure

Closed-end funds differ from open-end management investment companies
(commonly referred to as mutual funds) in that closed-end funds generally list
their shares for trading on a securities exchange and do not redeem their shares
at the option of the shareholder. By comparison, mutual funds issue securities
redeemable at net asset value at the option of the shareholder and typically
engage in a continuous offering of their shares. Mutual funds are subject to
continuous asset in flows and out flows that can complicate portfolio
management, whereas closed-end funds generally can stay more fully invested in
securities consistent with the closed-end fund's investment objective and
policies. In addition, in comparison to open-end funds, closed-end funds have
greater flexibility in their ability to make certain types of investments,
including investments in illiquid securities.

However, shares of closed-end investment companies listed for trading on a
securities exchange frequently trade at a discount from net asset value, but in
some cases trade at a premium. The market price may be affected by trading
volume of the shares, general market and economic conditions and other factors
beyond the control of the closed-end fund. The foregoing factors may result in
the market price of the common shares being greater than, less than or equal to
net asset value. The Board of Trustees has reviewed the structure of the Fund in
light of its investment objective and policies and has determined that the
closed-end structure is in the best interests of the shareholders. As described
below, however, the Board of Trustees will review periodically the trading range
and activity of the Fund's shares with respect to its net asset value and the
Board may take certain actions to seek to reduce or eliminate any such discount.
Such actions may include open market repurchases or tender offers for the common
shares at net asset value or the possible conversion of the Fund to an open-end
fund. There can be no assurance that the Board will decide to undertake any of
these actions or that, if undertaken, such actions would result in the common
shares trading at a price equal to or close to net asset value per common share.
In addition, as noted above, the Board of Trustees determined in connection with
the initial offering of common shares of the Fund that the closed-end structure
is desirable, given the Fund's investment objective and policies. Investors
should assume, therefore, that it is highly unlikely that the Board of Trustees
would vote to convert the Fund to an open-end investment company.

Repurchase of Common Shares and Tender Offers

In recognition of the possibility that the common shares might trade at a
discount to net asset value and that any such discount may not be in the
interest of shareholders, the Fund's Board of Trustees, in consultation with the
Advisor and the corporate finance services and consulting agent that the Advisor
has retained, from time to time will review possible actions to reduce any such
discount. The Board of Trustees of the Fund will consider from time to time open
market repurchases of and/or tender offers for common shares to seek to reduce
any market discount from net asset value that may develop. In connection with
its consideration from time to time of open-end repurchases of and/or tender
offers for common shares, the Board of Trustees of the Fund will consider
whether to commence a tender offer or share-repurchase program at the first
quarterly board meeting following a calendar year in which the Fund's common
shares have traded at an average weekly discount from net asset value of more
than 10% in the last 12 weeks of that calendar year. After any consideration of
potential actions to seek to reduce any significant market discount, the Board
may, subject to its fiduciary obligations and compliance with applicable state
and federal laws, authorize the commencement of a share repurchase program or
tender offer. The size and timing of any such share repurchase program or tender
offer will be determined by the Board of Trustees in light of the market
discount of the common shares, trading volume of the common shares, information
presented to the Board of Trustees regarding the potential impact of any such
share repurchase program or tender offer, and general market and economic
conditions. There can be no assurance that the Fund will in fact effect
repurchases of or tender offers for any of its common shares. The Fund may,
subject to its investment limitation with respect to Borrowings and limitations
on seniority within the Fund's capital structure if the Fund has other
Borrowings outstanding at such time, incur debt to finance such repurchases or a
tender offer or for other valid purposes. Interest on any such Borrowings would
increase the Fund's expenses and reduce the Fund's net income.

There can be no assurance that repurchases of common shares or tender
offers, if any, will cause the common shares to trade at a price equal to or in
excess of their net asset value. Nevertheless, the possibility that a portion of
the Fund's outstanding common shares may be the subject of repurchases or tender
offers may reduce the spread between market price and net asset value that might
otherwise exist. In the opinion of the Fund, sellers may be less inclined to
accept a significant discount in the sale of their common shares if they have a

-45-

reasonable expectation of being able to receive a price of net asset value for a
portion of their common shares in conjunction with an announced repurchase
program or tender offer for the common shares.

Although the Board of Trustees believes that repurchases or tender offers
generally would have a favorable effect on the market price of the common
shares, the acquisition of common shares by the Fund will decrease the Managed
Assets of the Fund and therefore will have the effect of increasing the Fund's
expense ratio and decreasing the asset coverage with respect to any Preferred
Shares outstanding. Because of the nature of the Fund's investment objective,
policies and portfolio, the Advisor does not anticipate that repurchases of
common shares or tender offers should interfere with the ability of the Fund to
manage its investments in order to seek its investment objective, and does not
anticipate any material difficulty in borrowing money or disposing of portfolio
securities to consummate repurchases of or tender offers for common shares,
although no assurance can be given that this will be the case.

Conversion to Open-End Fund

The Fund may be converted to an open-end investment company at any time if
approved by the holders of two thirds of the Fund's common shares outstanding
and entitled to vote; provided, however, that such vote shall be by Majority
Shareholder Vote if the action in question was previously approved by the
affirmative vote of two thirds of the Trustees. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of the shares
otherwise required by law or any agreement between the Fund and any national
securities exchange. In the event of conversion, the common shares would cease
to be listed on the New York Stock Exchange or other national securities
exchange or market system. Any Preferred Shares would need to be redeemed and
any Borrowings may need to be repaid upon conversion to an open-end investment
company. Additionally, the 1940 Act imposes limitations on open-end funds'
investments in illiquid securities, which could restrict the Fund's ability to
invest in certain securities discussed in this prospectus to the extent
discussed herein. Such limitations could adversely affect distributions to Fund
common shareholders in the event of conversion to an open-end fund. The Board of
Trustees believes, however, that the closed-end structure is desirable, given
the Fund's investment objective and policies. Investors should assume,
therefore, that it is unlikely that the Board of Trustees would vote to convert
the Fund to an open-end investment company. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. The Fund would expect to pay all such
redemption requests in cash, but intends to reserve the right to pay redemption
requests in a combination of cash or securities. If such partial payment in
securities were made, investors may incur brokerage costs in converting such
securities to cash. If the Fund were converted to an open-end fund, it is likely
that new common shares would be sold at net asset value plus a sales load.

TAX MATTERS

This section and the discussion in the SAI summarize some of the main U.S.
federal income tax consequences of owning shares of the Fund. This section is
current as of the date of this prospectus. Tax laws and interpretations change
frequently, and this summary does not describe all of the tax consequences to
all taxpayers. For example, this summary generally does not describe your
situation or the tax consequences to you if you are a bank or a financial
institution, an insurance company, a dealer in securities, a non U.S.
shareholder, a tax exempt or tax deferred plan, account or entity, a shareholder
that is subject to the alternative minimum tax or a shareholder that holds its
shares as or in a hedge against currency risk, constructive sale or a conversion
transaction or other investor with special circumstances. In addition, this
section does not describe state, local or foreign taxes. Investors should
consult their own tax advisors regarding the tax consequences of investing in
the Fund.

Fund Status. The Fund intends to elect and to qualify annually as a
"regulated investment company" under Subchapter M of the Code. To qualify, the
Fund must, among other things, satisfy certain requirements relating to the
source and nature of its income and the diversification of its assets. If the
Fund qualifies as a regulated investment company and distributes all of its net
income as required under the Code, the Fund generally will not be subject to
federal income or excise taxes.

Distributions. Fund distributions will constitute dividends to the extent of
the Fund's current and accumulated earnings and profits and are generally
taxable. After the end of each year, you will receive a tax statement that
separates your Fund's distributions into two categories, ordinary income
distributions and capital gains dividends. Ordinary income distributions are
generally taxed at ordinary tax rates, but, as further discussed below, if the

-46-

Fund holds equity securities, under the "Jobs and Growth Tax Relief
Reconciliation Act of 2003" (the "Tax Act"), certain ordinary income
distributions received by non corporate shareholders from the Fund may be taxed
at reduced tax rates equal to those applicable to net capital gains but this
amount is not expected to be significant. Generally, you will treat all capital
gains dividends as long-term capital gains regardless of how long you have owned
your shares. To determine your actual tax liability for your capital gains
dividends, you must calculate your total net capital gain or loss for the tax
year after considering all of your other taxable transactions, as described
below. In addition, to the extent that the Fund makes distributions in excess of
its current and accumulated earnings and profits, such distributions will
represent a return of capital for tax purposes to the extent of your tax basis
in the shares and thus will generally not be taxable to you. To the extent such
distributions exceed your tax basis, they will generally constitute a capital
gain. The tax status of your distributions from the Fund is not affected by
whether you reinvest your distributions in additional shares or receive them in
cash. The tax laws may require you to treat distributions made to you in January
as if you had received them on December 31 of the previous year.

Dividends Received Deduction. A corporation that owns shares generally will
not be entitled to the dividends received deduction with respect to dividends
received from the Fund because the dividends received deduction is generally not
available for distributions from regulated investment companies. However, if the
Fund holds equity securities, certain ordinary income dividends on shares that
are attributable to dividends received by the Fund from certain domestic
corporations may be designated by the Fund as being eligible for the dividends
received deduction, but this amount is not expected to be significant.

If You Sell Shares. If you sell your shares, you will generally recognize a
taxable gain or loss. To determine the amount of this gain or loss, you must
subtract your tax basis in your shares from the amount you receive in the
transaction. Your tax basis in your shares is generally equal to the cost of
your shares, generally including sales charges. In some cases, however, you may
have to adjust your tax basis after you purchase your shares. Any loss realized
upon a taxable disposition of the shares may be disallowed if other
substantially identical shares are acquired within a 61 day period beginning 30
days before and ending 30 days after the date the original shares are disposed
of. If disallowed, the loss will be reflected by an upward adjustment to the
basis of the shares acquired. In addition, the ability to deduct capital losses
may otherwise be limited.

Taxation of Capital Gains and Losses and Certain Ordinary Income Dividends.
Under the Tax Act, if you are an individual, the maximum marginal federal tax
rate for net capital gain is generally 15% (generally 0% for certain taxpayers
in the 10% and 15% tax brackets). These capital gains rates are generally
effective for taxable years beginning before January 1, 2013. For later periods,
if you are an individual, the maximum marginal federal tax rate for capital
gains is generally 20% (10% for certain taxpayers in the 10% and 15% brackets).
The 20% rate is reduced to 18% and the 10% rate is reduced to 8% for most
property with a holding period more than five years.

Net capital gain equals net long-term capital gain minus net short-term
capital loss for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your shares to determine your holding period. However, if you receive a
capital gain dividend from the Fund and sell your share at a loss after holding
it for six months or less, the loss will be recharacterized as long-term capital
loss to the extent of the capital gain dividend received. The tax rates for
capital gains realized from assets held for one year or less are generally the
same as for ordinary income. In addition, the Code treats certain capital gains
as ordinary income in special situations.

Pursuant to the Tax Act, if the Fund holds certain equity securities, a
portion of the ordinary income dividends received by an individual shareholder
from a regulated investment company such as the Fund generally will be taxed at
the same rates that apply to net capital gain (as discussed above), but only if
certain holding period and other requirements are satisfied by both the Fund and
the shareholder and the dividends are attributable to qualified dividends
received by the Fund itself. These special rules relating to the taxation of
ordinary income dividends from regulated investment companies generally apply to
taxable years beginning before January 1, 2013. The Fund generally does not
expect to generate qualifying dividends eligible for taxation at capital gains
tax rates.

Medicare Tax. Under the "Health Care and Education Reconciliation Act of
2010," income from the Fund may also be subject to a new 3.8 percent "medicare
tax" imposed for taxable years beginning after 2012. This tax will generally
apply to the net investment income of a Member who is an individual if such
Member's adjusted gross income exceeds certain threshold amounts, which are

-47-

$250,000 in the case of married couples filing joint returns and $200,000 in the
case of single individuals.

Backup Withholding. The Fund may be required to withhold, for U.S. federal
income taxes, a portion of all taxable dividends and redemption proceeds payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification numbers or who otherwise fail to make required certifications, or
if the Fund or a shareholder has been notified by the Internal Revenue Service
that such shareholder is subject to backup withholding. Corporate shareholders
and certain other shareholders under federal tax laws are generally exempt from
such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld will be allowed as a refund or credit against the shareholder's
federal income tax liability if the appropriate information is provided to the
Internal Revenue Service.

Foreign Investors. If you are a foreign investor (i.e., investor other than
a U.S. citizen or resident or a U.S. corporation, partnership, estate or fund),
you should be aware that, generally, subject to applicable tax treaties,
distributions from the Fund will be characterized as dividends for federal
income tax purposes (other than dividends which the Fund designates as capital
gain dividends) and will be subject to U.S. federal income taxes, including
withholding taxes, subject to certain exceptions described below. However,
distributions received by a foreign investor from the Fund that are properly
designated by the Fund as capital gain dividends may not be subject to U.S.
federal income taxes, including withholding taxes, provided that the Fund makes
certain elections and certain other conditions are met. There can be no
assurance as to what portion, if any, of the Fund's distributions will
constitute interest related dividends or short-term capital gain dividends.
Foreign investors should consult their tax advisors with respect to U.S. tax
consequences of ownership of Common Shares.

In addition, distributions after December 31, 2013 may be subject to a U.S.
withholding tax of 30% in the case of distributions to (i) certain non U.S.
financial institutions that either (A) have not entered into an agreement with
the U.S. Treasury to collect and disclose certain information or (B) are not
resident for tax purposes in a jurisdiction that has entered into an agreement
with the IRS to collect and provide the information otherwise required, and (ii)
certain other non U.S. entities that do not provide certain certifications and
information about the entity's U.S. owners. The gross proceeds from dispositions
of units in the Fund may be subject to withholding after December 31, 2014,
under similar requirements.

Certain Investments in REMICs. If the Fund acquires a residual interest in a
REMIC, the Fund may realize excess inclusion income. Excess inclusion income is
an amount, with respect to any calendar quarter, equal to the excess, if any, of
(i) the taxable income of the REMIC allocable to the holder of a residual
interest in a REMIC during such calendar quarter over (ii) the sum of amounts
allocated to each day in the calendar quarter equal to its ratable portion of
the product of (a) the adjusted issue price of the interest at the beginning of
the quarter multiplied by (b) 120% of the long-term federal rate (determined on
the basis of compounding at the close of each calendar quarter and properly
adjusted for the length of such quarter). Excess inclusion income generated by a
residual interest in a REMIC would be allocated among the holders of the Fund,
generally in a manner set forth under the applicable Treasury regulations. A
shareholder's share of any excess inclusion income: (i) could not be offset by
net operating losses of a shareholder; (ii) would be subject to tax as unrelated
business taxable income to a tax exempt holder; (iii) would be subject to the
application of the U.S. federal income tax withholding (without reduction
pursuant to any otherwise applicable income tax treaty) with respect to amounts
allocable to non U.S. shareholders; and (iv) would be taxable (at the highest
corporate tax rates) to the Fund, rather than the Fund's shareholders, to the
extent allocable to shares held by disqualified organizations (generally, tax
exempt entities not subject to unrelated business income tax, including
governmental organizations).

Further Information. The SAI summarizes further federal income tax
considerations that may apply to the Fund and its shareholders and may qualify
the considerations discussed herein.

CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT

The custodian of the assets of the Fund is BNY Mellon Investment Servicing
Trust Company ("Custodian"), One Wall Street, New York, New York 10286. The
Fund's transfer, shareholder services and dividend paying agent is BNY Mellon
Investment Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware
19809. Pursuant to an Administration and Accounting Services Agreement, BNY
Mellon Investment Servicing (U.S.) Inc. also provides certain administrative and

-48-

accounting services to the Fund, including maintaining the Fund's books of
account, records of the Fund's securities transactions, and certain other books
and records; acting as liaison with the Fund's independent registered public
accounting firm providing such independent registered public accounting firm
with various audit related information with respect to the Fund; and providing
other continuous accounting and administrative services. As compensation for
these services, the Fund has agreed to pay BNY Mellon Investment Servicing
(U.S.) Inc. an annual fee, calculated daily and payable on a monthly basis, of
0.06% of the Fund's first $250 million of average Managed Assets, subject to
decrease with respect to additional Fund Managed Assets.

LEGAL OPINIONS

Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois. Chapman and
Cutler LLP may rely as to certain matters of Massachusetts law on the opinion of
Bingham McCutchen LLP. If certain legal matters in connection with an offering
of Common Shares are passed upon by counsel for the underwriters or sales agent
of such offering, such counsel will be named in a prospectus supplement.

-49-

TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION

Page
Use of Proceeds.............................................................. 1
Investment Objectives........................................................ 1
Investment Restrictions...................................................... 2
Additional Information About the Fund's Investments.......................... 4
Management of the Fund...................................................... 24
Investment Advisor.......................................................... 35
Proxy Voting Procedures..................................................... 39
Portfolio Transactions...................................................... 39
Description of Shares....................................................... 41
Certain Provisions in the Declaration of Trust
and By-Laws.............................................................. 42
Repurchase of Fund Shares; Conversion to Open-End Fund...................... 45
Net Asset Value............................................................. 47
Federal Income Tax Matters.................................................. 50
Performance Related and Comparative Information............................. 55
Independent Registered Public Accounting Firm............................... 57
Custodian, Administrator, Fund Accountant and Transfer Agent................ 57
Additional Information...................................................... 58

Financial Statements and Report of Independent Registered Public
Accounting Firm..........................................................F-1
Appendix A Ratings of Investments.........................................A-1

-50-

This page is intentionally left blank.

-51-

You should rely only on the information contained or incorporated by
reference in this prospectus. The Fund has not authorized anyone to provide you
with different information. The Fund is not making an offer of these securities
in any state where the offer is not permitted.
--------------------------------------------------------------------------------

TABLE OF CONTENTS
Page
Prospectus Summary 1
Summary of Fund Expenses 17
Financial Highlights 18
Market and Net Asset Value Information 19
The Fund 20
Use of Proceeds 20
The Fund's Investments 20
Use of Leverage 25
Risks 28
Management of the Fund 36
Net Asset Value 38
Distributions 39
Dividend Reinvestment Plan 39
Plan of Distribution 40
Description of Shares 41
Certain Provisions in the Declaration of Trust and By-Laws 43
Structure of the Fund; Common Share Repurchases and Change
in Fund Structure 45
Tax Matters 46
Custodian, Administrator and Transfer Agent 48
Legal Opinions 49

-52-

FIRST TRUST SENIOR FLOATING RATE INCOME FUND II

UP TO ________________ COMMON SHARES

--------------------------------------------------------------------------------
PROSPECTUS
--------------------------------------------------------------------------------

, 2012

PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 28, 2012
SUBJECT TO COMPLETION

FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF ADDITIONAL INFORMATION

First Trust Senior Floating Rate Income Fund II (the "Fund") is a
diversified, closed-end management investment company which commenced operations
in May, 2004.

This Statement of Additional Information relates to the offering, on an
immediate, continuous or delayed basis, of up to _______________ common shares
of beneficial interest in the Fund in one or more offerings (the "Common
Shares"). This Statement of Additional Information does not constitute a
prospectus, but should be read in conjunction with the Fund's prospectus dated
_______________ (the "Prospectus") and any related prospectus supplement. The
Fund's currently outstanding common shares are, and the Common Shares offered by
the Prospectus and any prospectus supplement will be, subject to notice of
issuance, listed on the New York Stock Exchange under the trading or "ticker"
symbol "FCT."

This Statement of Additional Information does not include all information
that a prospective investor should consider before purchasing Common Shares.
Investors should obtain and read the Fund's Prospectus and any prospectus
supplement prior to purchasing such shares. A copy of the Fund's Prospectus and
any prospectus supplement may be obtained without charge by calling (800)
988-5891 or on the Securities and Exchange Commission's (the "Commission") web
site (http://www.sec.gov). Capitalized terms used but not defined in this
Statement of Additional Information have the meanings ascribed to them in the
Prospectus and any prospectus supplement.

This Statement of Additional Information is dated _______________.

THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

TABLE OF CONTENTS

Use of Proceeds.............................................................. 1
Investment Objectives........................................................ 1
Investment Restrictions...................................................... 2
Additional Information About the Fund's Investments.......................... 4
Management of the Fund...................................................... 24
Investment Advisor.......................................................... 35
Proxy Voting Procedures..................................................... 39
Portfolio Transactions...................................................... 39
Description of Shares....................................................... 41
Certain Provisions in the Declaration of Trust
and By-Laws.............................................................. 42
Repurchase of Fund Shares; Conversion to Open-End Fund...................... 45
Net Asset Value............................................................. 47
Federal Income Tax Matters.................................................. 50
Performance Related and Comparative Information............................. 55
Independent Registered Public Accounting Firm............................... 57
Custodian, Administrator, Fund Accountant and Transfer Agent................ 57
Additional Information...................................................... 58

-i-

USE OF PROCEEDS

The Fund will invest substantially all of the net proceeds from any sales
of Common Shares pursuant to the Prospectus and any prospectus supplement in
accordance with the Fund's investment objectives and policies as stated below,
to repay indebtedness or for other general corporate purposes.

Pending investment in securities that meet the Fund's investment
objectives and policies, the net proceeds of this offering will be invested in
cash or cash equivalents.

INVESTMENT OBJECTIVES

The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund attempts to preserve capital. The
Fund pursues these objectives through investment in a portfolio of senior
secured floating rate corporate loans ("Senior Loans"). Under normal conditions,
the Fund invests at least 80% of its Managed Assets in a diversified portfolio
of Senior Loans. The Fund cannot change this investment policy unless the Fund's
shareholders receive at least 60 days prior notice of any such change. On
December 12, 2011, the Fund's Board of Trustees (the "Board of Trustees" or
"Trustees") approved changes to the Fund's investment strategy, effective on or
about April 9, 2012, to permit purchases of publicly-traded high-yield debt
securities. Under normal circumstances, the Fund may invest up to 10% of its
Managed Assets through purchasing revolving credit facilities, investment grade
debtor-in-possession financing, unsecured loans, other floating rate debt
securities, such as notes, bonds and asset-backed securities (such as special
purpose trusts investing in bank loans), investment grade loans and fixed income
debt obligations, publicly-traded high-yield debt securities and money market
instruments, such as commercial paper. The Fund may also invest up to 15% of its
Managed Assets in U.S. dollar denominated foreign investments, predominantly in
developed countries and territories of those countries, but in no case will the
Fund invest in debt securities of issuers located in emerging markets. There can
be no assurance that the Fund will achieve its investment objectives.

The Senior Loans in which the Fund invests are primarily below investment
grade, or "high yield", debt instruments. Generally, at least 80% of the Fund's
Managed Assets are invested in lower grade debt investments, and from time to
time, 100% of the Fund's Managed Assets may be invested in lower grade debt
instruments. Lower grade debt instruments are rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's"), BB+ or lower by Standard & Poor's Ratings
Group, a division of the McGraw Hill Companies ("S&P"), comparably rated by
another nationally recognized statistical rating organization ("NRSRO"), or are
unrated securities of comparable credit quality. Lower grade debt instruments
are commonly referred to as "junk bonds" and are considered speculative with
respect to the issuer's capacity to pay interest and repay principal. They
involve greater risk of loss, are subject to greater price volatility and are
less liquid, especially during periods of economic uncertainty or change, than
higher rated debt instruments. See Appendix A to this Statement of Additional
Information for further information about debt ratings.

"Managed Assets" means the average daily gross asset value of the Fund
(including assets attributable to the Fund's Preferred Shares, if any, and the
principal amount of borrowings) minus the sum of the Fund's accrued and unpaid
dividends on any outstanding Preferred Shares and accrued liabilities (other
than the principal amount of any borrowings incurred or of commercial paper or
notes issued by the Fund). For purposes of determining Managed Assets, the
liquidation preference of the preferred shares is not treated as a liability.
Percentage limitations described in this Statement of Additional Information are
as of the time of investment by the Fund and could from time to time be exceeded
on a going-forward basis as a result of market value fluctuations of the Fund's
portfolio and other events.

The common shares may trade at a discount or premium to net asset value.
An investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. For further discussion of the
Fund's portfolio composition and associated special risk considerations, see
"The Fund's Investments" in the Prospectus.

INVESTMENT RESTRICTIONS

FUNDAMENTAL INVESTMENT POLICIES

The Fund's investment objectives and certain fundamental investment
policies of the Fund are described in the Prospectus. The Fund, as a fundamental
policy, may not:

1. With respect to 75% of its total assets, purchase any
securities, if as a result more than 5% of the Fund's total assets would
then be invested in securities of any single issuer or if, as a result,
the Fund would hold more than 10% of the outstanding voting securities of
any single issuer; provided, that Government securities (as defined in the
Investment Company Act of 1940 (the "1940 Act")), securities issued by
other investment companies and cash items (including receivables) shall
not be counted for purposes of this limitation.

2. Purchase any security if, as a result of the purchase, 25% or
more of the Fund's total assets (taken at current value) would be invested
in the securities of Borrowers and other issuers having their principal
business activities in the same industry; provided, that this limitation
shall not apply with respect to obligations issued or guaranteed by the
U.S. Government or by its agencies or instrumentalities.

3. Borrow money, except as permitted by the 1940 Act, the rules
thereunder and interpretations thereof or pursuant to a Commission
exemptive order.

4. Issue senior securities, as defined in the 1940 Act, other
than: (i) preferred shares which immediately after issuance will have
asset coverage of at least 200%; (ii) indebtedness which immediately after
issuance will have asset coverage of at least 300%; (iii) the borrowings
permitted by investment restriction 3 above, or (iv) pursuant to a
Commission exemptive order.

5. Make loans of money or property to any person, except for
obtaining interests in Senior Loans in accordance with its investment
objectives, through loans of portfolio securities or the acquisition of
securities subject to repurchase agreements, or pursuant to a Commission
rule or exemptive order.

6. Act as an underwriter of securities, except to the extent the
Fund may be deemed to be an underwriter in certain cases when disposing of
its portfolio investments or acting as an agent or one of a group of
co-agents in originating Senior Loans.

7. Purchase or sell real estate, commodities or commodities
contracts except pursuant to the exercise by the Fund of its rights under
loan agreements, bankruptcy or reorganization, or pursuant to a
Commission rule or exemptive order, and except to the extent the
interests in Senior Loans the Fund may invest in are considered to be
interests in real estate, commodities or commodities contracts and except
to the extent that hedging instruments the Fund may invest in are
considered to be commodities or commodities contracts.

For purposes of fundamental investment restriction numbers 1 and 2 above,
the Fund treats the Lender selling a participation and any persons
interpositioned between the Lender and the Fund as an issuer. The Fund may incur
borrowings and/or issue series of notes or other senior securities in an amount
up to 33-1/3% (or such other percentage to the extent permitted by the
Investment Company Act of 1940, as amended (the "1940 Act")) of its total assets
(including the amount borrowed) less all liabilities other than borrowings.

Except as noted above, the foregoing fundamental investment policies,
together with the investment objectives of the Fund, cannot be changed without
approval by holders of a majority of the outstanding voting securities of the
Fund, as defined in the 1940 Act, which includes common shares and preferred
shares, if any, voting together as a single class, and of the holders of the
outstanding preferred shares, if any, voting as a single class. Under the 1940
Act a "majority of the outstanding voting securities" means the vote of: (A) 67%
or more of the Fund's shares present at a meeting, if the holders of more than
50% of the Fund's shares are present or represented by proxy; or (B) more than
50% of the Fund's shares, whichever is less.

NON-FUNDAMENTAL INVESTMENT POLICIES

In addition to the foregoing fundamental investment policies, the Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees without the approval of the holders of a
"majority of the outstanding voting securities," provided that the holders of
the voting securities of the Fund receive at least 60 days prior written notice
of any change. The Fund may not:

1. Sell any security "short," write, purchase or sell puts, calls
or combinations thereof, or purchase or sell financial futures or options,

except to the extent that the hedging transactions in which the Fund may
engage would be deemed to be any of the foregoing transactions.

2. Invest in securities of other investment companies, except that
the Fund may purchase securities of other investment companies to the
extent permitted by: (i) the 1940 Act, as amended from time to time; (ii)
the rules and regulations promulgated by the Commission under the 1940
Act, as amended from time to time; or (iii) an exemption or other relief
from the provisions of the 1940 Act. The Fund will rely on representations
of Borrowers in Loan Agreements in determining whether the Borrowers are
investment companies.

3. Make investments for the purpose of exercising control or
participation in management, except to the extent that exercise by the
Fund of its rights under Loan Agreements would be deemed to constitute
control or participation.

The Fund does not have a minimum holding period for its investments and
may engage in the trading of securities for the purpose of realizing short-term
profits. Moreover, it will adjust its portfolio as it deems advisable in view of
prevailing or anticipated market conditions to accomplish the Fund's investment
objectives. Frequency of portfolio turnover will not be a limiting factor if the
Fund considers it advantageous to purchase or sell securities. The Fund
anticipates that the annual portfolio turnover rate of the Fund will be less
than 100%.

The foregoing restrictions and limitations apply only at the time of
purchase of securities, and the percentage limitations are not considered to be
violated unless an excess or deficiency occurs or exists immediately after and
as a result of an acquisition of securities, unless otherwise indicated.

ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS

SENIOR LOANS

Senior Loans are typically arranged through private negotiations between a
borrower ("Borrower") and several lenders ("Lenders") represented in each case
by one or more Lenders acting as agent of the several Lenders (the "Agent"). On
behalf of the several Lenders, the Agent, which is frequently the entity that
originates the Senior Loan and invites the other parties to join the lending
syndicate, will be primarily responsible for negotiating the Senior Loan
agreements that establish the relative terms, conditions and rights of the
Borrower and the several Lenders (the "Loan Agreements"). The co-agents, on the
other hand, are not responsible for administration of a Senior Loan, but are
part of the initial group of Lenders that commit to providing funding for a
Senior Loan once the Borrower and an Agent negotiate and agree on material
terms. In large transactions, it is common to have several Agents; however, one
Agent typically has primary responsibility for documentation and administration
of the Senior Loan. The Fund will not act as an Agent in a transaction. The
Agent is required to administer and manage the Senior Loan and to service or
monitor the collateral. The Agent also is responsible for the collection of
principal and interest and fee payments from the Borrower and the apportionment

of these payments to the credit of all Lenders which are parties to the Loan
Agreement. The Agent is generally responsible for monitoring compliance by the
Borrower with the restrictive covenants in the Loan Agreement and of notifying
the Lenders of any adverse change in the Borrower's financial condition. In
addition, the Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan.

Lenders generally rely on the Agent to collect their portion of the
payments on the Senior Loan and to use appropriate creditor remedies against the
Borrower. Typically under Loan Agreements, the Agent is given broad discretion
in enforcing the Loan Agreement. The Borrower compensates the Agent for these
services. Compensation may include special fees paid on structuring and funding
the Senior Loan and other fees paid on a continuing basis. The precise duties
and rights of an Agent are defined in the Loan Agreement.

When the Fund is an Agent, it has, as a party to the Loan Agreement, a
direct contractual relationship with the Borrower and, prior to allocating
portions of the Senior Loan to Lenders, if any, assumes all risks associated
with the Senior Loan. The Agent may enforce compliance by the Borrower with the
terms of the Loan Agreement. Agents also have voting and consent rights under
the applicable Loan Agreement. Action subject to Agent vote or consent generally
requires the vote or consent of the holders of some specified percentage of the
outstanding principal amount of the Senior Loan, which percentage varies
depending on the relevant Loan Agreement. Certain decisions, such as reducing
the amount or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing all or substantially all of the
collateral therefor, frequently require the consent of all Lenders affected.

Each Lender in a Senior Loan is generally responsible for performing its
own credit analysis and its own investigation of the financial condition of the
Borrower. Generally, Loan Agreements will hold the Fund, as Agent, liable for
any action taken or omitted constituting gross negligence or willful misconduct.
In the event of a Borrower's default on a loan, the Loan Agreements generally
provide that the Lenders do not have recourse against the Agent. Instead,
Lenders will be required to look to the Borrower for recourse.

Acting in the capacity of an Agent in a Senior Loan may subject the Fund
to certain risks in addition to those associated with the Fund's role as a
Lender. An Agent is charged with the above described duties and responsibilities
to Lenders and Borrowers subject to the terms of the Loan Agreement. Failure to
adequately discharge responsibilities in accordance with the standard of care
set forth in the Loan Agreement may expose the Fund to liability for breach of
contract. If a relationship of trust is found between the Agent and the Lenders,
the Agent will be held to a higher standard of conduct in administering the
loan.

Lending Fees. In the process of buying, selling and holding Senior Loans
the Fund may receive certain fees. These fees are in addition to interest
payments received and may include facility fees, commitment fees, commissions
and prepayment penalty fees. When the Fund buys a Senior Loan it may receive a

facility fee and when it sells a Senior Loan it may pay a facility fee. On an
ongoing basis, the Fund may receive a commitment fee based on the undrawn
portion of the underlying line of credit portion of a Senior Loan. In certain
circumstances, the Fund may receive a prepayment penalty fee upon the prepayment
of a Senior Loan by a Borrower. Other fees received by the Fund may include
covenant waiver fees and covenant modification fees.

Borrower Covenants. A Borrower must comply with various restrictive
covenants contained in a Loan Agreement. These covenants, in addition to
requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to stockholders,
provisions requiring the Borrower to maintain specific minimum financial ratios,
and limits on total debt. In addition, the Loan Agreement may contain a covenant
requiring the Borrower to prepay the Senior Loan with any free cash flow. Free
cash flow is generally defined as net cash flow after scheduled debt service
payments and permitted capital expenditures, and includes the proceeds from
asset dispositions or sales of securities. A breach of a covenant which is not
waived by the Agent, or by the Lenders directly, as the case may be, is normally
an event of acceleration; i.e., the Agent, or the Lenders directly, as the case
may be, has the right to call the outstanding Senior Loan. The typical practice
of an Agent or a Lender in relying exclusively or primarily on reports from the
Borrower may involve a risk of fraud by the Borrower. In the case of a Senior
Loan in the form of a participation, the agreement between the buyer and seller
may limit the rights of the holder of a Senior Loan to vote on certain changes
which may be made to the Loan Agreement, such as waiving a breach of a covenant.
However, the holder of the participation will, in almost all cases, have the
right to vote on certain fundamental issues such as changes in principal amount,
payment dates and interest rate.

Administration of Loans. The Agent typically administers the terms of the
Loan Agreement. In these cases, the Agent is normally responsible for the
collection of principal and interest payments from the Borrower and the
apportionment of these payments to the credit of all institutions which are
parties to the Loan Agreement. The Fund will generally rely upon the Agent or an
intermediate participant to receive and forward to the Fund its portion of the
principal and interest payments on the Senior Loan. Furthermore, unless under
the terms of a Participation Agreement the Fund has direct recourse against the
Borrower, the Fund will rely on the Agent and the other members of the lending
syndicate to use appropriate credit remedies against the Borrower. The Agent is
typically responsible for monitoring compliance with covenants contained in the
Loan Agreement based upon reports prepared by the Borrower. The seller of the
Senior Loan usually does, but is often not obligated to, notify holders of
Senior Loans of any failures of compliance. The Agent may monitor the value of
the collateral and, if the value of the collateral declines, may accelerate the
Senior Loan, may give the Borrower an opportunity to provide additional
collateral or may seek other protection for the benefit of the holders of the
Senior Loan. The Agent is compensated by the Borrower for providing these
services under a Loan Agreement. Compensation may include special fees paid upon
structuring and funding the Senior Loan and other fees paid on a continuing
basis.

A financial institution's appointment as Agent may be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent

would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the Loan Agreement should remain available to holders of Senior
Loans. However, if assets held by the Agent for the benefit of the Fund were
determined to be subject to the claims of the Agent's general creditors, the
settlement of open contracts in Senior Loans could be subject to contest,
potentially causing the Fund to incur certain costs and delays in realizing
payments. In situations involving other intermediate participants similar risks
may arise.

Prepayments. Senior Loans may require, in addition to scheduled payments
of interest and principal, the prepayment of the Senior Loan from free cash flow
or asset sales. The degree to which Borrowers prepay Senior Loans, whether as a
contractual requirement or at their election, may be affected by, among other
factors, general business conditions, the financial condition of the Borrower
and competitive conditions among Lenders. As such, prepayments cannot be
predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Fund derives interest income will be
reduced. However, the Fund may receive both a prepayment penalty fee from the
prepaying Borrower and a facility fee upon the purchase of a new Senior Loan
with the proceeds from the prepayment of the former. Prepayments generally will
not materially affect the Fund's performance because the Fund should be able to
reinvest prepayments in other Senior Loans that have similar or identical yields
and because receipt of such fees may mitigate any adverse impact on the Fund's
yield.

Other Information Regarding Senior Loans. The Fund may acquire interests
in Senior Loans which are designed to provide temporary or "bridge" financing to
a Borrower pending the sale of identified assets or the arrangement of
longer-term loans or the issuance and sale of debt obligations. The Fund also
may invest in Senior Loans of Borrowers who have obtained bridge loans from
other parties. A Borrower's use of bridge loans involves a risk that the
Borrower may be unable to locate permanent financing to replace the bridge loan,
which may impair the Borrower's perceived creditworthiness.

To the extent that collateral consists of the stock of the Borrower's
subsidiaries or other affiliates, the Fund will be subject to the risk that this
stock will decline in value. Such a decline, whether as a result of bankruptcy
proceedings or otherwise, could cause the Senior Loan to be undercollateralized
or unsecured. In most credit agreements there is no formal requirement to pledge
additional collateral. In addition, the Fund may invest in Senior Loans
guaranteed by, or fully secured by assets of, shareholders or owners, even if
the Senior Loans are not otherwise collateralized by assets of the Borrower;
provided, however, that the guarantees are fully secured. There may be temporary
periods when the principal asset held by a Borrower is the stock of a related
company, which may not legally be pledged to secure a Senior Loan. On occasions
when the stock cannot be pledged, the Senior Loan will be temporarily unsecured
until the stock can be pledged or is exchanged for or replaced by other assets,
which will be pledged as security for the Senior Loan. However, the Borrower's
ability to dispose of the securities, other than in connection with such pledge
or replacement, will be strictly limited for the protection of the holders of
Senior Loans.

If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the loan collateral or subordinate
the Fund's rights under the Senior Loan to the interests of the Borrower's
unsecured creditors. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the loan collateral to
the Fund. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Senior Loan were not received or retained by
the Borrower, but were instead paid to other persons (such as shareholders of
the Borrower) in an amount which left the Borrower insolvent or without
sufficient working capital. There are also other events, such as the failure to
perfect a security interest due to faulty documentation or faulty official
filings, which could lead to the invalidation of the Fund's security interest in
loan collateral. If the Fund's security interest in loan collateral is
invalidated or the Senior Loan is subordinated to other debt of a Borrower in
bankruptcy or other proceedings, it is unlikely that the Fund would be able to
recover the full amount of the principal and interest due on the Senior Loan.

Senior Loans generally hold the most senior position in the capital
structure of a business entity. Their secured position in a Borrower's capital
structure typically provides the holder of a Senior Loan with the first right to
cash flows and/or proceeds from the sale of collateral in the event of
liquidation after default. In order of priority, Senior Loans are typically
repaid before unsecured senior loans, unsecured senior bonds, subordinated debt,
trade creditors, and preferred and common stockholders. However, these factors
do not assure full payment of principal or interest, and delays or limitations
may result in the event of bankruptcy.

Senior Loans are floating rate instruments which are issued at a fixed
spread over some pre-defined base rate. The spread is set at the time the loan
is originated, and is typically referenced to the London Inter-Bank Offered Rate
("LIBOR") but also can be referenced to the rate on certificates of deposit or
the Prime Rate. The spread at the time of origination of a loan is a function of
several factors, including credit quality of the issuer, the structure of the
individual deal, and the general market conditions at the time of the
origination. As conditions change, the required spreads that market participants
demand from a specific borrower, or industry, may change and could result in
required spreads narrowing or widening for all corporate credits. It should be
noted that since most corporate loans may be pre-paid at par without penalty,
should general market spreads narrow, there is a high probability that the
Borrower would choose to refinance at a lower spread. Should an existing loan be
refinanced at a lower rate, or should there be a decrease in credit spreads in
the corporate loan market in general or for a particular industry, it is
expected there will be a decrease in portfolio income and a decrease in overall
portfolio return. The use of leverage in the portfolio will increase the impact
of the decreased income due to spread compression. Senior Loans also may
incorporate pre-determined "step-ups" where the spread increases by some
specified amount if the credit quality of the issuer deteriorates and
"step-downs" where the spread increases if the credit quality of the borrower
improves. Should credit quality decline, and the step-up be triggered, the
coupon income associated with loans to this borrower will increase. Similarly,
should a borrower's credit quality improve and the step-down become operative,
investor income will decrease due to the decrease in income associated with that
particular borrower.

Senior Loans are direct obligations of corporations or other business
entities and are arranged by banks or other commercial lending institutions and
made generally to finance internal growth, mergers, acquisitions, stock
repurchases, and leveraged buyouts. Senior Loans usually include restrictive
covenants which must be maintained by the Borrower. A breach of a covenant,
which is not waived by the Agent, is normally an event of acceleration, i.e.,
the Agent has the right to call the outstanding Senior Loan. These covenants, in
addition to the timely payment of interest and principal, may include
restrictions on dividend payments, and usually state that a Borrower must
maintain specific minimum financial ratios, as well as establishing limits on
total debt. In addition, Senior Loan covenants may include mandatory prepayment
provisions stemming from free cash flow. Free cash flow is cash that is in
excess of capital expenditures plus debt service requirements of principal and
interest. The free cash flow shall be applied to prepay the Senior Loan in an
order of maturity described in the loan documents. Under certain interests in
Senior Loans, the Fund may have an obligation to make additional loans upon
demand by the Borrower. The Fund intends to reserve against contingent
obligations by segregating sufficient assets in high quality short-term liquid
investments or borrowing to cover the obligations.

Senior Loans, unlike certain bonds, usually do not have call protection.
This means that investments comprising the Fund's portfolio, while having a
stated one to ten-year term, may be prepaid, often without penalty.

The Fund may be required to pay and receive various fees and commissions
in the process of purchasing, selling and holding Senior Loans. The fee
component may include any, or a combination of, the following elements:
arrangement fees, assignment fees, non-use fees, facility fees, letter of credit
fees and ticking fees. Arrangement fees are paid at the commencement of a Senior
Loan as compensation for the initiation of the transaction. An assignment fee
may be paid when a Senior Loan is assigned to another party. A non-use fee is
paid based upon the amount committed but not used typically under a revolving
credit facility, which may be issued coincident to the Senior Loan. Facility
fees are on-going annual fees paid in connection with a Senior Loan. Letter of
credit fees are paid if a Senior Loan involves a letter of credit. Ticking fees
are paid from the initial commitment indication until Senior Loan closing if for
an extended period. The fees are negotiated at the time of transaction.

DEBT SECURITIES

The debt securities in which the Fund may invest may provide for fixed or
variable principal payments and various types of interest rate and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment-in-kind and auction rate features. Certain debt securities are
"perpetual" in that they have no maturity date. Certain debt securities are zero
coupon bonds. A zero coupon bond is a bond that does not pay interest either for
the entire life of the obligations or for an initial period after the issuance
of the obligation.

The Fund will invest in debt securities that are typically rated below
investment grade at the time of purchase. In light of the risks of below
investment grade debt securities, as discussed below, the Advisor, in evaluating
the creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
operating history, financial resources and its sensitivity to economic

conditions and trends, the market support for the facility financed by the issue
(if applicable), the perceived ability and integrity of the issuer's management
and regulatory matters.

Fluctuations in the prices of debt securities may be caused by, among
other things, the supply and demand for similarly rated debt instruments. In
addition, the prices of debt securities fluctuate in response to the general
level of interest rates. Fluctuations in the prices of debt securities
subsequent to their acquisition will not affect cash income from such debt
securities but will be reflected in the Fund's net asset value.

LOWER GRADE AND BELOW INVESTMENT GRADE DEBT INSTRUMENTS

The Senior Loans in which the Fund invests are primarily below investment
grade, or "high yield." These lower grade debt instruments may become the
subject of bankruptcy proceedings or otherwise subsequently default as to the
repayment of principal and/or payment of interest or be downgraded to ratings in
the lower rating categories ("Ca" or lower by Moody's, "CC" or lower by S&P or
comparably rated by another NRSRO). The value of these securities is affected by
the creditworthiness of the issuers of the securities and by general economic
and specific industry conditions. Issuers of lower grade debt instruments are
not perceived to be as strong financially as those with higher credit ratings,
so the securities are usually considered speculative investments. These issuers
generally are more vulnerable to financial setbacks and recession than more
creditworthy issuers which may impair their ability to make interest and
principal payments. Lower grade debt instruments tend to be less liquid than
higher grade debt instruments.

Investing in lower grade debt instruments involves additional risks than
investment-grade debt instruments. Lower grade debt instruments are securities
rated "Ba1" or lower by Moody's or "BB+" or lower by S&P, or comparably rated by
any other NRSRO or considered to be of comparable credit quality. When
prevailing economic conditions cause a narrowing of the spreads between the
yields derived from lower grade or comparable debt instruments and those derived
from higher rated issues, the Fund may invest in higher rated debt instruments
which provide similar yields but have less risk. In addition, the Fund may be
forced to buy higher rated, lower yielding debt instruments, which would
decrease the Fund's return, if issuers redeem their lower grade debt instruments
at a higher than expected rate. Changes in economic or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments on securities rated "Ba1" by Moody's or lower or "BB+" by S&P or lower
than is the case with higher grade securities.

The Fund normally invests in securities rated below "B" by both Moody's
and S&P (or comparably rated by another NRSRO) only if it is determined that the
financial condition of the issuer or the protection afforded to the particular
securities is stronger than would otherwise be indicated by the lower ratings.
Lower grade debt instruments tend to offer higher yields than higher rated debt
instruments with the same maturities because the historical financial condition
of the issuers of the securities may not have been as strong as that of other
issuers. Since lower grade debt instruments generally involve greater risk of
loss of income and principal than higher rated debt instruments, investors
should consider carefully the relative risks associated with investments in

lower grade debt instruments. Investment in these securities is a long-term
investment strategy and, accordingly, investors in the Fund should have the
financial ability and willingness to remain invested for the long-term.

Fluctuations in the prices of fixed-income debt instruments may be caused
by, among other things, the supply and demand for similarly rated debt
instruments. In addition, the prices of debt instruments fluctuate in response
to the general level of interest rates. Fluctuations in the prices of debt
instruments subsequent to their acquisition will not affect cash income from
such debt instruments but will be reflected in the Fund's net asset value.

The Fund will perform its own investment analysis and rating assignment,
and will not rely principally on the ratings assigned by the rating services,
although these ratings will be considered. A description of corporate bond
ratings is contained in Appendix A to this Statement of Additional Information.
Ratings of securities represent the rating agencies' opinions regarding their
credit quality and are not a guarantee of quality. Rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than a rating
indicates. Therefore, the financial history, the financial condition, the
prospects and the management of an issuer, among other things, also will be
considered in selecting securities for the Fund's portfolio. Since some issuers
do not seek ratings for their securities, non-rated securities also will be
considered for investment by the Fund only when it is determined that the
financial condition of the issuers of the securities and/or the protection
afforded by the terms of the securities themselves limit the risk to the Fund to
a degree comparable to that of rated securities that are consistent with the
Fund's objectives and policies.

Risks Relating To Investing In Lower Grade and Below Investment Grade Debt
Instruments. Senior Loans are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and also
may be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower grade or similar unrated debt instruments
are more likely to react to developments affecting market and credit risk than
are more highly rated debt instruments, which react primarily to movements in
the general level of interest rates. Both credit risk and market risk will be
considered in making investment decisions for the Fund. The achievement of its
investment objectives may be more dependent on the Fund's own credit analysis
and rating assignment than is the case for higher quality securities.

Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession, securities
of highly leveraged issuers are more likely to default than securities of higher
rated issuers. In addition, the secondary market for lower grade debt
instruments, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated debt instruments. Under
adverse market or economic conditions, the secondary market for lower grade debt
instruments could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the Fund could find it
more difficult to sell these securities or may be able to sell the securities

only at prices lower than if the securities were widely traded. Prices realized
upon the sale of lower grade debt instruments, under these circumstances, may be
less than the prices used in calculating the Fund's net asset value. Under
circumstances where the Fund owns the majority of an issue, market and credit
risks may be greater. Moreover, from time to time, it may be more difficult to
value lower grade debt instruments than more highly rated debt instruments.

In addition to the risk of default, there are the related costs of
recovery on defaulted issues. The Fund will attempt to reduce these risks
through diversification of the portfolio and by analysis of each issuer and its
ability to make timely payments of income and principal, as well as broad
economic trends in corporate developments.

Since investors generally perceive that there are greater risks associated
with the lower grade debt instruments of the type in which the Fund may invest,
the yields and prices of these debt instruments may tend to fluctuate more than
those for higher rated debt instruments. In the lower quality segments of the
Senior Loan market, changes in perceptions of issuers' creditworthiness tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality fixed income securities.

Lower grade or unrated debt instruments also present risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors.

SPECIAL SITUATION INVESTMENTS

The Fund may invest up to 10% of its Managed Assets in Senior Loans and,
on limited occasions, equity and other debt securities acquired in connection
therewith, of firms that, at the time of acquisition, have defaulted on their
debt obligations and/or filed for protection under Chapter 11 of the U.S.
Bankruptcy Code or have entered into a voluntary reorganization in conjunction
with their creditors and stakeholders in order to avoid a bankruptcy filing, or
those same issuers prior to an event of default whose acute operating and/or
financial problems have resulted in the markets' valuing their respective
securities and debt at sufficiently discounted prices so as to be yielding,
should they not default, a significant premium over comparable duration U.S.
Treasury bonds ("Special Situation Investments").

Special Situation Investments are speculative and involve significant
risk. Special Situation Investments frequently do not produce income while they
are outstanding and may require the Fund to bear certain extraordinary expenses
in order to protect and recover its investment. Therefore, the Fund's ability to
achieve current income for its stockholders may be diminished. The Fund also
will be subject to significant uncertainty as to when and in what manner and for
what value the obligations evidenced by the Special Situation Investments
eventually will be satisfied (e.g., through a liquidation of the obligor's
assets, an exchange offer or plan of reorganization involving the Special
Situation Investments or a payment of some amount in satisfaction of the
obligation). In addition, even if an exchange offer is made or a plan of
reorganization is adopted with respect to Special Situation Investments held by
the Fund, there can be no assurance that the securities or other assets received
by the Fund in connection with the exchange offer or plan of reorganization will
not have a lower value or income potential than may have been anticipated when

the investment was made. Moreover, any securities received by the Fund upon
completion of an exchange offer or plan of reorganization may be restricted as
to resale. As a result of the Fund's participation in negotiations with respect
to any exchange offer or plan of reorganization with respect to an issuer of
Special Situation Investments, the Fund may be restricted from disposing of the
securities.

ILLIQUID SECURITIES

The Fund may invest without limit in illiquid securities. Most of the
Senior Loans in which the Fund will invest will be, at times, illiquid. Illiquid
securities also include repurchase agreements that have a maturity of longer
than seven days, certain securities with legal or contractual restrictions on
resale (restricted securities) and securities that are not readily marketable
either within or outside the United States. The Advisor will monitor the
liquidity of restricted securities under the supervision of the Trustees.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as restricted securities and
are purchased directly from the issuer or in the secondary market ("Direct
Placement Securities"). Limitations on resale may have an adverse effect on the
marketability of portfolio securities and the Fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices. The
Fund might also have to register the restricted securities to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede the public offering of securities.

Over time, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities,
convertible securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.

FOREIGN SECURITIES

The Fund may invest up to 15% of its Managed Assets in U.S. currency
denominated fixed-income issues of foreign governments and other foreign issuers
(based on issuer's domicile), and preferred stock. But in no case will the Fund
invest in debt securities of issuers located in emerging markets. "Foreign
government securities" include debt securities issued or guaranteed, as to
payment of principal and interest, by governments, semi-governmental entities,
governmental agencies, supranational entities and other governmental entities
(each a "Governmental Entity" and collectively, "Governmental Entities") of

foreign countries denominated in the currencies of such countries or in U.S.
dollars (including debt securities of a Governmental Entity in any such country
denominated in the currency of another such country).

A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of "semi-governmental entities" are
issued by entities owned by a national, state, or equivalent government or are
obligations of a political unit that are not backed by the national government's
"full faith and credit" and general taxing powers. Examples of semi-government
issuers include, among others, the Province of Ontario and the City of
Stockholm.

Investment in Sovereign Debt Can Involve a High Degree of Risk. The
Governmental Entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A Governmental Entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
Governmental Entity's policy toward the International Monetary Fund and the
political constraints to which a Governmental Entity may be subject.
Governmental Entities also may depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make disbursements may be conditioned on a Governmental
Entity's implementation of economic reforms and/or economic performance and the
timely service of the debtor's obligations. Failure to implement such reforms,
achieve the levels of economic performance or repay principal or interest when
due may result in the cancellation of such third parties' commitments to lend
funds to the Governmental Entity, which may further impair the debtor's ability
or willingness to service its debts in a timely manner. Consequently,
Governmental Entities may default on their sovereign debt. Holders of sovereign
debt (including the Funds) may be requested to participate in the rescheduling
of the debt and to extend further loans to Governmental Entities. There is no
bankruptcy proceeding by which sovereign debt on which Governmental Entities
have defaulted may be collected in whole or in part.

Foreign Securities Involve Certain Risks. These risks include political or
economic instability in the country of issue, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange
controls, and the seizure or nationalization of foreign deposits. Such
securities also may be subject to greater fluctuations in price than securities
issued by United States corporations or issued or guaranteed by the U.S.
Government, its instrumentalities or agencies. In addition, there may be less
publicly available information about a foreign issuer or government than about a
domestic issuer or the U.S. Government. Foreign issuers generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and, with respect to certain foreign countries,
there is a possibility of confiscatory taxation and diplomatic developments
which could affect investment. In many instances, foreign fixed-income

securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These securities may be less liquid than
securities of U.S. issuers, its instrumentalities or agencies. Finally, in the
event of a default of any foreign debt obligations, it may be more difficult for
the Fund to obtain or to enforce a judgment against the issuers of these
securities.

Investing in the fixed-income markets of developing countries involves
exposure to economies that are generally less diverse and mature and to
political systems which can be expected to have less stability than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of developed
countries. The risks associated with investments in foreign securities may be
greater with respect to investments in developing countries and are certainly
greater with respect to investments in the securities of financially and
operationally troubled issuers.

Additional costs could be incurred in connection with the Fund's
international investment activities. Foreign countries may impose taxes on
income on foreign investments. Foreign brokerage commissions are generally
higher than U.S. brokerage commissions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.

PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES

The Fund may invest in pay-in-kind and deferred payment securities only if
the Fund receives the instruments in connection with owning Senior Loans of an
issuer. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that pay no or a reduced rate of interest until a predetermined
date, at which time the stated coupon rate becomes effective and interest
becomes payable at regular intervals. Holders of certain of these types of
securities are deemed to have received income ("phantom income") annually,
notwithstanding that cash may not be received currently. The Fund accrues income
with respect to these securities for federal income tax and accounting purposes
prior to the receipt of cash payments. The effect of owning instruments which do
not make current interest payments is that a fixed yield is earned not only on
the original investment but also, in effect, on all discount accretion during
the life of the obligations. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the deferred payment portion of bond, but at the
same time eliminates the holder's ability to reinvest at higher rates in the
future. For this reason, some of these securities may be subject to
substantially greater price fluctuations during periods of changing market
interest rates than are comparable securities which pay interest currently,
which fluctuation increases the longer the period to maturity. These investments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of cash. Pay-in-kind and deferred payment securities may be
subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparable rated securities paying cash interest
at regular intervals. The Fund also may buy loans that provide for the payment

of additional income if certain operational benchmarks are achieved by the
Borrower that is to be paid on a deferred basis at an uncertain future date.

In addition to the above described risks, there are certain other risks
related to investing in pay-in-kind and deferred payment securities. During a
period of severe market conditions, the market for the securities may become
even less liquid. In addition, as these securities may not pay cash interest,
the Fund's investment exposure to these securities and their risks, including
credit risk, will increase during the time these securities are held in the
Fund's portfolio. Further, to maintain its qualification for pass-through
treatment under the federal tax laws, the Fund is required to distribute income
to its shareholders and, consequently, may have to dispose of its portfolio
securities under disadvantageous circumstances to generate the cash, or may have
to leverage itself by borrowing the cash to satisfy these distributions, as they
relate to the distribution of phantom income and the value of the paid-in-kind
interest. The required distributions will result in an increase in the Fund's
exposure to these securities.

CREDIT DEFAULT SWAP TRANSACTIONS

The Fund may invest up to 5% of its Managed Assets in credit default swap
transactions (as measured by the notional amounts of the swaps), including
credit-linked notes (described below) for hedging and investment purposes. The
"buyer" in a credit default contract is obligated to pay the "seller" a periodic
stream of payments over the term of the contract provided that no event of
default on an underlying reference obligation has occurred. If an event of
default occurs, the seller must pay the buyer the full notional value, or "par
value," of the reference obligation. Credit default swap transactions are either
"physical delivery" settled or "cash" settled. Physical delivery entails the
actual delivery of the reference asset to the seller in exchange for the payment
of the full par value of the reference asset. Cash settled entails a net cash
payment from the seller to the buyer based on the difference of the par value of
the reference asset and the current value of the reference asset that may have,
through default, lost some, most or all of its value. The Fund may be either the
buyer or seller in a credit default swap transaction. If the Fund is a buyer and
no event of default occurs, the Fund will have made a series of periodic
payments and recover nothing of monetary value. However, if an event of default
occurs, the Fund (if the buyer) will receive the full notional value of the
reference obligation either through a cash payment in exchange for the asset or
a cash payment in addition to owning the reference assets. As a seller, the Fund
receives a fixed rate of income throughout the term of the contract, which
typically is between six months and five years, provided that there is no event
of default. The Fund will segregate assets in the form of cash and cash
equivalents in an amount equal to the aggregate market value of the credit
default swaps of which it is the seller, marked to market on a daily basis. If
an event of default occurs, the seller must pay the buyer the full notional
value of the reference obligation through either physical settlement or cash
settlement. Credit default swap transactions involve greater risks than if the
Fund had invested in the reference obligation directly.

The Fund also may purchase credit default swap contracts in order to hedge
against the risk of default of debt securities it holds, in which case the Fund
would function as the counterparty referenced in the preceding paragraph. This

would involve the risk that the swap may expire worthless and would only
generate income in the event of an actual default by the issuer of the
underlying obligation (as opposed to a credit downgrade or other indication of
financial instability). It would also involve credit risk that the seller may
fail to satisfy its payment obligations to the Fund in the event of a default.

CREDIT-LINKED NOTES

The Fund may invest in credit-linked notes. Credit-linked notes are
securities that are collateralized by one or more credit default swaps on
corporate credits. The difference between a credit default swap and a
credit-linked note is that the buyer of a credit-linked note receives the
principal payment from the seller at the time the contract is originated.
Through the purchase of a credit-linked note, the buyer assumes the risk of the
reference asset and funds this exposure through the purchase of the note. The
buyer takes on the exposure to the seller to the full amount of the funding it
has provided. The seller has hedged its risk on the reference asset without
acquiring any additional credit exposure. The Fund has the right to receive
periodic interest payments from the issuer of the credit-linked note at an
agreed-upon interest rate, and a return of principal at the maturity date.

Credit-linked notes are subject to credit risk of the corporate credits
underlying the credit default swaps. If one of the underlying corporate credits
defaults, the Fund may receive the security that has defaulted, and the Fund's
principal investment would be reduced by the difference between the original
face value security and the current value of the defaulted security.

Credit-linked notes typically are privately negotiated transactions
between two or more parties. The Fund bears the risk that the issuer of the
credit-linked note will default or become bankrupt. The Fund bears the risk of
loss of its principal investment, and the periodic interest payments expected to
be received for the duration of its investment in the credit-linked note.

The market for credit-linked notes is, or suddenly can become, illiquid.
The other parties to the transaction may be the only investors with sufficient
understanding of the derivative to be interested in bidding for it. Changes in
liquidity may result in significant, rapid and unpredictable changes in the
prices for credit-linked notes. In certain cases, a market price for a
credit-linked note may not be available. The collateral for a credit-linked note
is one or more credit default swaps, which, as described above, are subject to
additional risk.

New financial products continue to be developed and the Fund may invest in
any products that may be developed to the extent consistent with its investment
objectives and the regulatory and federal tax requirements applicable to
investment companies.

STRUCTURED NOTES AND RELATED INSTRUMENTS

The Fund may invest up to 5% of its Managed Assets in "structured" notes
and other related instruments, which are privately negotiated debt obligations
where the principal and/or interest is determined by reference to the
performance of a benchmark asset, market or interest rate (an "embedded" index),

such as selected securities or debt investments, an index of such, or specified
interest rates, or the differential performance of two assets or markets, such
as indexes reflecting bonds. The terms of structured instruments normally
provide that their principal and/or interest payments are to be adjusted upwards
or downwards (but ordinarily not below zero) to reflect changes in the embedded
index while the structured instruments are outstanding. As a result, the
interest and/or principal payments that may be made on a structured product may
vary widely, depending on a variety of factors, including the volatility of the
embedded index and the effect of changes in the embedded index on principal
and/or interest payments. The rate of return on structured notes may be
determined by applying a multiplier to the performance or differential
performance of the referenced index(es) or other assets. Application of a
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss. As a result, a relatively small decline in the value of a
referenced Senior Loan or basket of Senior Loans could result in a relatively
large loss in the value of a structured note.

INTEREST RATE AND OTHER HEDGING TRANSACTIONS

The Fund may enter into various interest rate hedging and risk management
transactions. Certain of these interest rate hedging and risk management
transactions involve derivative instruments. A derivative is a financial
instrument whose performance is derived at least in part from the performance of
an underlying index, security or asset. The values of certain derivatives can be
affected dramatically by even small market movements, sometimes in ways that are
difficult to predict. There are many different types of derivatives, with many
different uses. The Fund expects to enter into these transactions primarily to
seek to preserve a return on a particular investment or portion of its
portfolio, and also may enter into such transactions to seek to protect against
decreases in the anticipated rate of return on floating or variable rate
financial instruments the Fund owns or anticipates purchasing at a later date,
or for other risk management strategies such as managing the effective
dollar-weighted average duration of the Fund's portfolio. The Fund also may
engage in hedging transactions to seek to protect the value of its portfolio
against declines in net asset value resulting from changes in interest rates or
other market changes. Market conditions will determine whether and in what
circumstances the Fund would employ any of the hedging and risk management
techniques described below. The successful utilization of hedging and risk
management transactions requires skills different from those needed in the
selection of the Fund's portfolio securities. The Fund believes that the Advisor
possesses the skills necessary for the successful utilization of hedging and
risk management transactions. The Fund will incur brokerage and other costs in
connection with its hedging transactions.

The Fund may enter into interest rate swaps or total rate of return swaps
or purchase or sell interest rate caps or floors. Interest rate swaps involve
the exchange by the Fund with another party of their respective obligations to
pay or receive interest, e.g., an exchange of an obligation to make floating
rate payments for an obligation to make fixed rate payments. For example, the
Fund may seek to shorten the effective interest rate redetermination period of a
Senior Loan in its portfolio with an interest rate redetermination period of

one-year. The Fund could exchange the Borrower's obligation to make fixed rate
payments for one-year for an obligation to make payments that readjust monthly.

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
interest obligations are determined although no actual exchange of principal
occurs) from the party selling the interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling the interest rate floor.

In circumstances in which the Advisor anticipates that interest rates will
decline, the Fund might, for example, enter into an interest rate swap as the
floating rate payor or, alternatively, purchase an interest rate floor. In the
case of purchasing an interest rate floor, if interest rates declined below the
floor rate, the Fund would receive payments from its counterparty which would
wholly or partially offset the decrease in the payments it would receive in
respect of the portfolio assets being hedged. In the case where the Fund
purchases an interest rate swap, if the floating rate payments fell below the
level of the fixed rate payment set in the swap agreement, the Fund's
counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive in respect of floating rate portfolio assets
being hedged.

The successful use of swaps, caps and floors to preserve the rate of
return on a portfolio of financial instruments depends on the Advisor's ability
to predict correctly the direction and extent of movements in interest rates.

Although the Fund believes that use of the hedging and risk management
techniques described above will benefit the Fund, if the Advisor's judgment
about the direction or extent of the movement in interest rates is incorrect,
the Fund's overall performance would be worse than if it had not entered into
any such transactions.

Because these hedging transactions are entered into for good-faith risk
management purposes, the Advisor and the Fund believe these obligations do not
constitute senior securities. The Fund usually will enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
obligations under each swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the New York Stock Exchange or
other entities determined by the Advisor, pursuant to procedures adopted and
reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a

default occurs by the other party to the transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction but
remedies may be subject to bankruptcy and insolvency laws which could affect the
Fund's rights as a creditor. There can be no assurance, however, that the Fund
will be able to enter into interest rate swaps or to purchase interest rate caps
or floors at prices or on terms the Advisor believes are advantageous to the
Fund. In addition, although the terms of interest rate swaps, caps and floors
may provide for termination, there can be no assurance that the Fund will be
able to terminate an interest rate swap or to sell or offset interest rate caps
or floors that it has purchased.

The Fund also may engage in credit derivative transactions. Default risk
derivatives are linked to the price of reference securities or loans after a
default by the issuer or borrower, respectively. Market spread derivatives are
based on the risk that changes in market factors, such as credit spreads, can
cause a decline in the value of a security, loan or index. There are three basic
transactional forms for credit derivatives: swaps, options and structured
instruments. The use of credit derivatives is a highly specialized activity
which involves strategies and risks different from those associated with
ordinary portfolio security transactions. If the Advisor is incorrect in its
forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these techniques were not used. Moreover, even if the Advisor is
correct in its forecasts, there is a risk that a credit derivative position may
correlate imperfectly with the price of the asset or liability being hedged.
Credit derivative transaction exposure will be limited to 20% of the Managed
Assets of the Fund. Such exposure will be attained through the use of
derivatives and through credit default swap transactions and credit linked
securities, as discussed above.

GENERAL LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. Subject to the
Fund's non-fundamental investment policies, the Fund may engage in futures and
related options transactions either for bona fide hedging or for other purposes
as permitted by the Commodity Futures Trading Commission (the "CFTC"). These
purposes may include using futures and options on futures as a substitute for
the purchase or sale of securities to increase or reduce exposure to particular
markets. The Fund relies on a CFTC rule which provides for an exclusion for the
Fund from the definition of commodity pool operator ("CPO"). The Advisor has
also relied on another CFTC rule which provides an exclusion from the definition
of commodity trading advisor ("CTA") for persons which are excluded from the CPO
definition as described above and whose commodity interest advisory activities
are solely incidental to the operation of the Fund. As a result of these
exclusions, neither the Advisor nor the Fund have been subject to registration
or regulation as a CTA or CPO, as applicable. However, the CFTC has adopted rule
amendments which would require operators of registered investment companies to
either limit such investment companies' use of futures, options on futures and
swaps or submit to dual regulation by the CFTC and the Commission. The rule
amendments limit transactions in commodity futures, commodity option contracts
and swaps for non-hedging purposes by either (a) limiting the aggregate initial
margin and premiums required to establish non-hedging commodities positions to
not more than 5% of the liquidation value of the Fund's portfolio after taking
into account unrealized profits and losses on any such contract or (b) limiting
the aggregate net notional value of non-hedging commodities positions to not
more than 100% of the liquidation value of the Fund's portfolio after taking
into account unrealized profits and losses on such positions. Upon the effective
compliance date of the amended rules, the Advisor intends to claim an exclusion

from the definition of a CPO with respect to the Fund under the amended rules.
If, in the future, the Advisor is not able to rely on such an exclusion, it will
register as a CPO with the CFTC. The Fund reserves the right to engage in
transactions involving futures, options thereon and swaps to the extent allowed
by CFTC regulations in effect from time to time and in accordance with the
Fund's policies.

LENDING OF SECURITIES

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities in any amount to brokers, dealers and financial
institutions, provided that loans are callable at any time by the Fund and are
at all times secured by cash or equivalent collateral that is equal to at least
the market value, determined daily, of the loaned securities. During the time
portfolio securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividend or interest paid on the securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. The advantage of the
loans is that the Fund continues to receive payments in lieu of the interest and
dividends of the loaned securities, while at the same time earning interest
either directly from the borrower or on the collateral which will be invested in
short-term obligations.

A loan may be terminated by the borrower on one business day's notice or
by the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed to be
creditworthy. On termination of the loan, the borrower is required to return the
securities to the Fund, and any gain or loss in the market price during the loan
would inure to the Fund.

Since voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of its rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders, administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.

OTHER INVESTMENT COMPANIES

The Fund may invest its Managed Assets in securities of other open- or
closed-end investment companies that invest primarily in securities of the types
in which the Fund may invest directly. In addition, the Fund may invest a
portion of its Managed Assets in pooled investment vehicles (other than
investment companies) that invest primarily in securities of the types in which
the Fund may invest directly. For instance, the Fund may purchase a synthetic
composite of performance of the leveraged loan market through credit derivatives
based on widely traded leveraged, or high yield, loans. The Fund generally
expects that it may invest in other investment companies and/or pooled
investment vehicles or similar indices either during periods when it has large
amounts of uninvested cash, such as the period shortly after the Fund receives

the proceeds of the offering of its Common Shares or preferred shares and/or
borrowings, or during periods when there is a shortage of attractive securities
of the types in which the Fund may invest in directly available in the market.
As an investor in an investment company, the Fund will bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Fund's advisory and administrative fees with respect to assets so invested. The
Fund's common shareholders would therefore be subject to duplicative expenses to
the extent the Fund invests in other investment companies. The Advisor will take
expenses into account when evaluating the investment merits of an investment in
the investment company relative to available securities of the types in which
the Fund may invest directly. In addition, the securities of other investment
companies also may be leveraged and therefore will be subject to the same
leverage risks described herein. As described in the section entitled
"Risks--Leverage Risk" in the Prospectus, the net asset value and market value
of leveraged shares will be more volatile and the yield to shareholders will
tend to fluctuate more than the yield generated by unleveraged shares. The Fund
will treat its investments in such investment companies as investments in Senior
Loans for all purposes, such as for purposes of determining compliance with the
requirement set forth above that at least 80% of the Fund's Managed Assets be
invested under normal market circumstances in Senior Loans.

TEMPORARY INVESTMENTS AND DEFENSIVE POSITION.

During the period where the net proceeds of this offering of Common
Shares, the issuance of Preferred Shares, if any, and/or Borrowings are being
invested or during periods in which the Advisor determines that it is
temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so, the Fund may deviate from its investment strategy and
invest all or any portion of its net assets in cash, cash equivalents or other
securities. The Advisor's determination that it is temporarily unable to follow
the Fund's investment strategy or that it is impracticable to do so generally
will occur only in situations in which a market disruption event has occurred
and where trading in the securities selected through application of the Fund's
investment strategy is extremely limited or absent. In such a case, the Fund may
not pursue or achieve its investment objectives.

Cash and cash equivalents are defined to include, without limitation, the
following:

(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by: (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United
States; (b) the Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Tennessee Valley Authority, whose securities are supported
by the right of the agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association; and (d) the Student Loan Marketing
Association, whose securities are supported only by its credit. While the
U.S. government provides financial support to such U.S. government-
sponsored agencies or instrumentalities, no assurance can be given that
it always will do so since it is not so obligated by law. The U.S.

government, its agencies, and instrumentalities do not guarantee the
market value of their securities. Consequently, the value of such
securities may fluctuate.

(2) Certificates of deposit issued against funds deposited in a
bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit 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.

(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver
such securities to the seller, who also simultaneously agrees to buy back
the securities 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. Pursuant to the Fund's policies and
procedures, 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 Fund is entitled to sell the underlying
collateral. 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 Advisor
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
Advisor 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.

(4) Commercial paper, which consists of 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 such notes. However, they are redeemable by the
Fund at any time. The Advisor will consider the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity measures)
and will continuously monitor the corporation's ability to meet all its
financial obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the highest categories by a NRSRO and which mature within one year of
the date of purchase or carry a variable or floating rate of interest.

(5) 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.

(6) 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.

(7) The Fund may invest in shares of money market funds in
accordance with the provisions of the 1940 Act.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS
The general supervision of the duties performed for the Fund under the
Investment Management Agreement is the responsibility of the Board of Trustees.
There are five Trustees of the Fund, one of whom is an "interested person" (as
the term is defined in the 1940 Act) ("Interested Trustee") and four of whom are
Trustees who are not officers or employees of First Trust Advisors L.P, the
Fund's investment advisor ("First Trust Advisors" or the "Advisor"), or any of
its affiliates ("Independent Trustees"). The Trustees set broad policies for the
Fund, choose the Fund's officers and hire the Fund's investment advisor and
other service providers. The Board of Trustees is divided into three classes:
Class I, Class II and Class III. In connection with the organization of the
Fund, each Trustee was elected for one initial term, the length of which depends
on the class, as more fully described below. Subsequently, the Trustees in each
class are elected to serve for a term expiring at the third succeeding annual
shareholder meeting subsequent to their election at an annual meeting, in each
case until their respective successors are duly elected and qualified, as
described below. Each Trustee, except for James A. Bowen, is an Independent
Trustee. Mr. Bowen is an Interested Trustee due to his position as Chief
Executive Officer of First Trust Advisors. The officers of the Fund manage the
day-to-day operations and are responsible to the Fund's Board of Trustees. The
officers of the Fund serve indefinite terms. The following is a list of the
Trustees and officers of the Fund and a statement of their present positions and
principal occupations during the past five years, the number of portfolios each
Trustee oversees and the other directorships they hold, if applicable.

NUMBER OF
PORTFOLIOS IN
THE FIRST
TERM OF OFFICE(2) TRUST OTHER
AND YEAR FIRST FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS POSITION AND OFFICES ELECTED OR PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY
AND DATE OF BIRTH WITH FUND APPOINTED DURING THE PAST 5 YEARS TRUSTEE TRUSTEE

Trustee who is an Interested
Person of the Fund
----------------------------

James A. Bowen(1) Chairman of the o Class III (3)(4) Chief Executive Officer 96 Portfolios None
120 East Liberty Drive, Board and Trustee (December 2010 to
Suite 400 Present), President
Wheaton, IL 60187 o 2004 (until December 2010),
D.O.B.: 09/55 First Trust Advisors
L.P. and First Trust
Portfolios L.P.;
Chairman of the Board
of Directors, BondWave
LLC (Software
Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)

Independent Trustees
----------------------------

Richard E. Erickson Trustee o Class II (3)(4) Physician; President, 96 Portfolios None
c/o First Trust Advisors L.P. Wheaton Orthopedics;
120 East Liberty Drive, Co-owner and
Suite 400 o 2004 Co-Director (January
Wheaton, IL 60187 1996 to May 2007),
D.O.B.: 04/51 Sports Med Center for
Fitness; Limited
Partner, Gundersen Real
Estate Limited
Partnership; Member,
Sportsmed LLC

Thomas R. Kadlec Trustee o Class II (3)(4) President (March 2010 96 Portfolios Director of ADM
c/o First Trust Advisors L.P. to Present), Senior Investor
120 East Liberty Drive, o 2004 Vice President and Services, Inc.
Suite 400 Chief Financial and ADM Investor
Wheaton, IL 60187 Officer (May 2007 Services
D.O.B.: 11/57 to March 2010), International
Vice President
and Chief Financial
Officer (1990 to
May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant)

Robert F. Keith Trustee o Class I (3)(4) President (2003 to 96 Portfolios Director of Trust
c/o First Trust Advisors L.P. Present), Hibs Company of
120 East Liberty Drive, o 2006 Enterprises (Financial Illinois
Suite 400 and Management
Wheaton, IL 60187 Consulting)
D.O.B.: 11/56

Niel B. Nielson Trustee o Class III (3)(4) President and Chief 96 Portfolios Director of
c/o First Trust Advisors L.P. Executive Officer, Dew Covenant
120 East Liberty Drive, o 2004 Learning LLC (July 2012 Transport Inc.
Suite 400 to Present); President
Wheaton, IL 60187 (June 2002 to July
D.O.B.: 03/54 2012), Covenant College

Officers of the Fund
----------------------------

Mark R. Bradley President and Chief o Indefinite term Chief Financial Officer N/A N/A
120 East Liberty Drive Executive Officer and Chief Operating
Suite 400 Officer (December 2010
Wheaton, IL 60187 o January 2012 to Present), First
D.O.B.: 11/57 Trust Advisors L.P. and
First Trust Portfolios
L.P.; Chief Financial
Officer, BondWave LLC
(Software Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)

James M. Dykas Treasurer, Chief o Indefinite term Controller (January N/A N/A
120 East Liberty Drive Financial Officer 2011 to Present),
Suite 400 and Chief o January 2012 Senior Vice President
Wheaton, IL 60187 Accounting Officer (April 2007 to January
D.O.B.: 01/66 2011), Vice President
(January 2005 to April
2007), First Trust
Advisors L.P. and First
Trust Portfolios L.P.

W. Scott Jardine Secretary o Indefinite term General Counsel, First N/A N/A
120 East Liberty Drive Trust Advisors L.P. and
Suite 400 o 2004 First Trust Portfolios
Wheaton, IL 60187 L.P.; Secretary,
D.O.B.: 05/60 BondWave LLC (Software
Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC
(Investment Advisor)

Daniel J. Lindquist Vice President o Indefinite term Senior Vice President N/A N/A
120 East Liberty Drive (September 2005 to
Suite 400 o 2005 Present), Vice
Wheaton, IL 60187 President (April 2004
D.O.B.: 02/70 to September 2005),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.

Kristi A. Maher Assistant Secretary o Indefinite term Deputy General Counsel N/A N/A
120 East Liberty Drive and Chief (May 2007 to Present),
Suite 400 Compliance Officer o Assistant Assistant General
Wheaton, IL 60187 Secretary since Counsel (March 2004 to
D.O.B.: 12/66 2004 and CCO May 2007), First Trust
since 2011 Advisors L.P. and First
Trust Portfolios L.P.

--------------------

(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors, the investment advisor
of the Fund.

(2) Officers of the Fund have an indefinite term.

(3) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are each serving as trustees
until the Fund's 2012 annual meeting of shareholders. James A. Bowen and
Niel B. Nielson, as Class III Trustees, are each serving as trustees until
the Fund's 2013 annual meeting of shareholders.

(4) Each Trustee has served in such capacity since the Fund's inception except
for Robert F. Keith, who was elected in June 2006.

UNITARY BOARD LEADERSHIP STRUCTURE

Each Trustee serves as a trustee of all open-end and closed-end funds in
the First Trust Fund Complex (as defined below), which is known as a "unitary"
board leadership structure. Each Trustee currently serves as a trustee of the
Fund; First Trust Series Fund, First Trust Variable Insurance Trust and First
Defined Portfolio Fund, LLC, open-end funds with eleven portfolios advised by
First Trust Advisors; First Trust Energy Infrastructure Fund, Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Active Dividend Income Fund and First Trust High Income
Long/Short Fund, closed-end funds advised by First Trust Advisors; and First
Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II, First Trust
Exchange-Traded Fund IV, First Trust Exchange-Traded Fund VI, First Trust
Exchange-Traded AlphaDEX(R) Fund and First Trust Exchange-Traded AlphaDEX(R)
Fund II, exchange-traded funds with 73 portfolios advised by First Trust
Advisors (each a "First Trust Fund" and collectively, the "First Trust Fund
Complex"). None of the Trustees who are not "interested persons" of the Fund,
nor any of their immediate family members, has ever been a director, officer or
employee of, or consultant to, First Trust Advisors, First Trust Portfolios L.P.
or their affiliates. Mr. Bowen serves as the Chairman of the Board of each Fund
in the First Trust Fund Complex. Mr. Mark R. Bradley and the other officers of
the Fund (other than Mr. Christopher Fallow) hold the same positions with the
other funds in the First Trust Fund Complex as they hold with the Fund. Mr.
Fallow serves as Assistant Vice President of all the closed-end funds and the
First Trust Series Fund only.

The same five persons serve as Trustees on the Fund's Board of Trustees
and on the boards of all other First Trust Funds. The unitary board structure
was adopted for the First Trust Funds because of the efficiencies it achieves
with respect to the governance and oversight of the First Trust Funds. Each
First Trust Fund is subject to the rules and regulations of the 1940 Act (and
other applicable securities laws), which means that many of the First Trust
Funds face similar issues with respect to certain of their fundamental
activities, including risk management, portfolio liquidity, portfolio valuation
and financial reporting. In addition, all of the First Trust closed-end funds
are managed by the Advisor and employ common service providers for custody, fund
accounting, administration and transfer agency that provide substantially
similar services to these closed-end funds pursuant to substantially similar
contractual arrangements. Because of the similar and often overlapping issues
facing the First Trust Funds, including the Fund, the Board of the First Trust
Funds believes that maintaining a unitary board structure promotes efficiency
and consistency in the governance and oversight of all First Trust Funds and
reduces the costs, administrative burdens and possible conflicts that may result
from having multiple boards. In adopting a unitary board structure, the Trustees
seek to provide effective governance through establishing a board, the overall

composition of which, as a body, possesses the appropriate skills, diversity,
independence and experience to oversee the business of the First Trust Funds.

Annually, the Board of Trustees reviews its governance structure and the
committee structures, their performance and functions and any processes that
would enhance Board governance over the business of the First Trust Funds. The
Board of Trustees has determined that its leadership structure, including the
unitary board and committee structure, is appropriate based on the
characteristics of the funds it serves and the characteristics of the First
Trust Fund Complex as a whole. The Interested Trustee serves as the Chairman of
the Board of each Fund and, prior to the election of Mark R. Bradley which
became effective on January 23, 2012, also served as the Chief Executive Officer
and President of each Fund.

In order to streamline communication between the Advisor and the
Independent Trustees and create certain efficiencies, the Board of Trustees has
a Lead Independent Trustee who is responsible for: (i) coordinating activities
of the Independent Trustees; (ii) working with the Advisor, Fund counsel and the
independent legal counsel to the Independent Trustees to determine the agenda
for Board meetings; (iii) serving as the principal contact for and facilitating
communication between the Independent Trustees and the service providers of the
First Trust Funds, particularly the Advisor; and (iv) any other duties that the
Independent Trustees may delegate to the Lead Independent Trustee. The Lead
Independent Trustee is selected by the Independent Trustees and serves a
two-year term or until his successor is selected. Robert F. Keith currently
serves as the Lead Independent Trustee.

The Board of Trustees has established four standing committees (as
described below) and has delegated certain of its responsibilities to those
committees. The Board and its committees meet frequently throughout the year to
oversee the activities of the First Trust Funds, review contractual arrangements
with and performance of service providers, oversee compliance with regulatory
requirements, and review the performance of the First Trust Funds. The
Independent Trustees are represented by independent legal counsel at all Board
and committee meetings (other than meetings of the Executive Committee).
Generally, the Board of Trustees acts by majority vote of all the Trustees,
including a majority vote of the Independent Trustees if required by applicable
law.

The three committee chairs and the Lead Independent Trustee rotate every
two years in serving as chair of the Audit Committee, the Nominating and
Governance Committee or the Valuation Committee, or as Lead Independent Trustee.
The Lead Independent Trustee also serves on the Executive Committee with the
Interested Trustee.

The four standing committees of the Board of Trustees are: the Executive
Committee (and Pricing and Dividend Committee), the Nominating and Governance
Committee, the Valuation Committee and the Audit Committee. The Executive
Committee, which meets between Board meetings, is authorized to exercise all
powers of and to act in the place of the Board of Trustees to the extent
permitted by the Fund's Declaration of Trust and By-Laws. The members of the
Executive Committee also serve as a special committee of the Board of Trustees
known as the Pricing and Dividend Committee, which is authorized to exercise all
of the powers and authority of the Board of Trustees in respect of the issuance

and sale, through an underwritten public offering, of the Common Shares of the
Fund and all other such matters relating to such financing, including
determining the price at which such Common Shares are to be sold, approval of
the final terms of the underwriting agreement, and approval of the members of
the underwriting syndicate. Such committee is also responsible for the
declaration and setting of dividends. Mr. Keith and Mr. Bowen are members of the
Executive Committee. During the last fiscal year, the Executive Committee held
13 meetings.

The Nominating and Governance Committee is responsible for appointing and
nominating non-interested persons to the Board of Trustees. Messrs. Erickson,
Kadlec, Keith and Nielson are members of the Nominating and Governance
Committee, and each is an Independent Trustee who is also an "independent
director" within the meaning of the listing standards of the NYSE. The
Nominating and Governance Committee operates under a written charter adopted and
approved by the Board, a copy of which is available on the Fund's website at
http://www.ftportfolios.com. If there is no vacancy on the Board of Trustees,
the Board of Trustees will not actively seek recommendations from other parties,
including shareholders. The Nominating and Governance Committee will not
consider new trustee candidates who are 72 years of age or older or will turn 72
years old during the initial term. The Board of Trustees has also adopted a
mandatory retirement age of 72. When a vacancy on the Board of Trustees of a
First Trust Fund occurs and nominations are sought to fill such vacancy, the
Nominating and Governance Committee may seek nominations from those sources it
deems appropriate in its discretion, including shareholders of the applicable
First Trust Fund. To submit a recommendation for nomination as a candidate for a
position on the Board of Trustees, shareholders of the Fund shall mail such
recommendation to W. Scott Jardine, Secretary, at the Fund's address, 120 East
Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation shall
include the following information: (i) evidence of Fund ownership of the person
or entity recommending the candidate (if a Fund shareholder); (ii) a full
description of the proposed candidate's background, including their education,
experience, current employment and date of birth; (iii) names and addresses of
at least three professional references for the candidate; (iv) information as to
whether the candidate is an "interested person" in relation to the Fund, as such
term is defined in the 1940 Act, and such other information that may be
considered to impair the candidate's independence; and (v) any other information
that may be helpful to the Nominating and Governance Committee in evaluating the
candidate. If a recommendation is received with satisfactorily completed
information regarding a candidate during a time when a vacancy exists on the
Board of Trustees or during such other time as the Nominating and Governance
Committee is accepting recommendations, the recommendation will be forwarded to
the Chair of the Nominating and Governance Committee and the counsel to the
Independent Trustees. Recommendations received at any other time will be kept on
file until such time as the Nominating and Governance Committee is accepting
recommendations, at which point they may be considered for nomination. During
the last fiscal year, the Nominating and Governance Committee held 4 meetings.

The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec, Keith and Nielson are members
of the Valuation Committee. During the last fiscal year, the Valuation Committee
held 4 meetings.

The Audit Committee is responsible for overseeing the Fund's accounting
and financial reporting process, the system of internal controls, audit process
and evaluating and appointing independent auditors (subject also to approval of
the Board of Trustees). Messrs. Erickson, Kadlec, Keith and Nielson, all of whom
are "independent" as defined in the listing standards of the NYSE, serve on the
Audit Committee. Messrs. Kadlec and Keith have been determined to qualify as an
"Audit Committee Financial Expert" as such term is defined in Form N-CSR. During
the last fiscal year, the Audit Committee held 8 meetings.

RISK OVERSIGHT

As part of the general oversight of the Fund, the Board of Trustees is
involved in the risk oversight of the Fund. The Board of Trustees has adopted
and periodically reviews policies and procedures designed to address the Fund's
risks. Oversight of investment and compliance risk is performed primarily at the
Board level in conjunction with the Advisor's investment oversight group and the
Fund's Chief Compliance Officer ("CCO"). Oversight of other risks also occurs at
the committee level. The Advisor's investment oversight group reports to the
Board of Trustees at quarterly meetings regarding, among other things, Fund
performance and the various drivers of such performance. The Board of Trustees
reviews reports on the Fund's and the service providers' compliance policies and
procedures at each quarterly Board meeting and receives an annual report from
the CCO regarding the operations of the Fund's and the service providers'
compliance programs. In addition, the Independent Trustees meet privately each
quarter with the CCO. The Audit Committee reviews with the Advisor the Fund's
major financial risk exposures and the steps the Advisor has taken to monitor
and control these exposures, including the Fund's risk assessment and risk
management policies and guidelines. The Audit Committee also, as appropriate,
reviews in a general manner the processes other Board committees have in place
with respect to risk assessment and risk management. The Nominating and
Governance Committee monitors all matters related to the corporate governance of
the Fund. The Valuation Committee monitors valuation risk and compliance with
the Fund's Valuation Procedures and oversees the pricing agents and actions by
the Advisor's Pricing Committee with respect to the valuation of portfolio
securities.

Not all risks that may affect the Fund can be identified nor can controls
be developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost-effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Fund or the Advisor or other service providers. Moreover, it is necessary to
bear certain risks (such as investment related risks) to achieve the Fund's
goals. As a result of the foregoing and other factors, the Fund's ability to
manage risk is subject to substantial limitations.

BOARD DIVERSIFICATION AND TRUSTEE QUALIFICATIONS

As described above, the Nominating and Governance Committee of the Board
of Trustees oversees matters related to the nomination of Trustees. The
Nominating and Governance Committee seeks to establish an effective Board of
Trustees with an appropriate range of skills and diversity, including, as
appropriate, differences in background, professional experience, education,
vocations, and other individual characteristics and traits in the aggregate.

Each Trustee must meet certain basic requirements, including relevant skills and
experience, time availability, and if qualifying as an Independent Trustee,
independence from the Advisor, underwriters or other service providers,
including any affiliates of these entities.

Listed below for each current Trustee are the experiences, qualifications
and attributes that led to the conclusion, as of the date of this Statement of
Additional Information, that each Trustee should serve as a trustee.

Independent Trustees. Richard E. Erickson, M.D., is an orthopedic surgeon
and President of Wheaton Orthopedics. He also has been a co-owner and director
of a fitness center and a limited partner of two real estate companies. Dr.
Erickson has served as a Trustee of each First Trust Fund since its inception.
Dr. Erickson has also served as the Lead Independent Trustee (2008 - 2009),
Chairman of the Nominating and Governance Committee (2003 - 2007) and Chairman
of the Valuation Committee (June 2006 - 2007 and 2010 - 2011) of the First Trust
Funds. He currently serves as Chairman of the Audit Committee (since January 1,
2012) of the First Trust Funds.

Thomas R. Kadlec is President of ADM Investor Services Inc. ("ADMIS"), a
futures commission merchant and wholly-owned subsidiary of the Archer Daniels
Midland Company ("ADM"). Mr. Kadlec has been employed by ADMIS and its
affiliates since 1990 in various accounting, financial, operations and risk
management capacities. Mr. Kadlec serves on the boards of several international
affiliates of ADMIS and is a member of ADM's Integrated Risk Committee, which is
tasked with the duty of implementing and communicating enterprise-wide risk
management. Mr. Kadlec has served as a Trustee of each First Trust closed-end
fund since its inception. Mr. Kadlec has also served on the Executive Committee
since the organization of the first First Trust closed-end fund in 2003 until he
was elected as the first Lead Independent Trustee in December 2005, serving as
such through 2007. He also served as Chairman of the Valuation Committee (2008 -
2009) and Chairman of the Audit Committee (2010 - 2011) and currently serves as
Chairman of the Nominating and Governance Committee (since January 1, 2012) of
the First Trust Funds.

Robert F. Keith is President of Hibs Enterprises, a financial and
management consulting firm. Mr. Keith has been with Hibs Enterprises since 2004.
Prior thereto, Mr. Keith spent 18 years with ServiceMaster and Aramark,
including three years as President and COO of ServiceMaster Consumer Services,
where he led the initial expansion of certain products overseas, five years as
President and COO of ServiceMaster Management Services and two years as
President of Aramark ServiceMaster Management Services. Mr. Keith is a certified
public accountant and also has held the positions of Treasurer and Chief
Financial Officer of ServiceMaster, at which time he oversaw the financial
aspects of ServiceMaster's expansion of its Management Services division into
Europe, the Middle East and Asia. Mr. Keith has served as a Trustee of the First
Trust Funds since June 2006. Mr. Keith has also served as the Chairman of the
Audit Committee (2008 - 2009) and Chairman of the Nominating and Governance
Committee (2010 - 2011) of the First Trust Funds. He currently serves as Lead
Independent Trustee (since January 1, 2012) of the First Trust Funds.

Niel B. Nielson, Ph.D., has served as President and Chief Executive
Officer of Dew Learning LLC (a global provider of digital and on-line
educational products and services) since 2012. Mr. Nielson formerly served as
President of Covenant College (2002-2012), and as a partner and trader (of
options and futures contracts for hedging options) for Ritchie Capital Markets
Group (1996 - 1997), where he held an administrative management position at this
proprietary derivatives trading company. He also held prior positions in new
business development for ServiceMaster Management Services Company, and in
personnel and human resources for NationsBank of North Carolina, N.A. and
Chicago Research and Trading Group, Ltd. ("CRT"). His international experience
includes serving as a director of CRT Europe, Inc. for two years, directing out
of London all aspects of business conducted by the U.K. and European subsidiary
of CRT. Prior to that, Mr. Nielson was a trader and manager at CRT in Chicago.
Mr. Nielson has served as a Trustee of each First Trust Fund since its
inception. Mr. Nielson has also served as the Chairman of the Audit Committee
(2003 - 2006), Chairman of the Nominating and Governance Committee (2008 - 2009)
and as Lead Independent Trustee (2010 - 2011) of the First Trust Funds. He
currently serves as Chairman of the Valuation Committee (since January 1, 2012)
of the First Trust Funds.

Interested Trustee. James A. Bowen is the Chairman of the Board of the
First Trust Funds and Chief Executive Officer of First Trust Advisors L.P. and
First Trust Portfolios L.P., and until January 23, 2012, also served as
President and Chief Executive Officer of the First Trust Funds. Mr. Bowen also
serves on the Executive Committee. He has over 26 years of experience in the
investment company business in sales, sales management and executive management.
Mr. Bowen has served as a Trustee of each First Trust Fund since its inception.

As described above, the Board of Trustees is divided into three classes
and, in connection with the organization of the Fund, each initial Trustee was
elected for an initial term of one, two or three years depending on the class.
Subsequently, the Trustees in each class are elected to serve for a term
expiring at the third succeeding annual shareholder meeting subsequent to their
election at an annual meeting, in each case until their respective successors
are duly elected and qualified, as described below. At each annual meeting, the
Trustees chosen to succeed those whose terms are expiring shall be identified as
being of the same class as the Trustees whom they succeed. Holders of any
Preferred Shares will be entitled to elect a majority of the Fund's Trustees
under certain circumstances. See "Description of Shares--Preferred
Shares--Voting Rights" in the Prospectus.

Until January 1, 2012, each trust in the First Trust Fund Complex paid
each Independent Trustee an annual retainer of $10,000 per trust for the first
14 trusts in the First Trust Fund Complex and an annual retainer of $7,500 per
trust for each subsequent trust added to the First Trust Fund Complex. The
annual retainer was allocated equally among each of the trusts. In addition, for
all the trusts in the First Trust Fund Complex, Mr. Nielson was paid annual
compensation of $10,000 to serve as the Lead Independent Trustee, Mr. Kadlec was
paid annual compensation of $5,000 to serve as Chairman of the Audit Committee,
Dr. Erickson was paid annual compensation of $2,500 to serve as Chairman of the
Valuation Committee and Mr. Keith was paid annual compensation of $2,500 to
serve as Chairman of the Nominating and Governance Committee. This annual
compensation was allocated equally among each of the trusts in the First Trust
Fund Complex.

Effective January 1, 2012, each Independent Trustee is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The Lead Independent Trustee and each Committee
chairman will serve two-year terms before rotating to serve as chairman of
another committee or as Lead Independent Trustee. The fixed annual retainer is
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets.

Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are also reimbursed by the investment companies in the First
Trust Fund Complex for travel and out-of-pocket expenses incurred in connection
with all meetings. The officers and "Interested Trustee" receive no compensation
from the Fund for acting in such capacities.

The following table sets forth compensation paid by the Fund during the
Fund's last fiscal year to each of the Independent Trustees and total
compensation paid to each of the Independent Trustees by the First Trust Fund
Complex for a full calendar year. The Fund has no retirement or pension plans.
The officers and the Trustee who is an "interested person" as designated above
serve without any compensation from the Fund. The Fund's officers are
compensated by First Trust Advisors.

AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND AND
NAME OF TRUSTEE FROM FUND (1) FUND COMPLEX(2)
Richard E. Erickson $9,330 $279,000
Thomas R. Kadlec $9,346 $274,000
Robert F. Keith $9,372 $284,000
Niel B. Nielson $9,730 $276,000

--------------------

(1) The compensation paid by the Fund to the Independent Trustees for the last
fiscal year for services to the Fund.

(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec,
Keith and Nielson, Independent Trustees, from the Fund and the First Trust
Fund Complex for a full calendar year is based on estimated compensation
to be paid to these Trustees for a full calendar year for services as
Trustees to the Fund and the First Trust Series Fund, the First Trust
Variable Insurance Trust and the First Defined Portfolio Fund, LLC,
open-end funds (with eleven portfolios), the First Trust Exchange-Traded
Fund, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded
Fund IV, First Trust Exchange-Traded Fund VI, First Trust Exchange-Traded
AlphaDEX(R) Fund and First Trust Exchange-Traded AlphaDEX(R) Fund II,
exchange-traded funds, plus estimated compensation to be paid to these
Trustees by the Macquarie/First Trust Global Infrastructure/Utilities
Dividend & Income Fund, the First Trust Energy Income and Growth Fund, the
First Trust Enhanced Equity Income Fund, the First Trust/Aberdeen Global
Opportunity Income Fund, the First Trust Mortgage Income Fund, the First
Trust Strategic High Income Fund II, the First Trust/Aberdeen Emerging
Opportunity Fund, the First Trust Specialty Finance and Financial
Opportunities Fund, the First Trust Active Dividend Income Fund, the First
Trust High Income Long/Short Fund and the First Trust Energy
Infrastructure Fund.

The Fund has no employees. Its officers are compensated by First Trust
Advisors. The shareholders of the Fund will elect certain Trustees for a
three-year term at the next annual meeting of shareholders.

The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Fund and in other funds overseen by
the Trustees in the First Trust Fund Complex as of December 31, 2011:

AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
DOLLAR RANGE OF ALL REGISTERED INVESTMENT
EQUITY SECURITIES COMPANIES OVERSEEN BY TRUSTEE
TRUSTEE IN THE FUND IN FIRST TRUST FUND COMPLEX
James A. Bowen $10,001 - $50,000 $50,001 - $100,000
Richard E. Erickson $1 - $10,000 Over $100,000
Thomas R. Kadlec $1 - $10,000 Over $100,000
Robert F. Keith None Over $100,000
Niel B. Nielson $1 - $10,000 Over $100,000

As of December 31, 2011, the Independent Trustees of the Fund and
immediate family members do not own beneficially or of record any class of
securities of an investment advisor or principal underwriter of the Fund or any
person directly or indirectly controlling, controlled by, or under common
control with an investment advisor or principal underwriter of the Fund.

As of December 31, 2011, the officers and Trustees, in the aggregate,
owned less than 1% of the shares of the Fund.

CONTROL PERSONS

To the knowledge of the Fund, as of August 31, 2012, no single shareholder
or "group" (as that term is used in Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "1934 Act")) beneficially owned more than 5% of the
Fund's outstanding common shares, except as described in the following table.
Information as to beneficial ownership of common shares, including percentage of
common shares beneficially owned, is based on reports filed with the Commission
by such holders and a securities position listing report from The Depository
Trust & Clearing Corporation as of August 31, 2012. The Fund does not have any
knowledge of the identity of the ultimate beneficiaries of the common shares of
beneficial interest listed below. A control person is one who owns, either
directly or indirectly, more than 25% of the voting securities of the Fund or
acknowledges the existence of control.

PERCENT NUMBER OF
SHAREHOLDER AND ADDRESS OWNERSHIP SHARES HELD

Bank of America Corporation 5.10%* 1,293,654*
100 North Tryon Street, Floor 25
Charlotte, NC 28255

First Clearing, LLC 15.25% 3,868,710
One North Jefferson Street
St. Louis, MO 63103

Merrill Lynch, Pierce Fenner & Smith Safekeeping 35.82% 9,084,777
101 Hudson Street, 8th Floor
Jersey City, NJ 07302

Raymond James & Associates, Inc. 9.13% 2,316,229
880 Carillon Parkway
P.O. Box 12749
St. Petersburg, FL 33716

UBS Financial 6.29% 1,594,879
1200 Harbor Blvd.
Weehawken, NJ 07086

* Information is according to Schedule 13G filed by the reporting person with
the Commission on February 14, 2012 on behalf of itself and its wholly-owned
subsidiary, Bank of America, N.A.

INVESTMENT ADVISOR

First Trust Advisors L.P., 120 East Liberty Drive, Suite 400, Wheaton,
Illinois 60187, is the investment advisor to the Fund. First Trust Advisors
serves as investment advisor or portfolio supervisor to investment portfolios
with approximately $59 billion in assets which it managed or supervised as of
August 31, 2012. As investment advisor, First Trust Advisors provides the Fund
with professional investment supervision and management and permits any of its
officers or employees to serve without compensation as Trustees or officers of
the Fund if elected to such positions. First Trust Advisors is also responsible
for the day-to-day management of the Fund's investment portfolio, managing the
Fund's business affairs and providing certain clerical, bookkeeping and other
administrative services. The Advisor's Leveraged Finance Investment Team is
responsible for determining the Fund's overall investment strategy and
overseeing its implementation.

The experienced professionals comprising the Advisor's Leveraged Finance
Investment Team currently manage assets that total approximately $703 million as
of August 31, 2012. The team's experience includes managing Senior Loans in both
the United States and Europe, managing high-yield debt and corporate
restructuring expertise. The team, led by William Housey and Scott Fries, has
managed institutional separate accounts, commingled funds, structured products
and retail funds.

William Housey, CFA, joined First Trust Advisors in June 2010 as Senior
Portfolio Manager for the Leveraged Finance Investment Team and has 16 years of
investment experience. Mr. Housey is a Senior Vice President of First Trust
Advisors, L.P. Prior to joining First Trust Advisors, Mr. Housey was at Morgan
Stanley/Van Kampen Funds, Inc. for 11 years and served as Executive Director

and Co-Portfolio Manager. Mr. Housey has extensive experience in portfolio
management of both leveraged and unleveraged credit products, including Senior
Loans, high-yield bonds, credit derivatives and corporate restructurings. Mr.
Housey received a B.S. in Finance from Eastern Illinois University and an M.B.A.
in Finance as well as Management and Strategy from Northwestern University's
Kellogg School of Business. He holds the FINRA Series 7, Series 52 and Series 63
licenses. Mr. Housey also holds the Chartered Financial Analyst designation. He
is a member of the CFA Institute and the CFA Society of Chicago.

Scott Fries, CFA, joined First Trust Advisors in June 2010 as Co-Portfolio
Manager in the Leveraged Finance Investment Team and has 18 years of
investment industry experience. Mr. Fries is a Vice President of First Trust
Advisors, L.P. Prior to joining First Trust Advisors, Mr. Fries spent 15 years
at Morgan Stanley/Van Kampen Funds, Inc., where he most recently served as
Executive Director and Co-Portfolio Manager of Institutional Separately Managed
Accounts. Mr. Fries received a B.A. in International Business from Illinois
Wesleyan University and an M.B.A. in Finance from DePaul University. Mr. Fries
holds the Chartered Financial Analyst designation. He is a member of the CFA
Institute and the CFA Society of Chicago.

--------------------------------------------------------------------------------------
NUMBER OF OTHER ACCOUNTS MANAGED AND ASSETS BY ACCOUNT TYPE
AS OF MAY 31, 2012
--------------------------- ------------------------------ --------------------------
REGISTERED INVESTMENT OTHER POOLED OTHER ACCOUNTS
COMPANIES
(OTHER THAN THE FUND) INVESTMENT VEHICLES
--------------------------- ------------------------------ --------------------------

Number: [ ] Number: [ ] Number: [ ]
Assets: $[ ] million Assets: $[ ] million Assets: $[ ] million
--------------------------- ------------------------------ --------------------------

[ ] of the [other accounts] managed by the Advisor, totaling $[ ]
in assets under management as of May 31, 2012 are subject to performance-based
advisory fees.

Actual or apparent conflicts of interest may arise when a portfolio
manager has day-to-day management responsibilities with respect to more than one
fund or other account. More specifically, portfolio managers who manage multiple
funds and/or other accounts may be presented with one or more of the potential
conflicts described below.

The management of multiple funds and/or other accounts may result in a
portfolio manager devoting unequal time and attention to the management of each
fund and/or other account. The Advisor seeks to manage such competing interests
for the time and attention of a portfolio manager by having the portfolio
manager focus on a particular investment discipline. Most other accounts managed
by a portfolio manager are managed using the same investment models that are
used in connection with the management of the Fund.

If a portfolio manager identifies a limited investment opportunity which
may be suitable for more than one fund or other account, a fund may not be able
to take full advantage of that opportunity due to an allocation of filled
purchase or sale orders across all eligible funds and other accounts. To deal

with these situations, the Advisor has adopted procedures for allocating
portfolio transactions across multiple accounts. In addition, Section 17(d) of
the 1940 Act may limit or prevent the Fund from participating in certain joint
transactions with affiliated persons.

With respect to securities transactions for the Fund, the Advisor
determines which broker to use to execute each order, consistent with its duty
to seek best execution of the transaction. However, with respect to certain
other accounts (such as mutual funds for which the Advisor acts as an adviser,
other pooled investment vehicles that are not registered mutual funds, and other
accounts managed for organizations and individuals), the Advisor may be limited
by the client with respect to the selection of brokers or may be instructed to
direct trades through a particular broker. In these cases, trades for a fund in
a particular security may be placed separately from, rather than aggregated
with, such other accounts. Having separate transactions with respect to a
security may temporarily affect the market price of the security or the
execution of the transaction, or both, to the possible detriment of such fund or
other account(s) involved.

The Advisor and the Fund have adopted certain compliance procedures which
are designed to address these types of conflicts. However, there is no guarantee
that such procedures will detect each and every situation in which a conflict
arises.

The Advisor, subject to the Board of Trustees' supervision, provides the
Fund with discretionary investment services. Specifically, the Advisor is
responsible for managing the investments of the Fund in accordance with the
Fund's investment objectives, policies and restrictions as provided in the
Prospectus and this Statement of Additional Information, as may be subsequently
changed by the Board of Trustees and communicated to the Advisor in writing. The
Advisor further agrees to conform to all applicable laws and regulations of the
Commission in all material respects and to conduct its activities under the
Investment Management Agreement in all material respects in accordance with
applicable regulations of any governmental authority pertaining to its
investment advisory services. In the performance of its duties, the Advisor will
in all material respects satisfy any applicable fiduciary duties it may have to
the Fund, will monitor the Fund's investments, and will comply with the
provisions of the Fund's Declaration of Trust and By-Laws, as amended from time
to time, and the stated investment objectives, policies and restrictions of the
Fund. The Advisor is responsible for effecting all security transactions for the
Fund's assets.

First Trust Advisors is an Illinois limited partnership formed in 1991 and
an investment advisor registered with the Commission under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). First Trust Advisors has
one limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one
general partner, The Charger Corporation. Grace Partners is a limited
partnership with one general partner, The Charger Corporation, and a number of
limited partners. Grace Partners' and The Charger Corporation's primary business
is investment advisory and broker/dealer services through their ownership
interests. The Charger Corporation is an Illinois corporation controlled by
James A. Bowen, Chief Executive Officer of the Advisor. First Trust Advisors is
controlled by Grace Partners and The Charger Corporation.

First Trust Advisors is advisor or sub-advisor to 15 mutual funds, six
exchange-traded funds consisting of 73 series and 12 closed-end funds (including
the Fund) and is the portfolio supervisor of certain unit investment trusts

sponsored by First Trust Portfolios L.P. First Trust Portfolios L.P. specializes
in the underwriting, trading and distribution of unit investment trusts and
other securities. First Trust Portfolios L.P., an Illinois limited partnership
formed in 1991, took over the First Trust product line and acts as sponsor for
successive series of The First Trust Combined Series, FT Series (formerly known
as The First Trust Special Situations Trust), The First Trust Insured Corporate
Trust, The First Trust of Insured Municipal Bonds and The First Trust GNMA. The
First Trust product line commenced with the first insured unit investment trust
in 1974, and to date, more than $175 billion in gross assets have been deposited
in First Trust Portfolios L.P. unit investment trusts.

First Trust Advisors acts as investment advisor to the Fund pursuant to an
Investment Management Agreement. The Investment Management Agreement continues
in effect from year to year after its initial two-year term so long as its
continuation is approved at least annually by the Trustees including a majority
of the Independent Trustees, or the vote of a majority of the outstanding voting
securities of the Fund. It may be terminated at any time without the payment of
any penalty upon 60 days' written notice by either party, or by a majority vote
of the outstanding voting securities of the Fund or by the Board of Trustees
(accompanied by appropriate notice), and will terminate automatically upon its
assignment. The Investment Management Agreement may also be terminated, at any
time, without payment of any penalty, by the Board or by vote of a majority of
the outstanding voting securities of the Fund, in the event that it shall have
been established by a court of competent jurisdiction that the Advisor, or any
officer or director of the Advisor, has taken any action which results in a
breach of the material covenants of the Advisor set forth in the Investment
Management Agreement. The Investment Management Agreement provides that First
Trust Advisors shall not be liable for any loss sustained by reason of the
purchase, sale or retention of any security, whether or not such purchase, sale
or retention shall have been based upon the investigation and research made by
any other individual, firm or corporation, if the recommendation shall have been
selected with due care and in good faith, except loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Advisor in
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the Investment Management
Agreement. As compensation for its services, the Fund pays First Trust Advisors
a fee as described in the Prospectus. See "Management of the Fund--Investment
Management Agreement" in the Fund's Prospectus.

In addition to the fee of the Advisor, the Fund pays all other costs and
expenses of its operations. The costs and expenses paid by the Fund include:
compensation of its Trustees (other than the Trustee affiliated with the
Advisor), custodian, transfer agent, administrative, accounting and dividend
disbursing expenses, legal fees, leverage expenses, expenses of independent
auditors, expenses of repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any. All fees and expenses are accrued
daily and deducted before payment of dividends to investors.

From the commencement of the Fund's operations through August 31, 2012,
the Fund paid the Advisor $37,745,025 of which $15,382,776 was paid by the
Advisor to Four Corners Capital Management, LLC, the Fund's sub-adviser until
October 12, 2010.

CODE OF ETHICS

The Fund and the Advisor have each adopted codes of ethics that comply
with Rule 17j-1 under the 1940 Act. These codes permit personnel subject to the
code to invest in securities that may be purchased or held by the Fund. These
codes can be reviewed and copied at the Commission's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the Commission at (202) 942-8090. The codes of ethics are
available on the EDGAR Database on the Commission's website
(http://www.sec.gov), and copies of these codes may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.

PROXY VOTING PROCEDURES

The Fund has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Fund are voted consistently and solely in the
best economic interests of the Fund.

A senior member of the Advisor is responsible for oversight of the Fund's
proxy voting process. The Advisor has engaged the services of Institutional
Shareholder Services, Inc. ("ISS") to make recommendations to the Advisor on the
voting of proxies relating to securities held by the Fund. ISS provides voting
recommendations based upon established guidelines and practices. The Advisor
reviews ISS recommendations and frequently follows the ISS recommendations.
However, on selected issues, the Advisor may not vote in accordance with the ISS
recommendations when the Advisor believes that specific ISS recommendations are
not in the best economic interest of the Fund. If the Advisor manages the assets
of a company or its pension plan and any of the Advisor's clients hold any
securities in that company, the Advisor will vote proxies relating to that
company's securities in accordance with the ISS recommendations to avoid any
conflict of interest. If a client requests the Advisor to follow specific voting
guidelines or additional guidelines, the Advisor will review the request and
inform the client only if the Advisor is not able to follow the client's
request.

The Advisor has adopted the ISS Proxy Voting Guidelines. While these
guidelines are not intended to be all-inclusive, they do provide guidance on the
Advisor's general voting policies.

When required by applicable regulations, information regarding how the
Fund voted proxies (if any) relating to portfolio securities will be available:
(i) without charge, upon request, by calling (800) 988-5891; (ii) on the Fund's
website at http://www.ftportfolios.com; and (iii) by accessing the Commission's
website at http://www.sec.gov.

PORTFOLIO TRANSACTIONS

The Advisor is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the

negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities are normally
purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in the securities, unless it appears that a better price
or execution may be obtained through other means. Portfolio securities will not
be purchased from the Fund's affiliates except in compliance with the 1940 Act.

With respect to interests in Senior Loans, the Fund may engage in
privately negotiated transactions for purchase or sale in which the Advisor
negotiates on behalf of the Fund. The Advisor identifies and chooses the Lenders
from whom the Fund will purchase assignments and participations by considering
their professional ability, level of service, relationship with the Borrower,
financial condition, credit standards and quality of management. Although the
Fund may hold interests in Senior Loans until maturity or prepayment of the
Senior Loan, the illiquidity of many Senior Loans may restrict the ability of
the Advisor to locate in a timely manner persons willing to purchase the Fund's
interests in Senior Loans at a fair price should the Fund desire to sell its
interests. See "Risks" in the Prospectus.

Substantially all other portfolio transactions will be effected on a
principal (as opposed to an agency) basis and, accordingly, the Fund does not
expect to pay any brokerage commissions. Purchases from underwriters include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers include the spread between the bid and asked price. It is the
policy of the Advisor to seek the best execution under the circumstances of each
trade. The Advisor evaluates price as the primary consideration, with the
financial condition, reputation and responsiveness of the dealer considered
secondary in determining best execution. Given the best execution obtainable, it
is the Advisor's practice to select dealers which, in addition, furnish research
information (primarily credit analyses of issuers and general economic reports)
and statistical and other services to the Advisor. It is not possible to place a
dollar value on information and statistical and other services received from
dealers. Since it is only supplementary to the Advisor's own research efforts,
the receipt of research information does not reduce significantly the Advisor's
expenses. While the Advisor is primarily responsible for the placement of the
business of the Fund, the policies and practices of the Advisor in this regard
must be consistent with the foregoing and is, at all times, subject to review by
the Board of Trustees of the Fund.

Securities considered as investments for the Fund also may be appropriate
for other investment accounts managed by the Advisor or its affiliates. Whenever
decisions are made to buy or sell securities by the Fund and one or more of the
other accounts simultaneously, the Advisor may aggregate the purchases and sales
of the securities and will allocate the securities transactions in a manner
which it believes to be equitable under the circumstances. As a result of the
allocations, there may be instances where the Fund will not participate in a
transaction that is allocated among other accounts. While these aggregation and
allocation policies could have a detrimental effect on the price or amount of
the securities available to the Fund from time to time, it is the opinion of the
Trustees of the Fund that the benefits from the Advisor organization outweigh
any disadvantage that may arise from exposure to simultaneous transactions.

DESCRIPTION OF SHARES

COMMON SHARES

The beneficial interest of the Fund may be divided from time to time into
shares of beneficial interest of such classes and of such designations and par
values (if any) and with such rights, preferences, privileges and restrictions
as shall be determined by the Trustees from time to time in their sole
discretion, without shareholder vote. The Fund's Declaration of Trust initially
authorizes the issuance of an unlimited number of common shares. The Common
Shares being offered have a par value of $0.01 per share and, subject to the
rights of holders of preferred shares, if issued, have equal rights as to the
payment of dividends and the distribution of assets upon liquidation of the
Fund. The Common Shares being offered will, when issued, be fully paid and,
subject to matters discussed in "Certain Provisions in the Declaration of Trust
and By-Laws," non-assessable, and currently have no pre-emptive or conversion
rights (except as may otherwise be determined by the Trustees in their sole
discretion) or rights to cumulative voting in the election of Trustees.

It is anticipated that the Common Shares will be approved for listing on
the New York Stock Exchange, subject to notice of issuance. The trading or
"ticker" symbol of the Common Shares will be "FCT". The Fund holds annual
meetings of shareholders so long as the common shares of beneficial interest in
the Fund are listed on a national securities exchange and such meetings are
required as a condition to such listing.

Shares of closed-end investment companies may frequently trade at prices
lower than NAV. NAV will be reduced immediately following this offering after
payment of the sales load and offering expenses. Although the value of the
Fund's net assets is generally considered by market participants in determining
whether to purchase or sell shares, whether investors will realize gains or
losses upon the sale of Common Shares will depend entirely upon whether the
market price of the Common Shares at the time of sale is above or below the
original purchase price for the shares. Since the market price of the Fund's
Common Shares will be determined by factors beyond the control of the Fund, the
Fund cannot predict whether the Common Shares will trade at, below, or above NAV
or at, below or above the initial public offering price. Accordingly, the Common
Shares are designed primarily for long-term investors, and investors in the
Common Shares should not view the Fund as a vehicle for trading purposes. See
"Repurchase of Fund Shares; Conversion to Open-End Fund" below and "The Fund's
Investments" in the Fund's Prospectus.

PREFERRED SHARE AUTHORIZATION

Under the terms of the Declaration of Trust, the Board of Trustees has the
authority in its sole discretion, without prior approval of the Fund's common
shareholders, to authorize the issuance of preferred shares in one or more
classes or series with such rights and terms, including voting rights, dividend
rates, redemption provisions, liquidation preferences and conversion provisions,
as determined by the Board of Trustees.

BORROWINGS

The Declaration of Trust authorizes the Fund, without prior approval of
the Fund's common shareholders, to borrow money. In this connection, the Fund
may issue notes or other evidence of indebtedness (including bank borrowings or
commercial paper) ("Borrowings") and may secure any such Borrowings by
mortgaging, pledging or otherwise subjecting as security the Fund's assets. In
connection with such Borrowings, the Fund may be required to maintain average
balances with the lender or to pay a commitment or other fee to maintain a line
of credit. Any such requirements will increase the cost of borrowing over the
borrowing instrument's stated interest rate. The Fund may borrow from banks and
other financial institutions.

Limitations on Borrowings. Under the requirements of the 1940 Act, the
Fund, immediately after any Borrowings, must have an "asset coverage" of at
least 300% (33-1/3% of Managed Assets after Borrowings). With respect to such
Borrowings, "asset coverage" means the ratio which the value of the total assets
of the Fund, less all liabilities and indebtedness not represented by senior
securities (as defined in the 1940 Act), bears to the aggregate amount of such
Borrowings represented by senior securities issued by the Fund. Certain types of
Borrowings may result in the Fund being subject to covenants in credit
agreements relating to asset coverage or portfolio composition or otherwise. In
addition, the Fund may be subject to certain restrictions imposed by the
guidelines of one or more NRSROs which may issue ratings for short-term
corporate debt securities and/or preferred shares issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.

Distribution Preference. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such Borrowings will be senior to
those of the Fund's common shareholders, and the terms of any such Borrowings
may contain provisions which limit certain activities of the Fund, including the
payment of dividends to the Fund's common shareholders in certain circumstances.

Voting Rights. The 1940 Act grants (in certain circumstances) to the
lenders to the Fund certain voting rights in the event the asset coverage falls
below specified levels. In the event that the Fund elects to be treated as a
regulated investment company under the Code and such provisions would impair the
Fund's status as a regulated investment company, the Fund, subject to its
ability to liquidate its portfolio, intends to repay the Borrowings as soon as
practicable. Any Borrowings will likely be ranked senior or equal to all other
existing and future borrowings of the Fund.

The discussion above describes the Fund's Board of Trustees' present
intention with respect to Borrowings. If authorized by the Board of Trustees,
the terms of any Borrowings may be the same as, or different from, the terms
described above, subject to applicable law and the Fund's Declaration of Trust.

CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS

obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration of Trust further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund solely by reason of his or her being a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Fund believes that the likelihood of such circumstances is
remote.

Generally, the Declaration of Trust requires the affirmative vote or
consent by holders of at least two-thirds of the shares outstanding and entitled
to vote, except as described below, to authorize: (i) a conversion of the Fund
from a closed-end to an open-end investment company; (ii) a merger or
consolidation of the Fund with any corporation, association, trust or other
organization, including a series or class of such other organization (other than
a merger, consolidation, reorganization or sale of assets with an acquiring fund
that is not an operating entity immediately prior to the transaction); (iii) a
sale, lease or exchange of all or substantially all of the Fund's assets (other
than in the regular course of business of the Fund, sales of assets in
connection with the termination of the Fund as provided in the Declaration of
Trust, or sale of assets with an acquiring fund that is not an operating entity
immediately prior to the transaction); (iv) in certain circumstances, a
termination of the Fund; (v) removal of Trustees by shareholders; or (vi)
certain transactions in which a Principal Shareholder (as defined below) is a
party to the transactions. However, with respect to items (i), (ii) and (iii)
above, if the applicable transaction has been already approved by the
affirmative vote of two-thirds of the Trustees, then the majority of the
outstanding voting securities as defined in the 1940 Act (a "Majority
Shareholder Vote") is required. In addition, if there are then preferred shares
outstanding, with respect to (i) above, two-thirds of the preferred shares
voting as a separate class shall also be required unless the action has already
been approved by two-thirds of the Trustees, in which case then a Majority
Shareholder Vote is required. Such affirmative vote or consent shall be in
addition to the vote or consent of the holders of the shares otherwise required
by law or by the terms of any class or series of preferred shares, whether now
or hereafter authorized, or any agreement between the Fund and any national
securities exchange. Further, in the case of items (ii) or (iii) that constitute
a plan of reorganization (as such term is used in the 1940 Act) which adversely
affects the preferred shares within the meaning of Section 18(a)(2)(D) of the

1940 Act, except as may otherwise be required by law, the approval of the action
in question will also require the affirmative vote of two-thirds of the
preferred shares voting as a separate class, provided, however, that such
separate class vote shall be by a Majority Shareholder Vote if the action in
question has previously been approved by the affirmative vote of two-thirds of
the Trustees.

Approval of shareholders is not required, however, for any transaction,
whether deemed a merger, consolidation, reorganization or otherwise whereby the
Fund issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the shares outstanding and entitled to vote.

As noted above, pursuant to the Declaration of Trust, the affirmative
approval of two-thirds of the shares outstanding and entitled to vote, subject
to certain exceptions, shall be required for the following transactions in which
a Principal Shareholder (as defined below) is a party: (i) the merger or
consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of the Fund to any
Principal Shareholder for cash other than pursuant to a dividend reinvestment or
similar plan available to all shareholders; (iii) the sale, lease or exchange of
all or any substantial part of the assets of the Fund to any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period); (iv) the sale, lease or exchange to the Fund or any subsidiary thereof,
in exchange for securities of the Fund, of any assets of any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period). However, shareholder approval for the foregoing transactions shall not
be applicable to (i) any transaction, including, without limitation, any rights
offering, made available on a pro rata basis to all shareholders of the Fund or
class thereof unless the Trustees specifically make such transaction subject to
this voting provision, (ii) any transaction if the Trustees shall by resolution
have approved a memorandum of understanding with such Principal Shareholder with
respect to and substantially consistent with such transaction or (iii) any such
transaction with any corporation of which a majority of the outstanding shares
of all classes of stock normally entitled to vote in elections of directors is
owned of record or beneficially by the Fund and its subsidiaries. As described
in the Declaration of Trust, a Principal Shareholder shall mean any corporation,
person or other entity which is the beneficial owner, directly or indirectly, of
more than 5% of the outstanding shares and shall include any affiliate or
associate (as such terms are defined in the Declaration of Trust) of a Principal
Shareholder. The above affirmative vote shall be in addition to the vote of the
shareholders otherwise required by law or by the terms of any class or series of
preferred shares, whether now or hereafter authorized, or any agreement between
the Fund and any national securities exchange.

The provisions of the Declaration of Trust described above could have the
effect of depriving the common shareholders of opportunities to sell their
common shares at a premium over market value by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar transaction.
The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They

provide, however, the advantage of potentially requiring persons seeking control
of the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
Board of Trustees of the Fund has considered the foregoing anti-takeover
provisions and concluded that they are in the best interests of the Fund and its
common shareholders.

The Declaration of Trust provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable to any person in
connection with the Fund property or the affairs of the Fund or for any neglect
or wrongdoing of any officer, employee or agent of the Fund or for the act or
omission of any other Trustee. Nothing in the Declaration, however, protects a
Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office with or on behalf of the
Fund.

Reference should be made to the Declaration of Trust on file with the
Commission for the full text of these provisions.

REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND

The Fund is a closed-end investment company and as such its shareholders
do not have the right to cause the Fund to redeem their shares. Instead, the
Fund's common shares trade in the open market at a price that is a function of
several factors, including dividend levels (which are in turn affected by
expenses), NAV, call protection, price, dividend stability, relative demand for
and supply of such shares in the market, general market and economic conditions
and other factors. Because shares of a closed-end investment company may
frequently trade at prices lower than NAV, the Trustees, in consultation with
the Fund's Advisor and the corporate finance services and consulting agent that
the Advisor has retained from time to time, may review possible actions to
reduce any such discount. Actions may include the repurchase of such shares in
the open market or in private transactions, the making of a tender offer for
such shares, or the conversion of the Fund to an open-end investment company.
There can be no assurance, however, that the Trustees will decide to take any of
these actions, or that share repurchases or tender offers, if undertaken, will
reduce a market discount. After any consideration of potential actions to seek
to reduce any significant market discount, the Trustees may, subject to their
fiduciary obligations and compliance with applicable state and federal laws,
authorize the commencement of a share-repurchase program or tender offer. The
size and timing of any such share repurchase program or tender offer will be
determined by the Trustees in light of the market discount of the common shares,
trading volume of the common shares, information presented to the Trustees
regarding the potential impact of any such share repurchase program or tender
offer, and general market and economic conditions, among other things. There can
be no assurance that the Fund will in fact effect repurchases of or tender
offers for any of its common shares. Before deciding whether to take any action
if the Fund's common shares trade below NAV, the Trustees would consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action that might be taken
on the Fund or its shareholders and market considerations. Based on these

considerations, even if the Fund's shares should trade at a discount, the
Trustees may determine that, in the interest of the Fund and its shareholders,
no action should be taken.

Further, the staff of the Commission currently requires that any tender
offer made by a closed-end investment company for its shares must be at a price
equal to the NAV of such shares on the close of business on the last day of the
tender offer. Any service fees incurred in connection with any tender offer made
by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.

Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will increase the Fund's expenses
and reduce the Fund's net income. Any share repurchase, tender offer or
borrowing that might be approved by the Trustees would have to comply with the
1934 Act and the 1940 Act and the rules and regulations thereunder.

Although the decision to take action in response to a discount from NAV
will be made by the Trustees at the time they consider such issue, it is the
Trustees' present policy, which may be changed by the Trustees, not to authorize
repurchases of common shares or a tender offer for such shares if (i) such
transactions, if consummated, would (a) result in the delisting of the common
shares from the New York Stock Exchange, or (b) impair the Fund's status as a
registered closed-end investment company under the 1940 Act; (ii) the Fund would
not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objective and policies in order to
repurchase shares; or (iii) there is, in the Board of Trustees' judgment, any
(a) material legal action or proceeding instituted or threatened challenging
such transactions or otherwise materially adversely affecting the Fund, (b)
general suspension of or limitation on prices for trading securities on the New
York Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or state banks in
which the Fund invests, (d) material limitation affecting the Fund or the
issuers of its portfolio securities by Federal or state authorities on the
extension of credit by lending institutions or on the exchange of non-U.S.
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Fund or its shareholders if shares were
repurchased. The Trustees may in the future modify these conditions in light of
experience with respect to the Fund.

Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's shares outstanding and entitled to
vote; provided, however, that unless otherwise provided by law, if there are
preferred shares outstanding, the affirmative vote of two-thirds of the
preferred shares voting as a separate class shall be required; provided,
however, that such votes shall be by the affirmative vote of the majority of the
outstanding voting securities, as defined in the 1940 Act, if the action in
question was previously approved by the affirmative vote of two-thirds of the
Trustees. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the shares otherwise required by law or by the terms
of any class or series of preferred shares, whether now or hereafter authorized,
or any agreement between the Fund and any national securities exchange. See the
Prospectus under "Closed-End Fund Structure" for a discussion of voting

requirements applicable to conversion of the Fund to an open-end company. If the
Fund converted to an open-end company, the Fund's common shares would no longer
be listed on the New York Stock Exchange. Any Preferred Shares would need to be
redeemed and any Borrowings may need to be repaid upon conversion to an open-end
investment company. Additionally, the 1940 Act imposes limitations on open-end
funds' investments in illiquid securities, which could restrict the Fund's
ability to invest in certain securities discussed in the Prospectus to the
extent discussed therein. Such limitations could adversely affect distributions
to Fund common shareholders in the event of conversion to an open-end fund.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Trustees may at any time
propose conversion of the Fund to an open-end company depending upon their
judgment as to the advisability of such action in light of circumstances then
prevailing.

The repurchase by the Fund of its shares at prices below NAV will result
in an increase in the NAV of those shares that remain outstanding. However,
there can be no assurance that share repurchases or tenders at or below NAV will
result in the Fund's shares trading at a price equal to their NAV. Nevertheless,
the fact that the Fund's shares may be the subject of repurchase or tender
offers from time to time may reduce any spread between market price and NAV that
might otherwise exist.

In addition, a purchase by the Fund of its common shares will decrease the
Fund's Managed Assets which would likely have the effect of increasing the
Fund's expense ratio.

NET ASSET VALUE

The NAV of the common shares of the Fund is computed based upon the value
of the Fund's portfolio securities and other assets. The NAV is determined daily
as of the close of regular session trading on the New York Stock Exchange
(normally 4:00 p.m. eastern time) on each day the New York Stock Exchange is
open for trading. Domestic debt securities and foreign securities will normally
be priced using data reflecting the earlier closing of the principal markets for
those securities. The Fund calculates NAV per common share 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 from the Fund's Managed Assets (the value of the 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 assets in the Fund's portfolio are valued daily in accordance with
Valuation Procedures adopted by the Board of Trustees. A majority of the Fund's
assets will likely be 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, the Fund may
use a fair value method in good faith 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 Board of Trustees, and in accordance with the
provisions of the 1940 Act.

For purposes of determining the NAV of the Fund, readily marketable
portfolio securities listed on any exchange other than the NASDAQ National
Market are valued, except as indicated below, 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 admitted to trade on the NASDAQ
National Market 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.

U.S. Equity securities traded in the over-the-counter market, but
excluding securities admitted to trading on the NASDAQ National Market, are
valued at the closing bid prices. Fixed income securities with a remaining
maturity of 60 days or more will be valued by the Fund using a pricing service.
When price quotes are not available, fair market value is based on prices of
comparable securities. Fixed income securities maturing within 60 days are
valued by the Fund on an amortized cost basis. Non-U.S. securities, currencies
and other assets denominated in non-U.S. currencies are translated into U.S.
dollars at the exchange rate of such currencies against the U.S. dollar as
provided by a pricing service. All assets denominated in non-U.S. currencies
will be converted into U.S. dollars at the exchange rates in effect at the time
of valuation.

Any derivative transaction that the Fund enters into may, depending on the
applicable market environment, have a positive or negative value for purposes of
calculating NAV. Forward foreign currency exchange contracts which are traded in
the United States on regulated exchanges are valued by calculating the mean
between the last bid and asked quotation supplied to a pricing service by
certain independent dealers in such contracts. Any option transaction that the
Fund enters into may, depending on the applicable market environment, have no
value or a positive value. Exchange traded options and futures contracts are
valued at the closing price in the market where such contracts are principally
traded.

Senior Loans and Illiquid Securities. The Senior Loans in which the Fund
may invest are not listed on any securities exchange or board of trade. Senior
Loans are typically bought and sold by institutional investors in individually
negotiated private transactions that function in many respects like an
over-the-counter secondary market, although typically no formal market-makers
exist. Some Senior Loans have few or no trades, or trade infrequently, and
information regarding a specific Senior Loan may not be widely available or may
be incomplete.

Accordingly, determinations of the market value of Senior Loans and other
illiquid securities may be based on infrequent and dated information. Because
there is less reliable, objective data available, elements of judgment may play

a greater role in valuation of infrastructure Senior Loans and other illiquid
securities held by the Fund than for other types of assets held by the Fund. For
further information, see "Risks--Management Risk--Senior Loans" and
"Risks--Management Risk--Valuation Difficulties" in the Fund's Prospectus.

Typically Senior Loans and other illiquid securities are valued using
information provided by an independent third party pricing service. If the
pricing service cannot or does not provide a valuation for a particular Senior
Loan (which is the case for most, if not all, unlisted investments) or such
valuation is deemed unreliable, the Fund may value such Senior Loan at a fair
value as determined in good faith under procedures established by the Board of
Trustees, and in accordance with the provisions of the 1940 Act.

Foreign Listed Securities. Foreign exchange-listed securities will
generally be valued using information provided by an independent third party
pricing service. If the pricing service cannot or does not provide a valuation
for a particular foreign listed security or such valuation is deemed unreliable,
the Board of Trustees or its designee may value such security at a fair value as
determined in good faith under procedures established by the Board of Trustees,
and in accordance with the provisions of the 1940 Act.

Fair Value. When applicable, fair value is determined by the Board of
Trustees or a committee of the Board or a designee of the Board. In fair valuing
the Fund's investments, consideration is given to several factors, which may
include, among others, the following:

o the fundamental business data relating to the issuer;

o an evaluation of the forces which influence the market in which the
securities of the issuer are purchased and sold;

o the type, size and cost of the security;

o the financial statements of the issuer;

o the credit quality and cash flow of issuer, based on the Advisor's
external analysis;

o the information as to any transactions in or offers for the
security;

o the price and extent of public trading in similar securities (or
equity securities) of the issuer, or comparable companies;

o the coupon payments;

o the quality, value and saleability of collateral, if any, securing
the security;

o the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;

o the prospects for the issuer's industry, and multiples (of earnings
and/or cash flow) being paid for similar businesses in that
industry;

o the issuer's competitive position within the industry;

o The issuer's ability to access additional liquidity through public
and private markets; and

o other relevant factors.

FEDERAL INCOME TAX MATTERS

The following discussion of federal income tax matters is based upon the
advice of Chapman and Cutler LLP, counsel to the Fund.

GENERAL

Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion also does not address the tax
consequences to shareholders that are subject to special rules, including
without limitation, banks or financial institutions, insurance companies,
dealers in securities, non-U.S. shareholders, tax-exempt or tax-deferred plans,
accounts or entities, shareholders that are subject to the alternative minimum
tax or shareholders that hold their shares as or in a hedge against currency
risk, constructive sale or a conversion transaction. Unless otherwise noted,
this discussion assumes you are a U.S. shareholder and that you hold your shares
as a capital asset. This discussion is based upon present provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. In addition,
this discussion does not address state, local or foreign tax consequences.
Prospective investors should consult their own tax advisors with regard to the
federal tax consequences of the purchase, ownership, or disposition of Fund
shares, as well as the tax consequences arising under the laws of any state,
locality, non-U.S. country, or other taxing jurisdiction.

The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Code and to comply with applicable
distribution requirements so that it will not pay federal income tax on income
and capital gains distributed to its shareholders.

Subject to certain exceptions for de minimis failures and reasonable
cause, to qualify for the favorable U.S. federal income tax treatment generally
accorded to regulated investment companies, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock, securities or foreign currencies or other income
derived with respect to its business of investing in such stock, securities or
currencies; (b) diversify its holdings so that, at the end of each quarter of

the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items (including receivables), U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer generally limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. Government securities or
the securities of other regulated investment companies) of any one issuer, or
two or more issuers which the Fund controls and are engaged in the same, similar
or related trades or businesses; and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of net long-term capital
losses) and at least 90% of its net tax-exempt interest income each taxable
year.

As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income (as that
term is defined in the Code, but without regard to the deduction for dividends
paid) and net capital gain (the excess of net long-term capital gain over net
short-term capital loss), if any, that it distributes to shareholders. The Fund
intends to distribute to its shareholders, at least annually, substantially all
of its investment company taxable income and net capital gain. If the Fund
retains any net capital gain or investment company taxable income, it will
generally be subject to federal income tax at regular corporate rates on the
amount retained. In addition, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax unless, generally, the Fund distributes during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98.2% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years. To prevent application of
the excise tax, the Fund intends to make its distributions in accordance with
the calendar year distribution requirement. A distribution will be treated as
paid on December 31 of the current calendar year if it is declared by the Fund
in October, November or December with a record date in such a month and paid by
the Fund during January of the following calendar year. These distributions will
be taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.

If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income.

DISTRIBUTIONS

Dividends paid out of the Fund's investment company taxable income
generally are taxable to a shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, pursuant to the "Jobs and Growth Tax Relief Reconciliation Act
of 2003" (the "Tax Act"), if the Fund holds equity securities, certain ordinary

income distributions received from the Fund may be taxed at lower tax rates. In
particular, under the Tax Act, a portion of the ordinary income dividends
received by an individual shareholder from a regulated investment company such
as the Fund are generally taxed at the same rates that apply to net capital
gain, provided certain holding period requirements are satisfied and provided
the dividends are attributable to "qualified dividends" received by the Fund
itself (i.e., generally 15% or 5% for taxpayers in the 10% and 15% tax
brackets). Dividends received by the Fund from REITs and foreign corporations
are qualified dividends eligible for this lower tax rate only in certain
circumstances. These special rules relating to the taxation of ordinary income
dividends from regulated investment companies generally apply to taxable years
beginning before January 1, 2013. The Fund generally does not expect to generate
qualified dividends eligible for the lower tax rates.

Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly designated as capital
gain dividends are taxable to a shareholder as long-term capital gains,
regardless of how long the shareholder has held Fund shares. Shareholders
receiving distributions in the form of additional shares, rather than cash,
generally will have a cost basis in each such share equal to the value of a
share of the Fund on the reinvestment date. A distribution of an amount in
excess of the Fund's current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied against and
reduces the shareholder's basis in his or her shares. To the extent that the
amount of any distribution exceeds the shareholder's basis in his or her shares,
the excess will be treated by the shareholder as gain from a sale or exchange of
the shares.

Shareholders will be notified annually as to the U.S. federal tax status
of distributions, and shareholders receiving distributions in the form of
additional shares will receive a report as to the value of those shares.

DIVIDENDS RECEIVED DEDUCTION

A corporation that owns shares generally will not be entitled to the
dividends received deduction with respect to dividends received from the Fund
because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, if the Fund holds
equity securities, certain ordinary income dividends on shares that are
attributable to dividends received by the Fund from certain domestic
corporations may be designated by the Fund as being eligible for the dividends
received deduction but this amount is not expected to be significant.

SALE OR EXCHANGE OF FUND SHARES

Upon the sale or other disposition of shares of the Fund, which a
shareholder holds as a capital asset, a shareholder may realize a capital gain
or loss which will be long-term or short-term, depending upon the shareholder's
holding period for the shares. Generally, a shareholder's gain or loss will be a
long-term gain or loss if the shares have been held for more than one year.

Any loss realized on a sale or exchange will be disallowed to the extent
that shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of shares or to the extent that the shareholder, during
such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In this case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gain received by the
shareholder with respect to the shares.

MEDICARE TAX

Under the "Health Care and Education Reconciliation Act of 2010," income
from the Fund may also be subject to a new 3.8 percent "medicare tax" imposed
for taxable years beginning after 2012. This tax will generally apply to the net
investment income of individual investors if your adjusted gross income exceeds
certain threshold amounts, which are $250,000 in the case of married couples
filing joint returns and $200,000 in the case of single individuals.

NATURE OF THE FUND'S INVESTMENTS

Certain of the Fund's investment practices may be subject to special and
complex federal income tax provisions that may, among other things, (1)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (2) convert lower taxed long-term capital gain into higher taxed
short-term capital or ordinary income, (3) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (4)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (5) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (6) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions,
will make the appropriate tax elections and take appropriate actions in order to
mitigate the effect of these rules and prevent disqualification of the Fund from
being taxed as a regulated investment company (including disposing of certain
investments to generate cash or borrowing cash to satisfy its distribution
requirements).

INVESTMENTS IN CERTAIN FOREIGN CORPORATIONS

The Fund may invest a portion of its portfolio in Senior Loans of non-U.S.
borrowers. Because of the nature of Senior Loans, there is an increased risk
that a portion of the Senior Loans may be recharacterized as equity for U.S.
federal income tax purposes. If the Fund holds an equity interest in any
"passive foreign investment companies" ("PFICs"), which are generally certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, certain rents and royalties or
capital gains) or that hold at least 50% of their assets in investments
producing such passive income, the Fund could be subject to U.S. federal income
tax and additional interest charges on gains and certain distributions with
respect to those equity interests, even if all the income or gain is timely
distributed to its shareholders. The Fund will not be able to pass through to
its shareholders any credit or deduction for such taxes. The Fund may be able to

make an election that could ameliorate these adverse tax consequences. In this
case, the Fund would recognize as ordinary income any increase in the value of
such PFIC shares, and as ordinary loss any decrease in such value to the extent
it did not exceed prior increases included in income. Under this election, the
Fund might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock during
that year, and such income would nevertheless be subject to the distribution
requirement and would be taken into account for purposes of the 4% excise tax.
Dividends paid by PFICs will not be treated as qualified dividend income.

BACKUP WITHHOLDING

The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. The withholding percentage
is 28% until 2013, when the percentage will revert to 31% unless amended by
Congress. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from backup withholding. This withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability.

FOREIGN INVESTORS

If you are a foreign investor (i.e., investor other than a U.S. citizen or
resident or a U.S. corporation, partnership, estate or fund), you should be
aware that, generally, subject to applicable tax treaties, distributions from
the Fund will be characterized as dividends for federal income tax purposes
(other than dividends which the Fund designates as capital gain dividends) and
will be subject to U.S. federal income taxes, including withholding taxes,
subject to certain exceptions described below. However, distributions received
by a foreign investor from the Fund that are properly designated by the Fund as
capital gain dividends may not be subject to U.S. federal income taxes,
including withholding taxes, provided that the Fund makes certain elections and
certain other conditions are met. There can be no assurance as to what portion,
if any, of the Fund's distributions will constitute interest related dividends
or short-term capital gain dividends. Foreign investors should consult their tax
advisors with respect to U.S. tax consequences of ownership of common shares.

In addition, distributions after December 31, 2013 may be subject to a
U.S. withholding tax of 30% in the case of distributions to (i) certain non-U.S.
financial institutions that either (A) have not entered into an agreement with
the U.S. Treasury to collect and disclose certain information or (B) are not
resident for tax purposes in a jurisdiction that has entered into an agreement
with the IRS to collect and provide the information otherwise required and (ii)
certain other non-U.S. entities that do not provide certain certifications and
information about the entity's U.S. owners. The gross proceeds from dispositions
of units in the Fund may be subject to withholding after December 31, 2014,
under similar requirements.

PERFORMANCE RELATED AND COMPARATIVE INFORMATION

The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds or indices. In reports or other communications to shareholders
of the Fund or in advertising materials, the Fund may compare its performance
with that of (i) other investment companies listed in the rankings prepared by
Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services;
publications such as Barrons, Business Week, Forbes, Fortune, Institutional
Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values,
The New York Times, The Wall Street Journal and USA Today; or other industry or
financial publications or (ii) the Standard & Poor's Index of 500 Stocks, the
Dow Jones Industrial Average, NASDAQ Composite Index and other relevant indices
and industry publications. The Fund may also compare the historical volatility
of its portfolio to the volatility of such indices during the same time periods.
(Volatility is a generally accepted barometer of the market risk associated with
a portfolio of securities and is generally measured in comparison to the stock
market as a whole -- the beta -- or in absolute terms -- the standard
deviation.) Comparison of the Fund to an alternative investment should be made
with consideration of differences in features and expected performance. The Fund
may obtain data from sources or reporting services, such as Bloomberg Financial
and Lipper Inc., that the Fund believes to be generally accurate.

The Fund may, from time to time, show the standard deviation of either the
Fund or the Fund's investment strategy and the standard deviation of the Fund's
benchmark index. Standard deviation is a statistical measure of the historical
volatility of a portfolio. Standard deviation is the measure of dispersion of
historical returns around the mean rate of return.

From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to shareholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and type of the respective investment companies' portfolio
securities.

The Fund's "average annual total return" is computed according to a
formula prescribed by the Commission. The formula can be expressed as follows:

Average Annual Total Return will be computed as follows:

ERV = P(1+T)/n/

Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion).

The Fund may also quote after-tax total returns to show the impact of
assumed federal income taxes on an investment in the Fund. The Fund's total
return "after taxes on distributions" shows the effect of taxable distributions,
but not any taxable gain or loss, on an investment in shares of the Fund for a
specified period of time. The Fund's total return "after taxes on distributions
and sale of Fund shares" shows the effect of both taxable distributions and any
taxable gain or loss realized by the shareholder upon the sale of Fund shares at
the end of a specified period. To determine these figures, all income,
short-term capital gain distributions, and long-term capital gains distributions
are assumed to have been taxed at the highest marginal individualized federal
tax rate then in effect. Those maximum tax rates are applied to distributions
prior to reinvestment and the after-tax portion is assumed to have been
reinvested in the Fund. State and local taxes are ignored.

Actual after-tax returns depend on a shareholder's tax situation and may
differ from those shown. After-tax returns reflect past tax effects and are not
predictive of future tax effects.

Average Annual Total Return (After Taxes on Distributions) will be
computed as follows:

ATV/D/ = P(1+T)/n/

Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D/ = ending value of a hypothetical $1,000 investment made at the
beginning of the period, at the end of the period (or fractional
portion thereof), after taxes on fund distributions but not
after taxes on redemptions.

Average Annual Total Return (After Taxes on Distributions and Sale of Fund
Shares) will be computed as follows:

ATV/DR/ = P(1+T)/n/

Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions and
redemption)
n = number of years
ATV/DR/ = ending value of a hypothetical $1,000 investment made at the
beginning periods, at the end of the periods (or fractional
portion thereof), after taxes on fund distributions and
redemptions.

Quotations of yield for the Fund will be based on all investment income
per share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:

Yield = 2 [( a-b/cd +1)/6/ - 1]

Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period

Past performance is not indicative of future results. At the time
shareholders sell their shares, they may be worth more or less than their
original investment.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Financial Statements of the Fund as of May 31, 2012, incorporated by
reference in this Statement of Additional Information, have been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as set
forth in their report thereon incorporated by reference in this Statement of
Additional Information, and are incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing services.
Deloitte & Touche LLP provides auditing services to the Fund. The principal
business address of Deloitte & Touche LLP is 111 South Wacker Drive, Chicago,
Illinois 60606.

CUSTODIAN, ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT

The Bank of New York Mellon ("BNY Mellon") serves as custodian for the
Fund. As such, BNY Mellon has custody of all securities and cash of the Fund and
attends to the collection of principal and income and payment for and collection
of proceeds of securities bought and sold by the Fund. BNY Mellon Investment
Servicing (US) Inc. ("BNY Mellon Servicing"), 301 Bellevue Parkway, Wilmington,

Delaware 19809, is the transfer agent, registrar, dividend disbursing agent and
shareholder servicing agent for the Fund and provides certain clerical,
bookkeeping, shareholder servicing and administrative services necessary for the
operation of the Fund and maintenance of shareholder accounts. BNY Mellon
Servicing also provides certain accounting and administrative services to the
Fund pursuant to an Administration and Accounting Services Agreement, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records; acting as liaison with the
Fund's independent registered public accounting firm and providing such
accountant with certain Fund accounting information; and providing other
continuous accounting and administrative services.

ADDITIONAL INFORMATION

A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Commission. The Fund's Prospectus, any prospectus supplement and this
Statement of Additional Information do not contain all of the information set
forth in the Registration Statement, including any exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the Fund's Registration Statement. Statements
contained in the Fund's Prospectus, any prospectus supplement and this Statement
of Additional Information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Copies of the Registration Statement may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.

FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Fund's financial statements and financial highlights and the report
of Deloitte & Touche LLP thereon, contained in the following documents filed by
the Fund with the Commission, are hereby incorporated by reference into, and are
made part of, this Statement of Additional Information: The Fund's Annual Report
for the year ended May 31, 2012 contained in the Fund's Form N-CSR filed with
the Commission on August 1, 2012. A copy of such Annual Report must accompany
the delivery of this Statement of Additional Information.

F-1

APPENDIX A

RATINGS OF INVESTMENTS

STANDARD & POOR'S RATINGS GROUP -- A BRIEF DESCRIPTION OF CERTAIN STANDARD
& POOR'S RATINGS GROUP, A DIVISION OF THE MCGRAW-HILL COMPANIES ("STANDARD &
POOR'S" OR "S&P") RATING SYMBOLS AND THEIR MEANINGS (AS PUBLISHED BY S&P)
FOLLOWS:

A Standard & Poor's issue credit rating is a forward-looking opinion about
the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium-term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes into
account the currency in which the obligation is denominated. The opinion
reflects Standard & Poor's view of the obligor's capacity and willingness to
meet its financial commitments as they become due, and may assess terms, such as
collateral security and subordination, which could affect ultimate payment in
the event of default.

Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days--including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.

LONG-TERM ISSUE CREDIT RATINGS

Issue credit ratings are based, in varying degrees, on Standard & Poor's
analysis of the following considerations:

o Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;

o Nature of and provisions of the obligation; and

o Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.

Issue ratings are an assessment of default risk, but may incorporate an
assessment of relative seniority or ultimate recovery in the event of default.
Junior obligations are typically rated lower than senior obligations, to reflect
the lower priority in bankruptcy as noted above. (Such differentiation may apply

A-1

when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company obligations.)

AAA

An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.

An obligation rated 'AA' differs from the highest-rated obligations only
to a small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

BBB

An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

BB, B, CCC, CC, AND C

Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

A-2

CCC

An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

An obligation rated 'CC' is currently highly vulnerable to nonpayment.

A 'C' rating is assigned to obligations that are currently highly
vulnerable to nonpayment, obligations that have payment arrearages allowed by
the terms of the documents, or obligations of an issuer that is the subject of a
bankruptcy petition or similar action which have not experienced a payment
default. Among others, the 'C' rating may be assigned to subordinated debt,
preferred stock or other obligations on which cash payments have been suspended
in accordance with the instrument's terms or when preferred stock is the subject
of a distressed exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other instruments having a
total value that is less than par.

An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation, including a regulatory capital instrument,
are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action if payments on an obligation
are jeopardized. An obligation's rating is lowered to 'D' upon completion of a
distressed exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other instruments having a
total value that is less than par.

Plus (+) or minus (-)

The ratings from 'AA' to 'CCC' may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating
categories.

This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.

A-3

SHORT-TERM ISSUE CREDIT RATINGS

A-1

A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.

A-2

A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

A-3

A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. Ratings of 'B-1', 'B-2', and 'B-3' may be assigned
to indicate finer distinctions within the 'B' category. The obligor currently
has the capacity to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.

B-1

A short-term obligation rated 'B-1' is regarded as having significant
speculative characteristics, but the obligor has a relatively stronger capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors.

B-2

A short-term obligation rated 'B-2' is regarded as having significant
speculative characteristics, and the obligor has an average speculative-grade
capacity to meet its financial commitments over the short-term compared to other
speculative-grade obligors.

A-4

B-3

A short-term obligation rated 'B-3' is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity to
meet its financial commitments over the short-term compared to other
speculative-grade obligors. C

A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.

A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation, including a regulatory capital
instrument, are not made on the date due even if the applicable grace period has
not expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.

SPUR (STANDARD & POOR'S UNDERLYING RATING)

This is a rating of a stand-alone capacity of an issue to pay debt service
on a credit-enhanced debt issue, without giving effect to the enhancement that
applies to it. These ratings are published only at the request of the debt
issuer/obligor with the designation SPUR to distinguish them from the
credit-enhanced rating that applies to the debt issue. Standard & Poor's
maintains surveillance of an issue with a published SPUR.

MUNICIPAL SHORT-TERM NOTE RATINGS DEFINITIONS

A Standard & Poor's U.S. municipal note rating reflects Standard & Poor's
opinion about the liquidity factors and market access risks unique to the notes.
Notes due in three years or less will likely receive a note rating. Notes with
an original maturity of more than three years will most likely receive a
long-term debt rating. In determining which type of rating, if any, to assign,
Standard & Poor's analysis will review the following considerations:

o Amortization schedule--the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and

o Source of payment--the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.

A-5

Note rating symbols are as follows:

SP-1

Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.

SP-2

Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.

SP-3

Speculative capacity to pay principal and interest.

DUAL RATINGS

Standard and Poor's assigns "dual" ratings to all debt issues that have a
put option or demand feature as part of their structure. The first rating
addresses the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term rating symbols
are used for bonds to denote the long-term maturity and the short-term rating
symbols for the put option (for example, 'AAA/A-1+'). With U.S. municipal
short-term demand debt, note rating symbols are used with the short-term issue
credit rating symbols (for example, 'SP-1+/A-1+').

ACTIVE QUALIFIERS (CURRENTLY APPLIED AND/OR OUTSTANDING)

This subscript is used for issues in which the credit factors, terms, or
both, that determine the likelihood of receipt of payment of interest are
different from the credit factors, terms or both that determine the likelihood
of receipt of principal on the obligation. The 'i' subscript indicates that the
rating addresses the interest portion of the obligation only. The 'i' subscript
will always be used in conjunction with the 'p' subscript, which addresses the
likelihood of receipt of principal. For example, a rated obligation could be
assigned ratings of 'AAAp NRi' indicating that the principal portion is rated
'AAA' and the interest portion of the obligation is not rated.

Ratings qualified with 'L' apply only to amounts invested up to federal
deposit insurance limits.

A-6

This subscript is used for issues in which the credit factors, the terms,
or both, that determine the likelihood of receipt of payment of principal are
different from the credit factors, terms or both that determine the likelihood
of receipt of interest on the obligation. The 'p' subscript indicates that the
rating addresses the principal portion of the obligation only. The 'p' subscript
will always be used in conjunction with the 'i' subscript, which addresses
likelihood of receipt of interest. For example, a rated obligation could be
assigned ratings of 'AAAp NRi' indicating that the principal portion is rated
'AAA' and the interest portion of the obligation is not rated.

Ratings with a 'pi' subscript are based on an analysis of an issuer's
published financial information, as well as additional information in the public
domain. They do not, however, reflect in-depth meetings with an issuer's
management and therefore may be based on less comprehensive information than
ratings without a 'pi' subscript. Ratings with a 'pi' subscript are reviewed
annually based on a new year's financial statement, but may be reviewed on an
interim basis if a major event occurs that may affect the issuer's credit
quality.

preliminary

Preliminary ratings, with the 'prelim' qualifier, may be assigned to
obligors or obligations, including financial programs, in the circumstances
described below. Assignment of a final rating is conditional on the receipt by
Standard & Poor's of appropriate documentation. Standard & Poor's reserves the
right not to issue a final rating. Moreover, if a final rating is issued, it may
differ from the preliminary rating.

o Preliminary ratings may be assigned to obligations, most commonly
structured and project finance issues, pending receipt of final
documentation and legal opinions.

o Preliminary ratings are assigned to Rule 415 Shelf Registrations. As
specific issues, with defined terms, are offered from the master
registration, a final rating may be assigned to them in accordance with
Standard & Poor's policies.

o Preliminary ratings may be assigned to obligations that will likely be
issued upon the obligor's emergence from bankruptcy or similar
reorganization, based on late-stage reorganization plans, documentation
and discussions with the obligor. Preliminary ratings may also be assigned
to the obligors. These ratings consider the anticipated general credit
quality of the reorganized or postbankruptcy issuer as well as attributes
of the anticipated obligation(s).

o Preliminary ratings may be assigned to entities that are being formed or
that are in the process of being independently established when, in
Standard & Poor's opinion, documentation is close to final. Preliminary
ratings may also be assigned to these entities' obligations.

A-7

o Preliminary ratings may be assigned when a previously unrated entity is
undergoing a well-formulated restructuring, recapitalization, significant
financing or other transformative event, generally at the point that
investor or lender commitments are invited. The preliminary rating may be
assigned to the entity and to its proposed obligation(s). These
preliminary ratings consider the anticipated general credit quality of the
obligor, as well as attributes of the anticipated obligation(s) assuming
successful completion of the transformative event. Should the
transformative event not occur, Standard & Poor's would likely withdraw
these preliminary ratings.

o A preliminary recovery rating may be assigned to an obligation that has a
preliminary issue credit rating.

The (sf) subscript is assigned to all issues and issuers to which a
regulation, such as the European Union Regulation on Credit Rating Agencies,
requires the assignment of an additional symbol which distinguishes a structured
finance instrument or obligor (as defined in the regulation) from any other
instrument or obligor. The addition of this subscript to a credit rating does
not change the definition of that rating or our opinion about the issue's or
issuer's creditworthiness.

This symbol indicates termination structures that are designed to honor
their contracts to full maturity or, should certain events occur, to terminate
and cash settle all of their contracts before their final maturity date.

unsolicited

Unsolicited ratings are those credit ratings assigned at the initiative of
Standard & Poor's and not at the request of the issuer or its agents.

INACTIVE QUALIFIERS (NO LONGER APPLIED OR OUTSTANDING)

This symbol indicated continuance of the ratings is contingent upon
Standard & Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows. Discontinued use in August
1998.

This qualifier was used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an investment-grade level and/or
the issuer's bonds are deemed taxable. Discontinued use in January 2001.

A-8

The letters 'pr' indicate that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.

A 'q' subscript indicates that the rating is based solely upon
quantitative analysis of publicly available information. Discontinued use in
April 2001.

The 'r' modifier was assigned to securities containing extraordinary
risks, particularly market risks, that are not covered in the credit rating. The
absence of an 'r' modifier should not be taken as an indication that an
obligation will not exhibit extraordinary non-credit related risks. Standard &
Poor's discontinued the use of the 'r' modifier for most obligations in June
2000 and for the balance of the obligations (mainly structured finance
transactions) in November 2002.

MOODY'S INVESTORS SERVICE, INC. -- A BRIEF DESCRIPTION OF CERTAIN MOODY'S
INVESTORS SERVICE, INC. ("MOODY'S") RATING SYMBOLS AND THEIR MEANINGS (AS
PUBLISHED BY MOODY'S) FOLLOWS:

LONG-TERM OBLIGATION RATINGS

Moody's long-term ratings are opinions of the relative credit risk of
financial obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings use Moody's Global Scale and reflect both the likelihood
of default and any financial loss suffered in the event of default.

AAA

Obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.

Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.

A-9

Obligations rated A are considered upper-medium grade and are subject to
low credit risk.

Baa

Obligations rated Baa are subject to moderate credit risk. They are
considered medium grade and as such may possess certain speculative
characteristics.

Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.

Obligations rated B are considered speculative and are subject to high
credit risk.

Caa

Obligations rated Caa are judged to be of poor standing and are subject to
very high credit risk.

Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.

Obligations rated C are the lowest rated class and are typically in
default with little prospect for recovery of principal or interest.

Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.

MEDIUM-TERM NOTE PROGRAM RATINGS

Moody's assigns ratings to medium-term note (MTN) programs and to the
individual debt securities issued from them (referred to as drawdowns or notes).
These ratings may be expressed on Moody's general long-term or short-term rating
sale, depending upon the intended tenor of the notes to be issued under the
program.

A-10

MTN program ratings are intended to reflect the ratings likely to be
assigned to drawdowns issued from the program with the specific priority of
claim (e.g., senior or subordinated). However, the rating assigned to a drawdown
from a rated MTN program may differ from the program if the drawdown is exposed
to additional credit risks besides the issuer's default, such as links to the
defaults of other issuers, or has other structural features that warrant a
different rating. In some circumstances, no rating may be assigned to a
drawdown.

Market participants must determine whether any particular note is rated,
and if so, at what rating level. Moody's encourages market participants to
contact Moody's Ratings Desks or visit www.moody's.com directly if they have
questions regarding ratings for specific notes issued under a medium-term note
program. Unrated notes issued under an MTN program may be assigned an NR (not
rated) symbol.

SHORT-TERM OBLIGATION RATINGS

Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted.

Moody's employs the following designations to indicate the relative
repayment ability of rated issuers:

P-1

Issuers (or supporting institutions) rated Prime-1 have a superior ability
to repay short-term debt obligations.

P-2

Issuers (or supporting institutions) rated Prime-2 have a strong ability
to repay short-term debt obligations.

P-3

Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.

Issuers (or supporting institutions) rated Not Prime do not fall within
any of the Prime rating categories.

Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.

A-11

U.S. MUNICIPAL SHORT-TERM OBLIGATION RATINGS

There are three rating categories for short-term municipal obligations
that are considered investment grade. These ratings are designated as Municipal
Investment Grade (MIG) and are divided into three levels -- MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade. MIG ratings expire at the maturity of the
obligation.

MIG 1

This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.

MIG 2

This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.

MIG 3

This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.

This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.

U.S. MUNICIPAL DEMAND OBLIGATION RATINGS

In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned; a long or short-term debt rating and a demand obligation
rating. The first element represents Moody's evaluation of the degree of risk
associated with scheduled principal and interest payments. The second element
represents Moody's evaluation of the degree of risk associated with the ability
to receive purchase price upon demand ("demand feature"), using a variation of
the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is
designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function
of each issue's specific structural or credit features.

A-12

VMIG 1

This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.

VMIG 2

This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.

VMIG 3

This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.

This designation denotes speculative-grade credit quality. Demand features
rated in this category may supported by a liquidity provider that does not have
an investment grade short-term rating or may lack the structural and/or legal
protections necessary to ensure the timely payment of purchase price upon
demand.

FITCH RATINGS -- A BRIEF DESCRIPTION OF CERTAIN FITCH RATINGS ("FITCH")
RATINGS SYMBOLS AND THEIR MEANINGS (AS PUBLISHED BY FITCH) FOLLOWS:

INTERNATIONAL ISSUER AND CREDIT RATING SCALES

The Primary Credit Rating Scales (those featuring the symbols 'AAA'-'D'
and 'F1'-'D') are used for debt and financial strength ratings.

LONG-TERM RATING SCALES--ISSUER CREDIT RATING SCALES

Rated entities in a number of sectors, including financial and
non-financial corporations, sovereigns and insurance companies, are generally
assigned Issuer Default Ratings (IDRs). IDRs opine on an entity's relative
vulnerability to default on financial obligations. The "threshold" default risk
addressed by the IDR is generally that of the financial obligations whose
non-payment would best reflect the uncured failure of that entity. As such, IDRs
also address relative vulnerability to bankruptcy, administrative receivership
or similar concepts, although the agency recognizes that issuers may also make
pre-emptive and therefore voluntary use of such mechanisms.

A-13

In aggregate, IDRs provide an ordinal ranking of issuers based on the
agency's view of their relative vulnerability to default, rather than a
prediction of a specific percentage likelihood of default.

AAA

Highest credit quality. 'AAA' ratings denote the lowest expectation of
default risk. They are assigned only in cases of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

Very high credit quality. 'AA' ratings denote expectations of very low
default risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

High credit quality. 'A' ratings denote expectations of low default risk.
The capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.

BBB

Good credit quality. 'BBB' ratings indicate that expectations of default
risk are currently low. The capacity for payment of financial commitments is
considered adequate but adverse business or economic conditions are more likely
to impair this capacity.

Speculative. 'BB' ratings indicate an elevated vulnerability to default
risk, particularly in the event of adverse changes in business or economic
conditions over time; however, business or financial flexibility exists which
supports the servicing of financial commitments.

Highly speculative. 'B' ratings indicate that material default risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is vulnerable to
deterioration in the business and economic environment.

CCC

Substantial credit risk. Default is a real possibility.

A-14

Very high levels of credit risk. Default of some kind appears probable.

Exceptionally high levels of credit risk. Default is imminent or
inevitable, or the issuer is in standstill. Conditions that are indicative of a
'C' category rating of an issuer include:

a. the issuer has entered into a grace or cure period following
non-payment of a material financial obligation;

b. the issuer has entered into a temporary negotiated waiver or
standstill agreement following a payment default on a material financial
obligation; or

c. Fitch Ratings otherwise believes a condition of 'RD' or 'D' to
be imminent or inevitable, including through the formal announcement of a
coercive debt exchange.

Restricted default. 'RD' ratings indicate an issuer that in Fitch Ratings'
opinion has experienced an uncured payment default on a bond, loan or other
material financial obligation but which has not entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up procedure,
and which has not otherwise ceased business. This would include:

a. the selective payment default on a specific class or currency
of debt;

b. the uncured expiry of any applicable grace period, cure period
or default forbearance period following a payment default on a bank loan,
capital markets security or other material financial obligation;

c. the extension of multiple waivers or forbearance periods upon
a payment default on one or more material financial obligations, either in
series or in parallel; or

d. execution of a coercive debt exchange on one or more material
financial obligations.

Default. 'D' ratings indicate an issuer that in Fitch Ratings' opinion has
entered into bankruptcy filings, administration, receivership, liquidation or
other formal winding-up procedure, or which has otherwise ceased business.

A-15

Default ratings are not assigned prospectively to entities or their
obligations; within this context, non-payment on an instrument that contains a
deferral feature or grace period will generally not be considered a default
until after the expiration of the deferral or grace period, unless a default is
otherwise driven by bankruptcy or other similar circumstance, or by a coercive
debt exchange.

"Imminent" default typically refers to the occasion where a payment
default has been intimated by the issuer, and is all but inevitable. This may,
for example, be where an issuer has missed a scheduled payment, but (as is
typical) has a grace period during which it may cure the payment default.
Another alternative would be where an issuer has formally announced a coercive
debt exchange, but the date of the exchange still lies several days or weeks in
the immediate future.

In all cases, the assignment of a default rating reflects the agency's
opinion as to the most appropriate rating category consistent with the rest of
its universe of ratings, and may differ from the definition of default under the
terms of an issuer's financial obligations or local commercial practice.

Note: The modifiers "+" or "-" may be appended to a rating to denote relative
status within the major rating categories. Such suffixes are not added to the
'AAA' Long-Term IDR category, or to Long-Term IDR categories below 'B'.

Limitations of the Issuer Credit Rating Scale:

Specific limitations relevant to the issuer credit rating scale include:

o The ratings do not predict a specific percentage of default
likelihood over any given time period.

o The ratings do not opine on the market value of any issuer's
securities or stock, or the likelihood that this value may change.

o The ratings do not opine on the liquidity of the issuer's securities
or stock.

o The ratings do not opine on the possible loss severity on an
obligation should an issuer default.

o The ratings do not opine on the suitability of an issuer as
counterparty to trade credit.

o The ratings do not opine on any quality related to an issuer's
business, operational or financial profile other than the agency's
opinion on its relative vulnerability to default.

Ratings assigned by Fitch Ratings articulate an opinion on discrete and
specific areas of risk. The above list is not exhaustive, and is provided for
the reader's convenience.

A-16

SHORT-TERM RATINGS -- SHORT-TERM RATINGS ASSIGNED TO ISSUERS OR OBLIGATIONS IN
CORPORATE, PUBLIC AND STRUCTURED FINANCE

A short-term issuer or obligation rating is based in all cases on the
short-term vulnerability to default of the rated entity or security stream and
relates to the capacity to meet financial obligations in accordance with the
documentation governing the relevant obligation. Short-Term Ratings are assigned
to obligations whose initial maturity is viewed as "short term" based on market
convention. Typically, this means up to 13 months for corporate, sovereign, and
structured obligations, and up to 36 months for obligations in U.S. public
finance markets.

Highest short-term credit quality. Indicates the strongest intrinsic
capacity for timely payment of financial commitments; may have an added "+" to
denote any exceptionally strong credit feature.

Good short-term credit quality. Good intrinsic capacity for timely payment
of financial commitments.

Fair short-term credit quality. The intrinsic capacity for timely payment
of financial commitments is adequate.

Speculative short-term credit quality. Minimal capacity for timely payment
of financial commitments, plus heightened vulnerability to near term adverse
changes in financial and economic conditions.

High short-term default risk. Default is a real possibility.

Restricted default. Indicates an entity that has defaulted on one or more
of its financial commitments, although it continues to meet other financial
obligations. Applicable to entity ratings only.

A-17

Default. Indicates a broad-based default event for an entity, or the
default of a short-term obligation.

Limitations of the Short-Term Ratings Scale:

Specific limitations relevant to the Short-Term Ratings scale include:

o The ratings do not predict a specific percentage of default
likelihood over any given time period.

o The ratings do not opine on the market value of any issuer's
securities or stock, or the likelihood that this value may change.

o The ratings do not opine on the liquidity of the issuer's securities
or stock.

o The ratings do not opine on the possible loss severity on an
obligation should an obligation default.

o The ratings do not opine on any quality related to an issuer or
transaction's profile other than the agency's opinion on the
relative vulnerability to default of the rated issuer or obligation.

Ratings assigned by Fitch Ratings articulate an opinion on discrete and
specific areas of risk. The above list is not exhaustive, and is provided for
the reader's convenience.

ADDITIONAL INFORMATION

'Not Rated' or 'NR': A designation of 'Not Rated' or 'NR' is used to
denote securities not rated by Fitch where Fitch has rated some, but not all,
securities comprising an issuance capital structure.

'Withdrawn': The rating has been withdrawn and the issue or issuer is no
longer rated by Fitch. Indicated in rating databases with the symbol 'WD'.

A-18

PART C - OTHER INFORMATION

Item 25: Financial Statements and Exhibits

1. Financial Statements:

The Registrant's audited financial statements, notes to the financial
statements and the report of independent public accounting firm thereon have
been incorporated into Part B of the Registration Statement by reference to
Registrant's Annual Report for the fiscal year ended May 31, 2012 contained in
its Form N-CSR, as described in the statement of additional information.

2. Exhibits:

a.1 Declaration of Trust dated March 25, 2004.(1)

a.2 Amendment to Declaration of Trust dated October 27, 2008.**

a.3 Amendment to Declaration of Trust dated September 20, 2010.**

b. By-Laws of Fund.(2)

c. None.

d. Form of Global Certificate.(3)

e. Terms and Conditions of the Dividend Reinvestment Plan.(4)

f. None.

g. Investment Management Agreement between Registrant and First Trust
Advisors L.P. dated December 20, 2010.(5)

h.1 Form of Underwriting Agreement.*

h.2 Form of Sales Agreement.*

i. None.

j. Custodian Services Agreement dated May 26, 2004.(3)

k.1 Transfer Agency Services Agreement dated May 26, 2004.(3)

k.2 Administration and Accounting Services Agreement dated May 26, 2004.(3)

k.3 Revolving Credit and Security Agreement.**

l.1 Opinion and consent of Chapman and Cutler LLP.*

l.2 Opinion and consent of Bingham McCutchen LLP.*

m. None.

n. Consent of Independent Registered Public Accounting Firm.**

o. None.

p. Subscription Agreement dated May 18, 2004.(4)

q. None.

r.1 Code of Ethics of Registrant.(4)

r.2 Code of Ethics of First Trust Portfolios L.P.(4)

r.3 Code of Ethics of First Trust Advisors L.P.(4)

s. Powers of Attorney.**

--------------------------------------------------------------------------------

* To be filed by amendment.

** Filed herewith.

(1) Filed on April 29, 2004 as an Exhibit to Registrant's Amended
Registration Statement on Form N-2/A (File No. 333-113978) and
incorporated herein by reference.

(2) Filed on July 30, 2010 as an Exhibit to Registrant's Annual Report for
Management Companies on Form N-SAR (File No. 811-21539) and incorporated
herein by reference.

(3) Filed on August 23, 2004 as an Exhibit to Registrant's Amended
Registration Statement on Form N-2/A (File No. 333-115414) and
incorporated herein by reference.

(4) Filed on May 25, 2004 as an Exhibit to Registrant's Amended Registration
Statement on Form N-2/A (File No. 333-113978) and incorporated herein by
reference.

(5) Filed on July 28, 2011 as an Exhibit to Registrant's Annual Report for
Management Companies on Form N-SAR and incorporated herein by reference.

Item 26: Marketing Arrangements

Reference is made to the form of underwriting agreement and/or sales
agreement for the Registrant's common shares to be filed in a post-effective
amendment to the Registrant's Registration Statement and the section entitled
"Plan of Distribution" contained in Registrant's Prospectus, filed herewith as
Part A of Registrant's Registration Statement.

Item 27: Other Expenses of Issuance and Distribution

---------------------------------------------------------- -------------------
Securities and Exchange Commission Fees $ *
---------------------------------------------------------- -------------------
Financial Industry Regulatory Authority, Inc. Fees $ *
---------------------------------------------------------- -------------------
Printing and Engraving Expenses $ *
---------------------------------------------------------- -------------------
Legal Fees $ *
---------------------------------------------------------- -------------------
Listing Fees $ *
---------------------------------------------------------- -------------------
Accounting Expenses $ *
---------------------------------------------------------- -------------------
Blue Sky Filing Fees and Expenses $ *
---------------------------------------------------------- -------------------
Miscellaneous Expenses $ *
---------------------------------------------------------- -------------------
Total $ *
---------------------------------------------------------- -------------------
* To be completed by amendment.

Item 28: Persons Controlled by or under Common Control with Registrant

Not applicable.

Item 29: Number of Holders of Securities

At ______________, 2012

----------------------------------------- ------------------------------------
Title of Class Number of Record Holders
----------------------------------------- ------------------------------------
Common Shares, $0.01 par value *
----------------------------------------- ------------------------------------
* To be completed by amendment.

Item 30: Indemnification

Section 5.3 of the Registrant's Declaration of Trust provides as follows:

Section 5.3. Mandatory Indemnification. (a) Subject to the exceptions and
limitations contained in paragraph (b) below:

(i) every person who is or has been a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be indemnified
by the Trust against all liability and against all expenses reasonably
incurred or paid by him or her in connection with any claim, action, suit
or proceeding in which that individual becomes involved as a party or
otherwise by virtue of being or having been a Trustee or officer and
against amounts paid or incurred by that individual in the settlement
thereof;

(ii) the words "claim," "action," "suit" or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal,
administrative or other, including appeals), actual or threatened; and the
words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement or
compromise, fines, penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a Covered Person:

(i) against any liability to the Trust or the Shareholders by reason
of a final adjudication by the court or other body before which the
proceeding was brought that the Covered Person engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of that individual's office;

(ii) with respect to any matter as to which the Covered Person shall
have been finally adjudicated not to have acted in good faith in the
reasonable belief that that individual's action was in the best interest of
the Trust; or

(iii) in the event of a settlement involving a payment by a Trustee or
officer or other disposition not involving a final adjudication as provided
in paragraph (b)(i) or (b)(ii) above resulting in a payment by a Covered
Person, unless there has been either a determination that such Covered
Person did not engage in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of that
individual's office by the court or other body approving the settlement or
other disposition or by a reasonable determination, based upon a review of
readily available facts (as opposed to a full trial-type inquiry) that that
individual did not engage in such conduct:

(A) by vote of a majority of the Disinterested Trustees (as
defined below) acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or

(B) by written opinion of (i) the then-current legal counsel to
the Trustees who are not Interested Persons of the Trust or (ii) other
legal counsel chosen by a majority of the Disinterested Trustees (or
if there are no Disinterested Trustees with respect to the matter in
question, by a majority of the Trustees who are not Interested Persons
of the Trust) and determined by them in their reasonable judgment to
be independent.

(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be a Covered Person and shall inure to
the benefit of the heirs, executors and administrators of such person. Nothing
contained herein shall limit the Trust from entering into other insurance
arrangements or affect any rights to indemnification to which Trust personnel,
including Covered Persons, may be entitled by contract or otherwise under law.

(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the Covered Person to repay
such amount if it is ultimately determined that the Covered Person is not
entitled to indemnification under this Section 5.3, provided that either:

(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising
out of any such advances; or

(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or legal counsel meeting the requirement in Section
5.3(b)(iii)(B) above in a written opinion, shall determine, based upon a
review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the Covered Person
ultimately will be found entitled to indemnification.

As used in this Section 5.3 a "Disinterested Trustee" is one (i) who is not
an "Interested Person" of the Trust (including anyone who has been exempted from
being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.

(e) With respect to any such determination or opinion referred to in clause
(b)(iii) above or clause (d)(ii) above, a rebuttable presumption shall be
afforded that the Covered Person has not engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office in accordance with pronouncements of the
Commission.

Item 31: Business and Other Connections of Investment Advisers

The information in the Statement of Additional Information under the captions
"Management of the Fund--Trustees and Officers" is hereby incorporated by
reference.

Item 32: Location of Accounts and Records.

First Trust Advisors L.P. maintains the Declaration of Trust, By-Laws, minutes
of trustees and shareholders meetings and contracts of the Registrant, all
advisory material of the investment adviser, all general and subsidiary ledgers,
journals, trial balances, records of all portfolio purchases and sales, and all
other required records.

Item 33: Management Services

Not applicable.

Item 34: Undertakings

1. Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of the
Registration Statement, or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.

2. Not applicable.

3. Not applicable.

4. The Registrant undertakes (a) to file, during any period in which offers
or sales are being made, a post-effective amendment to this Registration
Statement:

(1) to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;

(2) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and

(3) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

(b) that, for the purpose of determining liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of those securities at that time shall be deemed to be the
initial bona fide offering thereof; and

(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;

(d) that, for the purpose of determining liability under the Securities Act
of 1933 to any purchaser, if the Registrant is subject to Rule 430C;
each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the
Securities Act of 1933, shall be deemed to be part of and included in
this Registration Statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in this
Registration Statement or prospectus that is part of this registration
statement or made in a document incorporated or deemed incorporated by
reference into this registration statement or prospectus that is art of
this registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supercede or modify any
statement that was made in this registration statement or prospectus
that was part of this registration statement or made in any such
document immediately prior to such date of first use;

(e) that for the purpose of determining liability of the Registrant under
the Securities Act of 1933 to any purchaser in the initial distribution
of securities:

The undersigned Registrant undertakes that in a primary offering of
securities of the undersigned Registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the
undersigned Registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to the purchaser:

(1) any preliminary prospectus or prospectus of the undersigned Registrant
relating to the offering required to be filed pursuant to Rule 497 under
the Securities Act of 1933;

(2) the portion of any advertisement pursuant to Rule 482 under the
Securities Act of 1933 relating to the offering containing material
information about the undersigned Registrant or its securities provided
by or on behalf of the undersigned Registrant; and

(3) any other communication that is an offer in the offering made by the
undersigned Registrant to the purchaser.

5. The Registrant undertakes that:

a. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant under Rule 497(h) under
the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective; and

b. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.

6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional
Information.

7. Upon each issuance of securities pursuant to this Registration
Statement, the Registrant undertakes to file a form of prospectus and/or
prospectus supplement pursuant to Rule 497 and a post-effective
amendment to the extent required by the Securities Act of 1933 and the
rules and regulations thereunder, including, but not limited to a
post-effective amendment pursuant to Rule 462(c) or Rule 462(d) under
the Securities Act of 1933.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Wheaton, and State of Illinois, on the 28th day of
September, 2012.

FIRST TRUST SENIOR FLOATING RATE INCOME FUND II

By: /s/ Mark R. Bradley
-------------------------------------------
Mark R. Bradley, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.

--------------------------------------- ------------------------------------- ------------------------------------
SIGNATURE TITLE DATE
--------------------------------------- ------------------------------------- ------------------------------------

President and Chief Executive September 28, 2012
/s/ Mark R. Bradley Officer (Principal Executive
----------------------------------- Officer)
Mark R. Bradley
--------------------------------------- ------------------------------------- ------------------------------------
Chief Financial Officer, Chief
Accounting Officer and Treasurer September 28, 2012
/s/ James M. Dykas (Principal Financial and Accounting
----------------------------------- Officer)
James M. Dykas
--------------------------------------- ------------------------------------- ------------------------------------
James A. Bowen(1) Chairman of the Board and Trustee )
)
)
Richard E. Erickson(1) Trustee )
)
)
Thomas R. Kadlec(1) Trustee ) BY: /s/ W. Scott Jardine
) -----------------------
) W. Scott Jardine
Robert F. Keith(1) Trustee ) Attorney-In-Fact
) September 28, 2012
)
Niel B. Nielson(1) Trustee )
)
--------------------------------------- ------------------------------------- ------------------------------------

(1) Original powers of attorney authorizing James A. Bowen, Mark R. Bradley, W.
Scott Jardine, Kristi A. Maher and Eric F. Fess to execute Registrant's
Registration Statement, and Amendments thereto, for each of the trustees of the
Registrant on whose behalf this Registration Statement is filed, were previously
executed and are filed as an Exhibit hereto.

INDEX TO EXHIBITS

a.2. Amendment to Declaration of Trust dated October 27, 2008.

a.3. Amendment to Declaration of Trust dated September 20, 2010.

k.3. Revolving Credit and Security Agreement.

n. Consent of Independent Registered Public Accounting Firm.

s. Powers of Attorney.