UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21586
First Trust Enhanced Equity Income Fund
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
Date of fiscal year end: December 31
Date of reporting period: December 31, 2009
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2009
(GRAPHIC) FIRST TRUST
ENHANCED EQUITY
INCOME FUND
CHARTWELL INVESTMENT PARTNERS
INSTITUTIONAL AND PRIVATE ASSET MANAGEMENT
(FIRST TRUST LOGO)
(GRAPHIC)
TABLE OF CONTENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009
Shareholder Letter ....................................................... 1
At a Glance .............................................................. 2
Portfolio Commentary ..................................................... 3
Portfolio of Investments. ................................................ 6
Statement of Assets and Liabilities ...................................... 13
Statement of Operations .................................................. 14
Statements of Changes in Net Assets ...................................... 15
Financial Highlights. .................................................... 16
Notes to Financial Statements ............................................ 17
Report of Independent Registered Public Accounting Firm .................. 23
Additional Information ................................................... 24
Board of Trustees and Officers ........................................... 26
Privacy Policy ........................................................... 30
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, L.P. ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Enhanced Equity Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and Chartwell and their
respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market value
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Chartwell are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
ANNUAL REPORT
DECEMBER 31, 2009
Dear Shareholders:
The year 2009 was more positive for the U.S. and global markets, which eased the
minds of economists and investors alike. Many economists believe that the
recession that began in December 2007 ended in March 2009. In fact, the Dow
Jones Industrial Average's total return from March 9 (the statistical end of the
bear market) to December 31, 2009, was 61.59%. Of course, no one can guarantee
that this trend will continue, but the economy has continued to rise and most
investors have found it easier to open their financial statements since March.
First Trust Advisors L.P. ("First Trust") has always believed that in order to
be successful in reaching your financial goals, you should be invested for the
long term. A long-term investor understands that the market, from a historical
perspective, has always experienced ups and downs. But history has shown that
the patient investor is typically rewarded over the long term. We have always
believed that staying invested in quality products and having a long-term
perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust Enhanced Equity Income Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by the report. I encourage you to read this document and discuss it with
your financial advisor.
Since its inception, First Trust has been through many types of markets. We
remain committed to bringing you quality investment solutions regardless of the
inevitable volatility the market experiences. We offer a variety of products
that can fit many financial plans to help those investors seeking long-term
investment success. As well, we are committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Enhanced Equity Income Fund
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND
"AT A GLANCE"
AS OF DECEMBER 31, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FFA
Common Share Price $ 11.70
Common Share Net Asset Value ("NAV") $ 12.32
Premium (Discount) to NAV (5.03)%
Net Assets Applicable to Common Shares $246,048,008
Current Quarterly Distribution per Common Share (1) $ 0.220
Current Annualized Distribution per Common Share $ 0.880
Current Distribution Rate on Closing Common Share Price (2) 7.52%
Current Distribution Rate on NAV (2) 7.14%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Common
Share
Price NAV
------ ------
12/31/08 8.85 11.15
1/2/09 9.31 11.32
1/9/09 9.2 11.07
1/16/09 8.93 10.74
1/23/09 8.84 10.59
1/30/09 8.67 10.55
2/6/09 9.11 10.96
2/13/09 8.86 10.6
2/20/09 8.02 9.95
2/27/09 7.73 9.66
3/6/09 6.97 9.12
3/13/09 7.89 9.76
3/20/09 7.56 9.46
3/27/09 8.01 9.9
4/3/09 8.29 10.22
4/9/09 8.45 10.31
4/17/09 8.55 10.37
4/24/09 8.39 10.22
5/1/09 8.59 10.35
5/8/09 8.89 10.69
5/15/09 8.41 10.38
5/22/09 8.65 10.45
5/29/09 8.86 10.74
6/5/09 9.09 10.9
6/12/09 9.09 11.01
6/19/09 8.75 10.64
6/26/09 8.85 10.67
7/2/09 8.78 10.5
7/10/09 8.45 10.31
7/17/09 9.01 10.94
7/24/09 9.47 11.29
7/31/09 9.55 11.36
8/7/09 9.80 11.44
8/14/09 9.80 11.44
8/21/09 10.02 11.68
8/28/09 9.94 11.7
9/4/09 10.02 11.63
9/11/09 10.35 11.89
9/18/09 10.58 12.05
9/25/09 10.14 11.64
10/2/09 9.97 11.47
10/9/09 10.38 11.93
10/16/09 10.49 12.05
10/23/09 10.59 11.99
10/30/09 9.97 11.59
11/6/09 10.49 11.91
11/13/09 10.69 12.13
11/20/09 10.89 12.12
11/27/09 10.80 12.17
12/4/09 11.16 12.34
12/11/09 11.38 12.38
12/18/09 11.50 12.36
12/24/09 11.75 12.39
12/31/09 11.70 12.32
PERFORMANCE
Average Annual Total Return
-------------------------------------
1 Year Ended 5 Years Ended Inception (8/26/2004)
12/31/2009 12/31/2009 to 12/31/2009
------------ ------------- ---------------------
Fund Performance(3)
NAV 22.24% 0.36% 1.66%
Market Value 46.26% -0.70% -0.18%
Index Performance
S&P 500 Index 26.47% 0.42% 2.26%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Bristol-Myers Squibb Co. 4.1%
Intel Corp. 3.8
Occidental Petroleum Corp. 3.5
Exxon Mobil Corp. 3.3
Limited Brands, Inc. 3.1
Emerson Electric Co. 3.1
Cisco Systems, Inc. 2.9
International Business Machines Corp. 2.7
Target Corp. 2.6
JPMorgan Chase & Co. 2.5
----
Total 31.6%
====
% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
--------------------- -----------
Information Technology 16.8%
Financials 14.4
Energy 13.9
Consumer Discretionary 12.4
Industrial 12.2
Healthcare 10.7
Consumer Staples 8.5
Telecommunication Services 3.8
Materials 3.5
Other 2.3
Utilities 1.5
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 12/31/2009. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 12/31/2009. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gains 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. Past performance is
not indicative of future results.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Chartwell Investment Partners, L.P. ("Chartwell") is an employee-owned
investment advisory firm founded on April 1, 1997 by nine investment
professionals from Delaware Investment Advisers. The firm is 75% owned by the
partners and employees of Chartwell and 25% owned by a limited partnership
comprised of three passive investors in the Philadelphia area. There are no
affiliates at this time. The firm is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process.
Timothy J. Riddle, an executive with 30 years of investment industry experience,
is the Chief Executive Officer of Chartwell. Michael J. McCloskey, an executive
with 22 years of management experience, serves as President. G. Gregory Hagar is
Chartwell's Chief Financial Officer and Chief Compliance Officer. He has 21
years of related experience.
PORTFOLIO MANAGEMENT TEAM
(PHOTO OF BERNARD P. SCHAFFER)
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 38 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund since 2007, he focuses on securities in the Energy,
Financials and Consumer Staples sectors. He was employed as a Senior Portfolio
Manager at Delaware Investment Advisers from 1990 to 1997, managing two
closed-end equity income funds that utilized option strategies to generate
portfolio gains. Mr. Schaffer earned a Bachelor's degree in Economics from
Villanova University and an MBA from the University of Pennsylvania's Wharton
School.
(PHOTO OF DOUGLAS W. KUGLER)
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 12 years of investment industry experience. His areas of
focus include the Transportation and Consumer Discretionary sectors of the
market. He has been a portfolio manager for the Fund since 2007. From 1993 to
2003, he held several positions at Morgan Stanley Investment Management (Miller
Anderson & Sherrerd) including Head of Mutual Fund Administration and Vice
President and Treasurer of the MAS Funds, Junior Associate in the Equity
Department, and his last position held prior to joining Chartwell was Senior
Associate and Analyst for the Large Cap Value team. Prior to joining Morgan
Stanley, he was an Assistant Vice President and Senior Accounting Officer at
Provident Financial Processing Corporation. Mr. Kugler is a member of the CFA
(Chartered Financial Analysts) Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. Mr. Kugler earned a
Bachelor's degree in Accounting from the University of Delaware.
(PHOTO OF KEVIN A. MELICH)
KEVIN A. MELICH, CFA
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Melich is a founding partner of Chartwell and has 45 years of investment
industry experience. He is a member of Chartwell's large-cap equity portfolio
management team and implements portfolio management decisions for high-yield
equity institutional portfolios, including the Fund. He has been a portfolio
manager for the Fund since 2007. His areas of focus are in the Automotive,
Machinery, Office Electronics and REITs sectors. He was employed as a Senior
Portfolio Manager at Delaware Investment Advisers from 1983 to 1997. There he
managed over $1.6 billion for institutional accounts in the value style. From
1979 to 1983, Mr. Melich was a Partner with the economics consulting firm A.B.
Laffer Associates. From 1964 to 1979, he was the Senior Investment Officer and
Manager of the Trust and Investment Division of Security Trust Company. Mr.
Melich is a member of the CFA Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. He earned a Bachelor of
Science degree in Economics from St. John Fisher College.
Page 3
PORTFOLIO COMMENTARY -CONTINUED
COMMENTARY
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of First Trust Enhanced Equity Income Fund (the "Fund")
is to provide a high level of current income and gains and, to a lesser extent,
capital appreciation. The Fund pursues its investment objective by investing in
a diversified portfolio of equity securities. Under normal market conditions,
the Fund pursues an integrated investment strategy in which the Fund invests
substantially all of its managed assets in a diversified portfolio of common
stocks of U.S. corporations and U.S. dollar-denominated equity securities of
foreign issuers. These securities are traded on U.S. securities exchanges. In
addition, on an ongoing and consistent basis, the Fund will write (sell) covered
call options on a portion of the Fund's managed assets. There can be no
assurance that the Fund's investment objective will be achieved.
MARKET RECAP
Stock market performance in 2009 was comprised of two distinct and very
different periods. From the start of the year through March 9, 2009, the market
continued its significant decline from previous highs. After March 9, 2009, the
Standard & Poor's 500 Index ("S&P 500") reversed course and rebounded almost
without break through the end of the year. Overall for the period, the market
(as measured by the S&P 500) was up 26.47%. The first months of 2009 saw a
continuation of the economic and financial crises that we wrote about in our
portfolio commentary for the 2008 Annual Report. Home prices continued to
decline and unemployment increased. Financial institutions were absorbing
significant losses on their loan and investment portfolios as economic activity
slowed and security values plunged. The availability of credit to fund every day
business transactions was dramatically reduced. All of this uncertainty drove
the S&P 500 down to its intra-day low of 667 on March 6, 2009. On March 10,
2009, it appears as if the "all clear bell" was rung and market participants
found "green shoots" of nascent economic improvement. Financial institutions
began to lose less money and in some instances hinted at substantial profits.
The rates of decline of many economic indicators began to ebb. Job losses
slowed, credit became more available and China appeared to begin to feel the
benefits of its substantial economic stimulus package. These and other "green
shoots" incited the S&P 500 to rally almost 37% from its lows through the end of
May. The market rally paused from there through mid-July as uncertainty
regarding the overall outcome and impact of the various government programs that
were put in place crept into the market. However, second quarter earnings (and
subsequently third quarter earnings) came in significantly better than expected
on strong corporate cost controls and the market rally resumed with the S&P 500
up another 26.8% at year-end from the July lows. This brought the overall gain
for 2009 for the S&P 500 to 64.8% from its March 9th closing low. The size of
the rally over a nine-month period is unprecedented since 1933.
PERFORMANCE ANALYSIS
The Net Asset Value ("NAV") total return(1) of the Fund for the year ending
December 31, 2009 was 22.24% and the market value total return(1) of the Fund
was 46.26%. Both these returns were inclusive of dividends paid during the
period. During this time period, the S&P 500 returned 26.47%. The Fund continued
to take full advantage of volatility in the market and sold call options on a
significant percentage of the Fund's holdings. This supplemented the dividend
stream and provided support to the Fund's performance. We continue to believe
the strategy of combining high dividend-paying stocks and an option overwrite
program is an excellent long-term strategy.
Two major contributors to the performance of the S&P 500 during the year were
lower quality and smaller capitalization stocks. A Bank of America Merrill Lynch
study showed that for the year, stocks with quality rankings of B or lower
significantly outperformed the S&P 500. The impact of market capitalization on
2009 market returns can be seen in the fact that the equally-weighted S&P 500
returned (on a price only basis) 20 percentage points more than the
capitalization-weighted S&P 500 during the year. The Fund's portfolio has been
and will continue to be invested in higher quality, mostly larger capitalization
dividend-paying stocks and thus faced a headwind during 2009.
Performance versus the S&P 500 was largely driven by the quality issue described
previously. From a portfolio holdings standpoint, the weakest relative
performance versus the S&P 500 came from an underweight and lagging stock
selection in the Technology sector (which was up 62% for the year) and negative
stock selection in the Financials sector. Positive contributors to the Fund's
portfolio performance versus the S&P 500 during 2009 were the Consumer Staples
and Energy sectors. The outperformance in Consumer Staples was driven by the
Fund's underweight position and good stock selection while outperformance in the
Energy sector was driven by strong stock selection. In addition, as the
financial system stabilized, positions in high quality financial institutions
were added to the portfolio, the timing of which benefited relative performance.
----------
(1) Total return is based on the combination of reinvested dividend, capital
gains 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. Past performance is
not indicative of future results.
Page 4
PORTFOLIO COMMENTARY - CONTINUED
MARKET & FUND OUTLOOK
The stock market is a forward looking indicator and it appears to be factoring
in an economic recovery that likely started in the third quarter of 2009. In
general, we are in agreement with this notion. We believe that the economy will
be on better footing in 2010. In our opinion, this improvement will come as a
result of inventory restocking, the impact of the domestic stimulus package,
continued low interest rates and global economic improvement. As the market
rally took hold in 2009, the economic sensitivity of the Fund's portfolio was
increased. This trend will be continued in 2010 if the economy continues to
improve. Any additions to the economic sensitivity of the Fund's portfolio will
be made through investments in high quality, dividend-paying companies, as was
done in 2009. In addition, we will continue to reduce the Fund's overall
weightings in less economically sensitive areas such as Telecommunications and
Utilities if the economy continues to improve. Investors will likely focus on
the outlook for the economy and changes in Federal Reserve monetary policy. We
will continue to manage the portfolio with the dual objectives of earning
dividend income and options gains while seeking capital appreciation
opportunities over the market cycle.
Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
DECEMBER 31, 2009
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
COMMON STOCKS - 93.2%
AEROSPACE & DEFENSE - 2.7%
75,900 Honeywell International, Inc......................... $ 2,975,280
54,000 United Technologies Corp. (b)........................ 3,748,140
------------
6,723,420
------------
BEVERAGES - 4.1%
80,000 Coca-Cola (The) Co. (b).............................. 4,560,000
40,000 Diageo PLC, ADR...................................... 2,776,400
45,000 PepsiCo, Inc......................................... 2,736,000
------------
10,072,400
------------
CAPITAL MARKETS - 1.9%
56,300 Ameriprise Financial, Inc. (b)....................... 2,185,566
105,000 Invesco, Ltd......................................... 2,466,450
------------
4,652,016
------------
CHEMICALS - 1.7%
70,000 PPG Industries, Inc.................................. 4,097,800
------------
COMMERCIAL BANKS - 0.5%
198,185 National Penn Bancshares, Inc........................ 1,147,491
------------
COMMERCIAL SERVICES & SUPPLIES - 1.1%
80,000 Waste Management, Inc. (b)........................... 2,704,800
------------
COMMUNICATIONS EQUIPMENT - 4.0%
295,200 Cisco Systems, Inc. (b) (c).......................... 7,067,088
60,000 QUALCOMM, Inc........................................ 2,775,600
------------
9,842,688
------------
COMPUTERS & PERIPHERALS - 4.1%
70,000 Hewlett-Packard Co................................... 3,605,700
50,000 International Business Machines Corp. (b)............ 6,545,000
------------
10,150,700
------------
DIVERSIFIED FINANCIAL SERVICES - 4.0%
567,900 Citigroup, Inc. (d).................................. 1,879,749
147,000 JPMorgan Chase & Co.................................. 6,125,490
70,000 NYSE Euronext........................................ 1,771,000
------------
9,776,239
------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 3.8%
200,000 Alaska Communications Systems Group, Inc............. 1,596,000
92,100 AT&T, Inc. (d)....................................... 2,581,563
155,000 Verizon Communications, Inc. (b)..................... 5,135,150
------------
9,312,713
------------
ELECTRIC UTILITIES - 1.0%
35,000 Exelon Corp.......................................... 1,710,450
20,000 Southern Co.......................................... 666,400
------------
2,376,850
------------
See Notes to Financial Statements
Page 6
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2009
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
ELECTRICAL EQUIPMENT - 3.1%
180,000 Emerson Electric Co. (b)............................. $ 7,668,000
------------
FOOD & STAPLES RETAILING - 0.6%
45,000 CVS Caremark Corp. (b)............................... 1,449,450
------------
FOOD PRODUCTS - 1.0%
90,000 Kraft Foods, Inc., Class A (b)....................... 2,446,200
------------
HEALTHCARE EQUIPMENT & SUPPLIES - 1.6%
90,000 Medtronic, Inc. (b).................................. 3,958,200
------------
HOTELS, RESTAURANTS & LEISURE - 2.6%
90,000 Carnival Corp. (b) (c)............................... 2,852,100
100,000 Darden Restaurants, Inc. (b)......................... 3,507,000
------------
6,359,100
------------
HOUSEHOLD PRODUCTS - 0.8%
35,000 Procter & Gamble (The) Co............................ 2,122,050
------------
INDUSTRIAL CONGLOMERATES - 1.2%
35,000 3M Co. (d)........................................... 2,893,450
------------
INSURANCE - 4.7%
65,000 ACE Ltd.............................................. 3,276,000
110,000 Lincoln National Corp. (b)........................... 2,736,800
80,000 MetLife, Inc......................................... 2,828,000
55,000 Prudential Financial, Inc............................ 2,736,800
------------
11,577,600
------------
IT SERVICES - 1.2%
100,000 Paychex, Inc......................................... 3,064,000
------------
MACHINERY - 2.1%
90,000 Caterpillar, Inc..................................... 5,129,100
------------
MARINE - 0.4%
110,000 Seaspan Corp......................................... 1,014,200
------------
MEDIA - 1.7%
240,000 Regal Entertainment Group, Class A (b)............... 3,465,600
25,500 Walt Disney (The) Co................................. 822,375
------------
4,287,975
------------
METALS & MINING - 1.9%
60,000 BHP Billiton Ltd., ADR (b).......................... 4,594,800
------------
MULTILINE RETAIL - 4.1%
139,000 J.C. Penney Co., Inc. (b)........................... 3,698,790
131,000 Target Corp......................................... 6,336,470
------------
10,035,260
------------
See Notes to Financial Statements
Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2009
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - 9.2%
60,000 Chevron Corp......................................... $ 4,619,400
120,000 Exxon Mobil Corp. (b)................................ 8,182,800
105,200 Occidental Petroleum Corp............................ 8,558,020
60,000 Williams (The) Cos., Inc............................. 1,264,800
------------
22,625,020
------------
PERSONAL PRODUCTS - 0.8%
67,000 Avon Products, Inc................................... 2,110,500
------------
PHARMACEUTICALS - 9.1%
95,000 Abbott Laboratories (b).............................. 5,129,050
400,000 Bristol-Myers Squibb Co. (b)......................... 10,100,000
70,000 Merck & Co., Inc. (b)................................ 2,557,800
250,000 Pfizer, Inc. (b)..................................... 4,547,500
------------
22,334,350
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 3.4%
184,300 Annaly Capital Management, Inc. (d)................. 3,197,605
100,000 Capstead Mortgage Corp.............................. 1,365,000
515,000 MFA Mortgage Investments, Inc....................... 3,785,250
------------
8,347,855
------------
ROAD & RAIL - 1.6%
60,900 Union Pacific Corp. (d)............................. 3,891,510
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 6.1%
457,300 Intel Corp.......................................... 9,328,920
200,000 Microchip Technology, Inc........................... 5,812,000
------------
15,140,920
------------
SOFTWARE - 1.4%
110,000 Microsoft Corp. (b)................................. 3,353,900
------------
SPECIALTY RETAIL - 3.1%
400,000 Limited Brands, Inc. (b)............................ 7,696,000
------------
TOBACCO - 1.9%
120,000 Altria Group, Inc................................... 2,355,600
50,000 Philip Morris International, Inc.................... 2,409,500
------------
4,765,100
------------
WATER UTILITIES - 0.7%
74,200 American Water Works Co., Inc....................... 1,662,822
------------
TOTAL COMMON STOCKS
(Cost $240,924,062)................................. 229,384,479
------------
See Notes to Financial Statements
Page 8
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2009
SHARES/
UNITS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
MASTER LIMITED PARTNERSHIPS - 4.8%
OIL, GAS & CONSUMABLE FUELS - 4.8%
160,000 Copano Energy, LLC................................... $ 3,825,600
90,000 Energy Transfer Partners, L.P........................ 4,047,300
40,000 Enterprise Products Partners, L.P.................... 1,256,400
60,000 Magellan Midstream Partners, L.P..................... 2,599,800
------------
TOTAL MASTER LIMITED PARTNERSHIPS.................... 11,729,100
(Cost $9,471,612) ------------
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
EXCHANGE-TRADED FUNDS - 2.3%
CAPITAL MARKET - 2.3%
264,500 SPDR KBW Bank ETF (b)................................ 5,599,465
------------
TOTAL EXCHANGE-TRADED FUNDS......................... 5,599,465
(Cost $3,929,150) ------------
TOTAL INVESTMENTS - 100.3%.......................... 246,713,044
(Cost $254,324,824) (e) ------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (0.8%)
3M Co. Call
350 @ 85 due Jan 10...................................... (17,500)
------------
Abbott Laboratories Call
400 @ 55 due Jan 10...................................... (10,000)
------------
Ameriprise Financial, Inc. Call
263 @ 40 due Jan 10...................................... (11,835)
------------
Annaly Capital Management, Inc. Call
1,843 @ 19 due Jan 10...................................... (3,686)
------------
AT&T, Inc. Call
921 @ 28 due Jan 10...................................... (23,025)
------------
BHP Billiton Ltd., ADR Call
300 @ 75 due Jan 10...................................... (83,400)
------------
Bristol-Myers Squibb Co. Call
2,000 @ 27 due Jan 10...................................... (16,000)
------------
Carnival Corp. Call
600 @ 35 due Jan 10...................................... (3,000)
------------
See Notes to Financial Statements
Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2009
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
Cisco Systems, Inc. Call
550 @ 25 due Jan 10...................................... $ (6,600)
------------
Citigroup, Inc. Call
5,679 @ 3 due Mar 10....................................... (278,271)
------------
Coca-Cola (The) Co. Call
600 @ 60 due Jan 10...................................... (3,000)
------------
CVS Caremark Corp. Call
300 @ 33 due Jan 10...................................... (10,500)
------------
Darden Restaurants, Inc. Call
300 @ 37 due Jan 10...................................... (3,750)
------------
Emerson Electric Co. Call
600 @ 45 due Jan 10...................................... (9,000)
------------
Exxon Mobil Corp. Call
200 @ 70 due Jan 10...................................... (7,200)
------------
International Business Machines Corp. Call
250 @ 135 due Jan 10..................................... (12,500)
------------
J.C. Penney Co., Inc. Call
390 @ 29 due Jan 10...................................... (5,850)
------------
Kraft Foods, Inc., Class A Call
200 @ 27.5 due Jan 10.................................... (5,000)
------------
Lincoln National Corp. Calls
100 @ 25 due Jan 10...................................... (6,800)
200 @ 27 due Jan 10...................................... (2,800)
------------
(9,600)
------------
Limited Brands, Inc. Call
1,000 @ 20 due Jan 10...................................... (30,000)
------------
Medtronic, Inc. Call
500 @ 45 due Jan 10...................................... (30,000)
------------
Merck & Co., Inc. Call
350 @ 39 due Jan 10...................................... (1,750)
------------
Microsoft Corp. Call
550 @ 31 due Jan 10...................................... (14,300)
------------
Pfizer, Inc. Call
1,500 @ 19 due Jan 10...................................... (18,000)
------------
See Notes to Financial Statements
Page 10
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2009
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
Regal Entertainment Group, Class A Call
500 @ 15 due Feb 10...................................... $ (22,500)
------------
S&P 500 Index Calls (f)
400 @ 1110 due Jan 10................................... (770,000)
400 @ 1130 due Jan 10................................... (348,000)
------------
(1,118,000)
------------
SPDR KBW Bank ETF Call
1,000 @ 22 due Jan 10..................................... (22,500)
------------
Union Pacific Corp. Calls
309 @ 65 due Jan 10..................................... (27,810)
300 @ 67.5 due Jan 10................................... (8,400)
------------
(36,210)
------------
United Technologies Corp. Call
340 @ 70 due Jan 10..................................... (25,500)
------------
Verizon Communications, Inc. Call
850 @ 33 due Jan 10..................................... (29,750)
------------
Waste Management, Inc. Call
400 @ 35 due Jan 10..................................... (8,000)
------------
TOTAL CALL OPTIONS WRITTEN - (0.8)%................. (1,876,227)
(Premiums received $2,227,651)
------------
NET OTHER ASSETS AND LIABILITIES - 0.5%............. 1,211,191
------------
NET ASSETS - 100.0%................................. $246,048,008
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Call options were written on a portion of the Common Stock position and are
fully covered by the Common Stock position.
(c) Non-income producing security.
(d) Call options were written on this entire Common Stock position and are
fully covered by the Common Stock position.
(e) Aggregate cost for federal income tax purposes is $256,033,477. As of
December 31, 2009, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$19,722,153 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$29,042,586.
(f) Call options on securities indices were written on a portion of the Common
Stock positions that were not covered by call options on individual equity
securities held in the Fund's portfolio.
ADR American Depositary Receipt
See Notes to Financial Statements
Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2009
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2009 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2009 PRICE INPUTS INPUTS
------------ ------------ ----------- ------------
Common Stocks* $229,384,479 $229,384,479 $-- $--
Master Limited Partnerships* 11,729,100 11,729,100 -- --
Exchange-Traded Funds* 5,599,465 5,599,465 -- --
------------ ------------ --- ---
Total Investments $246,713,044 $246,713,044 $-- $--
============ ============ === ===
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2009 PRICE INPUTS INPUTS
------------ ------------ ----------- ------------
Call Options Written $(1,876,227) $(1,876,227) $-- $--
=========== =========== === ===
* See the Portfolio of Investments for industry breakdown.
See Notes to Financial Statements
Page 12
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2009
ASSETS:
Investments, at value
(Cost $254,324,824) ........................................................................ $246,713,044
Cash .......................................................................................... 1,074,351
Prepaid expenses .............................................................................. 11,249
Receivables:
Dividends .................................................................................. 747,738
Interest ................................................................................... 136
------------
Total Assets ............................................................................ 248,546,518
------------
LIABILITIES:
Options written, at value (Premiums received $2,227,651) ...................................... 1,876,227
Payables:
Investment securities purchased ............................................................ 253,863
Investment advisory fees ................................................................... 209,300
Audit and tax fees ......................................................................... 44,200
Legal fees ................................................................................. 43,584
Printing fees .............................................................................. 34,462
Administrative fees ........................................................................ 19,095
Custodian fees ............................................................................. 14,474
Transfer agent fees ........................................................................ 2,729
Other liabilities ............................................................................. 576
------------
Total Liabilities ....................................................................... 2,498,510
------------
NET ASSETS .................................................................................... $246,048,008
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $343,864,427
Par value ..................................................................................... 199,732
Accumulated net investment income (loss) ...................................................... 187,549
Accumulated net realized gain (loss) on investments and written options transactions .......... (90,943,344)
Net unrealized appreciation (depreciation) on investments and written options ................. (7,260,356)
------------
NET ASSETS .................................................................................... $246,048,008
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .......................... $ 12.32
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ... 19,973,164
============
See Notes to Financial Statements
Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2009
INVESTMENT INCOME:
Dividends ........................................................ $ 6,939,550
Interest ......................................................... 7,006
------------
Total investment income .................................... 6,946,556
------------
EXPENSES:
Investment advisory fees ......................................... 2,211,615
Administrative fees .............................................. 205,722
Legal fees ....................................................... 134,201
Printing fees .................................................... 109,934
Custodian fees ................................................... 109,017
Audit and tax fees ............................................... 47,039
Trustees' fees and expenses ...................................... 39,298
Transfer agent fees .............................................. 36,267
Other ............................................................ 75,840
------------
Total expenses ............................................. 2,968,933
------------
NET INVESTMENT INCOME (LOSS) ..................................... 3,977,623
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................... (58,634,598)
Written option transactions * ................................. 3,453,288
------------
Net realized gain (loss) ......................................... (55,181,310)
------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................... 94,672,348
Written options held * ........................................ (921,784)
------------
Net change in unrealized appreciation (depreciation) ............. 93,750,564
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) .......................... 38,569,254
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .. $ 42,546,877
============
* Primary risk exposure is equity contracts.
See Notes to Financial Statements
Page 14
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2009 12/31/2008
------------ -------------
OPERATIONS:
Net investment income (loss) ...................................... $ 3,977,623 $ 8,341,860
Net realized gain (loss) .......................................... (55,181,310) (33,263,036)
Net change in unrealized appreciation (depreciation) .............. 93,750,564 (87,455,886)
------------ -------------
Net increase (decrease) in net assets resulting from operations ... 42,546,877 (112,377,062)
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (3,797,356) (8,517,786)
Net realized gains ................................................ -- (2,088,601)
Return of capital ................................................. (15,376,882) (21,350,675)
------------ -------------
Total distributions to shareholders ............................... (19,174,238) (31,957,062)
------------ -------------
Total increase (decrease) in net assets ........................... 23,372,639 (144,334,124)
NET ASSETS:
Beginning of period ............................................... 222,675,369 367,009,493
------------ -------------
End of period ..................................................... $246,048,008 $ 222,675,369
============ =============
Accumulated net investment income (loss) at end of period ......... $ 187,549 $ --
============ =============
See Notes to Financial Statements
Page 15
FIRST TRUST ENHANCED EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/2009 12/31/2008 12/31/2007(a) 12/31/2006 12/31/2005
---------- ---------- ------------- ---------- ----------
Net asset value, beginning of period ............... $ 11.15 $ 18.38 $ 18.65 $ 18.99 $ 19.97
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ....................... 0.20 0.42 0.14 0.02 0.01
Net realized and unrealized gain (loss) ............ 1.93 (6.05) 1.24 1.24 0.61
-------- -------- -------- -------- --------
Total from investment operations ................... 2.13 (5.63) 1.38 1.26 0.62
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .............................. (0.19) (0.43) (0.14) (0.02) (0.01)
Net realized gain .................................. -- (0.10) (1.51) (1.58) (1.59)
Return of capital .................................. (0.77) (1.07) -- -- --
-------- -------- -------- -------- --------
Total distributions ................................ (0.96) (1.60) (1.65) (1.60) (1.60)
-------- -------- -------- -------- --------
Net asset value, end of period ..................... $ 12.32 $ 11.15 $ 18.38 $ 18.65 $ 18.99
======== ======== ======== ======== ========
Market value, end of period ........................ $ 11.70 $ 8.85 $ 16.14 $ 18.41 $ 17.12
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (b) .......... 22.24% (30.54)% 8.19% 7.09% 3.48%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (b) ............. 46.26% (37.22)% (3.76)% 17.26% (6.85)%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............... $246,048 $222,675 $367,009 $372,576 $379,245
Ratio of total expenses to average net assets ...... 1.34% 1.31% 1.21% 1.24% 1.23%
Ratio of net investment income (loss) to average
net assets ...................................... 1.80% 2.80% 0.76% 0.13% 0.04%
Portfolio turnover rate ............................ 74% 121% 174% 131% 266%
----------
(a) On September 14, 2007, Chartwell Investment Partners, L.P. became the
sub-advisor to the Fund.
(b) 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.
See Notes to Financial Statements
Page 16
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009
1. FUND DESCRIPTION
First Trust Enhanced Equity Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 20, 2004 and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FFA on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income and
gains and, to a lesser extent, capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities. Under normal market conditions, the Fund pursues an integrated
investment strategy in which the Fund invests substantially all of its managed
assets in a diversified portfolio of common stocks of U.S. corporations and U.S.
dollar-denominated equity securities of non-U.S. issuers, in each case that are
traded on U.S. securities exchanges, and on an ongoing and consistent basis
writes (sells) covered call options on a portion of the Fund's managed assets.
There can be no assurance that the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. The NAV per Common Share is calculated
by dividing the value of all assets of the Fund (including accrued interest and
dividends), less all liabilities (including accrued expenses, the value of call
options written (sold) and dividends declared but unpaid), by the total number
of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value in
accordance with valuation procedures adopted by the Fund's Board of Trustees. A
majority of the Fund's assets are valued using market information supplied by
third parties. In the event that market quotations are not readily available,
the pricing service does not provide a valuation for a particular asset, or the
valuations are deemed unreliable, the Fund's Board of Trustees has designated
First Trust Advisors L.P. ("First Trust") to use a fair value method to value
the Fund's securities and other investments. Additionally, if events occur after
the close of the principal markets for particular securities (e.g., domestic
debt and foreign securities), but before the Fund values its assets, that could
materially affect NAV, First Trust may use a fair value method to value the
Fund's securities and other investments. The use of fair value pricing by the
Fund is governed by valuation procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, or
no official closing price in the case of securities traded on the NASDAQ, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days are valued at amortized cost.
The Fund values exchange-traded options and other derivative contracts at the
closing price on the exchange on which they are principally traded, or if not
traded, or no closing price is available, at the mean between the last bid and
asked price.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in markets that
are non-active. A non-active market is a market where there are
few transactions for the security, the prices are not current, or
price quotations vary substantially either over time or among
market makers, or in which little information is released
publicly.
- Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks, and default rates).
- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of December 31, 2009, is
included with the Fund's Portfolio of Investments.
B. WRITTEN OPTIONS:
The Fund may write (sell) covered call options ("options") on all or a portion
of the equity securities held in the Fund's portfolio and on securities indices
as determined to be appropriate by Chartwell Investment Partners, L.P.
("Chartwell" or the "Sub-Advisor"), consistent with the Fund's investment
objective. The number of options the Fund can write (sell) is limited by the
amount of equity securities the Fund holds in its portfolio. Options on
securities indices are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security and are similar to options on single securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. The Fund will not
write (sell) "naked" or uncovered options. If certain equity securities held in
the Fund's portfolio are not covered by a related call option on the individual
equity security, securities index options may be written on all or a portion of
such uncovered securities. By writing (selling) options, the Fund seeks to
generate additional income, in the form of premiums received, for writing
(selling) the options, and to provide a partial hedge against a market decline
in the underlying equity security. When the Fund writes (sells) an option, an
amount equal to the premium received by the Fund is included in the Fund's
Statement of Assets and Liabilities as a liability. Options are marked-to-market
daily and their value will be affected by changes in the value and dividend
rates of the underlying equity securities, changes in interest rates, changes in
the actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the exercise price. In this case, the
option premium received by the Fund will be added to the amount realized on the
sale of the underlying equity security for purposes of determining gain or loss.
If the price of the underlying equity security is less than the option's
exercise price, the option will likely expire without being exercised. The
option premium received by the Fund will, in this case, be treated as short-term
capital gain on the expiration date of the option. The Fund may also elect to
close out its position in an option prior to its expiration by purchasing an
option of the same series as the option written (sold) by the Fund.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the Fund's covered call investment strategy depends on the ability of Chartwell
to predict pertinent market movements, which cannot be assured. Thus, the use of
options may require the Fund to sell portfolio securities at inopportune times
or for prices other than current market value, which may limit the amount of
appreciation the Fund can realize on an investment, or may cause the Fund to
hold a security that it might otherwise sell. As the writer (seller) of a
covered option, the Fund forgoes, during the option's life, the opportunity to
profit from increases in the market value of the security covering the option
above the sum of the premium received and the exercise price of the option, but
has retained the risk of loss should the price of the underlying security
decline. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective. Over-the-counter ("OTC") options have the risk of the
potential inability of counterparties to meet the terms of their contracts. The
Fund's maximum equity price risk for purchased options is limited to the premium
initially paid. In addition, certain risks may arise upon entering into option
contracts including the risk that an illiquid secondary market will limit the
Fund's ability to close out an option contract prior to the expiration date and
that a change in the value of the option contract may not correlate exactly with
changes in the value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis, including amortization of premiums and accretion of
discounts.
The Fund may hold publicly-traded master limited partnerships ("MLPs") and real
estate investment trusts ("REITs"). Distributions from such investments may
include a return of capital component from the MLP or REIT to the extent of the
cost basis of such MLP or REIT investments. The actual character of amounts
received during the year is not known until after the fiscal year end. The Fund
records the character of distributions received from the MLPs or REITs during
the year based on estimates available. The Fund's characterization may be
subsequently revised based on information received from the MLPs or REITs after
their tax reporting periods conclude.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income of the Fund are declared and paid quarterly
or as the Board of Trustees may determine from time to time. Distributions of
any net realized capital gains earned by the Fund are distributed at least
annually. Distributions will automatically be reinvested into additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and realized capital gains are determined in
accordance with income tax regulations, which may differ from accounting
principles generally accepted in the United States of America. These differences
are primarily due to differing treatments of income and gains on various
investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund. Permanent differences
incurred during the tax year ended December 31, 2009, resulting in book and tax
accounting differences, have been reclassified at year end to reflect an
increase in accumulated net investment income (loss) of $7,282, a decrease in
accumulated net realized gain (loss) on investments of $164,790 and an increase
to paid-in capital of $157,508. Net assets were not affected by this
reclassification.
The tax character of distributions paid during the years ended December 31, 2009
and December 31, 2008 was as follows:
Distributions paid from:
2009 2008
----------- -----------
Ordinary Income .............................. $ 3,797,356 $10,606,387
Return of Capital ............................ 15,376,882 21,350,675
As of December 31, 2009, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ................ $ --
Net Unrealized Appreciation (Depreciation) ... (13,727,702)
Accumulated Capital and Other Losses ......... (84,288,449)
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009
E. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry a realized capital loss forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2009, the
Fund had a capital loss carryforward for federal income tax purposes of
$83,364,751, with $15,025,062 and $68,339,689 expiring on December 31, 2016 and
2017, respectively.
Certain capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended December 31, 2009, the Fund intends to elect to defer net realized capital
losses of $923,698 incurred from November 1, 2009 through December 31, 2009.
The Fund is subject to tax accounting standards that establish a minimum
threshold for recognizing, and a system for measuring, the benefits of a tax
position taken or expected to be taken in a tax return. Taxable years ending
2009, 2008, 2007 and 2006 remain open to federal and state audit. As of December
31, 2009, management has evaluated the application of these standards to the
Fund, and has determined that no provision for income tax is required in the
Fund's financial statements for uncertain tax positions.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ACCOUNTING PRONOUNCEMENT:
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements". ASU 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are effective for interim and annual reporting
periods beginning after December 15, 2009, and other required disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Management is currently evaluating the impact
ASU No. 2010-06 will have on its financial statement disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets, which means the average daily gross
assets of the Fund minus the sum of the Fund's accrued and unpaid dividends on
any outstanding Common Shares and accrued liabilities, including the value of
call options written (sold).
Chartwell manages the Fund's portfolio subject to First Trust's supervision.
Chartwell receives a monthly portfolio management fee calculated at an annual
rate of 0.50% of the Fund's Managed Assets that is paid monthly by First Trust
out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, also an indirect, majority-owned subsidiary of
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor,
or any of their affiliates ("Independent Trustees"), is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and Valuation Committee are
paid $2,500 annually to serve in such capacities, with such compensation paid by
the trusts in the First Trust Fund Complex and equally allocated among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
The Lead Independent Trustee and each Committee chairman served two-year terms
ending December 31, 2009, before rotating to serve as chairman of another
Committee or as Lead Independent Trustee. The officers and "Interested" Trustee
receive no compensation from the trusts for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS ACTIVITY
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments and written options, for the year ended December 31,
2009, were $165,536,520 and $175,820,474, respectively.
Written option activity for the year ended December 31, 2009 was as follows:
NUMBER
OF
CONTRACTS PREMIUMS
--------- ------------
WRITTEN OPTIONS
Options outstanding at December 31, 2008 .... 58,717 $ 8,449,321
Options written ............................. 657,872 76,946,599
Options expired ............................. (210,178) (16,729,817)
Options exercised ........................... (16,952) (1,410,190)
Options closed .............................. (465,014) (65,028,262)
-------- ------------
Options outstanding at December 31, 2009 .... 24,445 $ 2,227,651
======== ============
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
EQUITY SECURITIES RISK: The Fund invests in equity securities. An adverse event
affecting an issuer, such as an unfavorable earnings report, may depress the
value of a particular equity security held by the Fund. Also, the prices of
equity securities are sensitive to general movements in the stock market and a
drop in the stock market may depress the prices of equity securities to which
the Fund has exposure. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when political
or economic events affecting the issuers or their industries occur.
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009
OPTION RISK: The Fund may write (sell) covered call options on all or a portion
of the equity securities held in the Fund's portfolio as determined to be
appropriate by the Fund's Sub-Advisor, consistent with the Fund's investment
objective. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Advisor's ability to predict pertinent market movements,
which can not be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold an equity security that it might
otherwise sell. There can be no assurance that a liquid market for the options
will exist when the Fund seeks to close out an option position. Additionally, to
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to additional risks.
INDUSTRY RISK: The Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry. If the Fund is focused in an
industry, it may present more risks than if it were broadly diversified over
numerous industries of the economy. Individual industries may be subject to
unique risks which may include, among others, governmental regulation,
inflation, technological innovations that may render existing products and
equipment obsolete, competition from new entrants, high research and development
costs, and rising interest rates.
INCOME RISK: Net investment income paid by the Fund to its Common Shareholders
is derived from the premiums it receives from writing (selling) call options and
from the dividends and interest it receives from the equity securities and other
investments held in the Fund's portfolio and short-term gains thereon. Premiums
from writing (selling) call options and dividends and interest payments made by
the securities in the Fund's portfolio can vary widely over time. Dividends on
equity securities are not fixed but are declared at the discretion of an
issuer's board of directors. There is no guarantee that the issuers of the
equity securities in which the Fund invests will declare dividends in the future
or that if declared they will remain at current levels. The Fund cannot assure
as to what percentage of the distributions paid on the Common Shares, if any,
will consist of qualified dividend income or long-term capital gains, both of
which are taxed at lower rates for individuals than are ordinary income and
short-term capital gains.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. A related risk is that there may be difficulty
in obtaining or enforcing a court judgment abroad.
7. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events on the Fund through
February 24, 2010, the date the financial statements were issued, and has
determined that there was a subsequent event as follows:
On February 2, 2010, The PNC Financial Services Group, Inc. ("PNC") entered into
a Stock Purchase Agreement (the "Stock Purchase Agreement") with The Bank of New
York Mellon Corporation ("BNY Mellon"). Upon the terms and subject to the
conditions set forth in the Stock Purchase Agreement, which has been approved by
the board of directors of each company, PNC will sell to BNY Mellon (the "Stock
Sale") 100% of the issued and outstanding shares of PNC Global Investment
Servicing Inc., an indirect, wholly-owned subsidiary of PNC.
The Stock Sale includes PNC Global Investment Servicing (U.S.) Inc. and PFPC
Trust Company and PNC has indicated that it is expected to close in the third
quarter of 2010.
Page 22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST ENHANCED EQUITY INCOME
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Enhanced Equity Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2009, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2009 by correspondence with the Fund's
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Enhanced Equity Income Fund as of December 31, 2009, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America.
(DELOITTE & TOUCHE LLP)
Chicago, Illinois
February 24, 2010
Page 23
ADDITIONAL INFORMATION
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions on your Common Shares, will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent") in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of valuation,
the Fund will issue new shares at a price equal to the greater of (i)
NAV per Common Share on that date or (ii) 95% of the market price on
that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. It is possible
that the market price for the Common Shares may increase before the
Plan Agent has completed its purchases. Therefore, the average
purchase price per share paid by the Plan Agent may exceed the market
price at the time of valuation, resulting in the purchase of fewer
shares than if the dividend or distribution had been paid in Common
Shares issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 24
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the NYSE Listed Company Manual, the Fund's
President has certified to the NYSE that, as of June 16, 2009, he was not aware
of any violation by the Fund of NYSE corporate governance listing standards. In
addition, the Fund's reports to the SEC on Form N-CSR and N-Q contain
certifications by the Fund's principal executive officer and principal financial
officer to the Fund's public disclosure in such reports and that are required by
Rule 30a-2 under the 1940 Act.
TAX INFORMATION
Of the ordinary income (including short-term capital gain, if applicable),
distributions made by the Fund during the year ended December 31, 2009, 56.25%
qualified for the corporate dividends received deduction available to corporate
shareholders.
The Fund hereby designates as qualified dividend income 57.45% of its ordinary
income distributions (including short-term capital gain, if applicable), for the
year ended December 31, 2009.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund was
held on April 16, 2009. At the Annual Meeting, Trustees Richard E. Erickson and
Thomas R. Kadlec were elected by holders of the Common Shares of the First Trust
Enhanced Equity Income Fund as Class II Trustees for three-year terms expiring
at the Fund's annual meeting of shareholders in 2012. The number of votes cast
in favor of Dr. Erickson was 17,247,996, the number of votes against was 954,965
and the number of abstentions was 1,770,203. The number of votes cast in favor
of Mr. Kadlec was 17,245,837, the number of votes against was 957,124 and the
number of abstentions was 1,770,203. James A. Bowen, Robert F. Keith and Niel B.
Nielson are the current and continuing Trustees.
Page 25
BOARD OF TRUSTEES AND OFFICERS
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
----------------------------- -------------------- -------------------------- ------------------- ------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Three Year Term Physician; President, 61 None
c/o First Trust Advisors L.P. - Since Fund Wheaton Orthopedics;
120 E. Liberty Drive, Inception Co-owner and Co-
Suite 400 Director (January 1996
Wheaton, IL 60187 to May 2007), Sports
D.O.B.: 04/51 Med Center for Fitness;
Limited Partner,
Gundersen Real Estate
Partnership; Limited
Partner, Sportsmed LLC
Thomas R. Kadlec, Trustee - Three Year Term Senior Vice President and 61 Director of ADM
c/o First Trust Advisors L.P. - Since Fund Chief Financial Officer Investor Services,
120 E. Liberty Drive, Inception (May 2007 to Present), Inc. and ADM
Suite 400 Vice President and Chief Investor Services
Wheaton, IL 60187 Financial Officer (1990 to International
D.O.B.: 11/57 May 2007), ADM Investor
Services, Inc. (Futures
Commission Merchant)
Robert F. Keith, Trustee - Three Year Term President (2003 to 61 None
c/o First Trust Advisors L.P. - Since June 2006 Present), Hibs
120 E. Liberty Drive, Enterprises (Financial
Suite 400 and Management
Wheaton, IL 60187 Consulting)
D.O.B.: 11/56
----------
(1) Currently, Robert F. Keith is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
Page 26
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
----------------------------- -------------------- -------------------------- ------------------- ------------------
INDEPENDENT TRUSTEES - (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 61 Director of
c/o First Trust Advisors L.P. - Since Fund to Present), Covenant Covenant Transport
120 E. Liberty Drive, Inception College Inc.
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen(2), Trustee, - Three Year President, First Trust 61 Trustee of Wheaton
President, Chairman of the Trustee Term Advisors L.P. and First College
Board and CEO and Indefinite Trust Portfolios L.P.;
120 E. Liberty Drive, Officer Term Chairman of the Board
Suite 400 - Since Fund of Directors, BondWave
Wheaton, IL 60187 Inception LLC (Software
D.O.B.: 09/55 Development
Company/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ----------------------- ------------------ -----------------------------
OFFICERS WHO ARE NOT TRUSTEES(3)
Mark R. Bradley Treasurer, Controller, - Indefinite Term Chief Financial Officer,
120 E. Liberty Drive, Chief Financial Officer - Since Fund First Trust Advisors L.P.
Suite 400 and Chief Accounting Inception and First Trust Portfolios
Wheaton, IL 60187 Officer L.P.; Chief Financial
D.O.B.: 11/57 Officer, BondWave LLC
(Software Development
Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
----------
(1) Currently, Robert F. Keith is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
(2) Mr Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 27
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ----------------------- ------------------ -----------------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
Erin E. Chapman Assistant Secretary - Indefinite Term Assistant General
120 E. Liberty Drive, - Since June 2009 Counsel (October 2007 to
Suite 400 Present), Associate
Wheaton, IL 60187 Counsel (March 2006 to
D.O.B.: 08/76 October 2007), First Trust
Advisors L.P. and First
Trust Portfolios L.P.;
Associate Attorney
(November 2003 to
March 2006), Doyle &
Bolotin, Ltd.
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President
120 E. Liberty Drive, - Since December (April 2007 to Present),
Suite 400 2005 Vice President (January
Wheaton, IL 60187 2005 to April 2007), First
D.O.B.: 01/66 Trust Advisors L.P. and
First Trust Portfolios L.P.
Christopher R. Fallow Assistant Vice - Indefinite Term Assistant Vice President
120 E. Liberty Drive, President - Since December (August 2006 to Present),
Suite 400 2006 Associate (January 2005 to
Wheaton, IL 60187 August 2006), First Trust
D.O.B.: 04/79 Advisors L.P. and First
Trust Portfolios L.P.
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel, First
120 E. Liberty Drive, Compliance Officer - Since Fund Trust Advisors L.P., First
Suite 400 Inception Trust Portfolios L.P. and
Wheaton, IL 60187 BondWave LLC (Software
D.O.B.: 05/60 Development
Company/Investment
Advisor); Secretary of
Stonebridge Advisors LLC
(Investment Advisor)
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 28
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ----------------------- ------------------ -----------------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
Daniel J. Lindquist Vice President - Indefinite Term Senior Vice President
120 E. Liberty Drive, - Since December (September 2005 to Present),
Suite 400 2005 Vice President (April 2004 to
Wheaton, IL 60187 September 2005), First Trust
D.O.B.: 02/70 Advisors L.P. and First Trust
Portfolios L.P.
Coleen D. Lynch Assistant Vice - Indefinite Term Assistant Vice President
120 E. Liberty Drive, President - Since July 2008 (January 2008 to Present),
Suite 400 First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.;
D.O.B.: 07/58 Vice President (May 1998 to
January 2008), Van Kampen
Asset Management and
Morgan Stanley Investment
Management
Kristi A. Maher Assistant Secretary - Indefinite Term Deputy General Counsel
120 E. Liberty Drive, and Deputy Chief - Assistant (May 2007 to Present),
Suite 400 Compliance Officer Secretary since Assistant General Counsel
Wheaton, IL 60187 Fund Inception (March 2004 to May 2007),
D.O.B.: 12/66 - Deputy Chief First Trust Advisors L.P. and
Compliance First Trust Portfolios L.P.
Officer since
November 2009
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 29
PRIVACY POLICY
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2009 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining that relationship. We are committed to protecting the
security and confidentiality of your personal information.
I. SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
A. Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews, applications, agreements
or other forms;
B. Information about your transactions with us, our affiliates or others;
C. Information we receive from your inquiries by mail, e-mail or telephone;
and
D. Information we collect on our website through the use of "cookies". For
example, we may identify the pages on our website that your browser requests or
visits.
II. INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
III. DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
A. In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your personal
information as described above to unaffiliated financial service providers and
other companies that perform administrative or other services on our behalf,
such as transfer agents, custodians and trustees, or that assist us in the
distribution of investor materials such as trustees, banks, financial
representatives, proxy services, solicitors and printers.
B. We may release information we have about you if you direct us to do so,
if we are compelled by law to do so, or in other legally limited circumstances
(for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
IV. CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, we restrict access to your
nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
V. POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822
Page 30
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This Page Left Blank Intentionally.
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party.
(c) During the period covered by this report, the code of ethics that
applies to the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and that
relates to any element of the code of ethics description was amended
to name W. Scott Jardine as the Compliance Coordinator for the
implementation and administration of the aforementioned code. The
amended code of ethics is provided as an exhibit pursuant to Item
12(a)(1).
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are
employed by the registrant or a third party, that relates to one or
more of the items set forth in paragraph (b) of this item's
instructions.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $37,000.00 for 2008 and
$39,000.00 for 2009.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years, for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $0 for 2008 and $0 for 2009.
AUDIT-RELATED FEES (INVESTMENT ADVISER) -- The aggregate fees billed
in each of the last two fiscal years of the registrant for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2008 and $0 for 2009.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were
$5,000.00 for 2008 and $7,320.00 for 2009. These fees were for tax preparation.
TAX FEES (INVESTMENT ADVISER) -- The aggregate fees billed in each of
the last two fiscal years of the registrant for professional services rendered
by the principal accountant for tax compliance, tax advice, and tax planning to
the registrant's adviser were $0 for 2008 and $0 for 2009.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2008 and $0 for 2009.
ALL OTHER FEES (INVESTMENT ADVISER) -- The aggregate fees billed in
each of the last two fiscal years for products and services provided by the
principal accountant to the registrant's investment adviser, other than services
reported in paragraphs (a) through (c) of this Item were $0 for 2008 and $0 for
2009.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "COMMITTEE") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the DE MINIMIS exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were
not pre-approved pursuant to its policies, the Committee will consider whether
the provision of such non-audit services is compatible with the auditor's
independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's engagement
to audit the registrant's financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
Registrant for 2008 were $5,000.00 and $12,143.00 for the Registrant and
the Registrant's investment adviser, respectively, and for 2009 were
$7,320.00 and $36,000.00, for the Registrant and the Registrant's
investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees determined that
the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the Registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent trustees of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
CHARTWELL INVESTMENT PARTNERS
PROXY VOTING POLICIES AND PROCEDURES
As Further Amended July, 2009
PURPOSE. Chartwell Investment Partners ("Chartwell") has adopted these Proxy
Voting Policies and Procedures ("Policies") to seek to ensure that it exercises
voting authority on behalf of Chartwell clients in a manner consistent with the
best interests of each client and its agreement with the client.
SCOPE. These Policies apply where clients have delegated the authority and
responsibility to Chartwell to decide how to vote proxies. Chartwell does not
accept or retain authority to vote proxies in accordance with individual client
guidelines (with the exception of Clients who wish to instruct Chartwell not to
vote in accordance with AFL-CIO Key Vote Survey recommendations, as described
below). Clients that wish to arrange to vote proxies in accordance with their
own guidelines may elect to do so at any time by notifying Chartwell. Chartwell
generally will follow these Policies if asked to make recommendations about
proxy voting to clients who request that advice but have not delegated proxy
voting responsibility to Chartwell.
GUIDING PRINCIPLES. Chartwell believes that voting proxies in the best interests
of each client means making a judgment as to what voting decision is most likely
to maximize total return to the client as an investor in the securities being
voted, and casting the vote accordingly. For this reason, Chartwell's evaluation
of the possible impact of a proxy vote on the economic interests of company
shareholders similarly situated to Chartwell's clients will be the primary
factor governing Chartwell's proxy voting decisions.
USE OF INDEPENDENT PROXY VOTING SERVICE. Chartwell has retained RiskMetrics
Group, an independent proxy voting service, to assist it in analyzing specific
proxy votes with respect to securities held by Chartwell clients and to handle
the mechanical aspects of casting votes. Historically, Chartwell has placed
substantial reliance on RiskMetrics Group's (RMG - formerly ISS) analyses and
recommendations and generally gives instructions to RMG/ISS to vote proxies in
accordance with RMG/ISS' recommendations, unless Chartwell reaches a different
conclusion than RMG/ISS about how a particular matter should be voted. RMG/ISS'
proxy voting recommendations typically are made available to Chartwell about a
week before the proxy must be voted, and are reviewed and monitored by members
of the Proxy Voting Committee (and, in certain cases, by Chartwell portfolio
managers), with a view to determining whether it is in the best interests of
Chartwell's clients to vote proxies as recommended by RMG/ISS, or whether client
proxies should be voted on a particular proposal in another manner. In addition,
Chartwell generally votes in accordance with AFL-CIO Key Votes Survey,
a list of proposals and meetings based on the AFL-CIO Proxy Voting Guidelines.
To the extent that any of the proxy voting positions stated in these Policies
are inconsistent with a Key Vote Survey recommendation, Chartwell will generally
vote in accordance with the Key Vote Survey recommendation on all impacted
securities unless any client has chosen to instruct Chartwell to refrain from
doing so. In that case, Chartwell will vote the client's securities position in
accordance with these Policies (which may or may not cause the vote to be the
same as the Key Vote Survey recommendation).
ADMINISTRATION OF POLICIES. Chartwell has established a Proxy Voting Committee
to oversee and administer the voting of proxies on behalf of clients, comprised
of approximately five representatives of the firm's compliance and operations
departments. The Committee's responsibilities include reviewing and updating
these Policies as may be appropriate from time to time; identifying and
resolving any material conflicts of interest on the part of Chartwell or its
personnel that may affect particular proxy votes; evaluating and monitoring, on
an ongoing basis, the analyses, recommendations and other services provided by
RMG/ISS or another third party retained to assist Chartwell in carrying out its
proxy voting responsibilities; when deemed appropriate by the Committee,
consulting with Chartwell portfolio managers and investment professionals on
particular proposals or categories of proposals presented for vote; and
determining when and how client proxies should be voted other than in accordance
with the general rules and criteria set forth in Chartwell's Proxy Voting
Guidelines or with the recommendations of RMG or another independent proxy
voting service retained by Chartwell..
CONFLICTS OF INTEREST. It is Chartwell's policy not to exercise its authority to
decide how to vote a proxy if there is a material conflict of interest between
Chartwell's interests and the interests of the client that owns the shares to be
voted that could affect the vote on that matter. To seek to identify any such
material conflicts, a representative of the Proxy Voting Committee screens all
proxies and presents any potential conflicts identified to the Committee for
determination of whether the conflict exists and if so, whether it is material.
Conflicts of interest could result from a variety of circumstances, including,
but not limited to, significant personal relationships between executive
officers of an issuer and Chartwell personnel, a current or prospective
investment adviser-client relationship between an issuer or a pension plan
sponsored by an issuer and Chartwell, a significant ownership interest by
Chartwell or its personnel in the issuer and various other business, personal or
investment relationships. Generally, a current or prospective adviser-client
relationship will not be considered material for these purposes if the net
advisory revenues to Chartwell have not in the most recent fiscal year and are
not expected in the current fiscal year to exceed 1/2 of 1 percent of
Chartwell's annual advisory revenue.
Currently, the Proxy Voting Committee has determined that voting in accordance
with AFL-CIO Key Votes Survey recommendations is not a material conflict of
interest. In reaching this decision, the Committee recognized that Chartwell has
many union clients and many clients that are not union-oriented. By voting all
impacted securities positions in accordance with AFL-CIO recommendations, it
could be said that Chartwell is attempting to retain or attract existing and
prospective union clients. However, the overall number of proxy issues in the
AFL-CIO Key Votes Survey on which Chartwell has historically voted is
approximately 14 - 30 out of a total of approximately 500 company meetings and
thousands of proxy votes cast by Chartwell each year. Chartwell does not use its
AFL-CIO Key Votes Survey rankings for marketing purposes so to the extent any
client or prospect becomes aware of how Chartwell votes in the Surveys, it does
so on its own. Recognizing that deciding this is not a material conflict of
interest is fundamentally subjective, Chartwell nonetheless discloses its
practices to clients and invites clients to instruct Chartwell not to change any
vote in these Policies to be consistent
with an AFL-CIO Key Votes Survey recommendation (even though voting consistently
with these Policies may result in voting the same way).
In the event the Committee determines that there is a material conflict of
interest that may affect a particular proxy vote, Chartwell will NOT make the
decision how to vote the proxy in accordance with these Policies unless the
Policies specify how votes shall be cast on that particular type of matter,
i.e., "for" or "against" the proposal. Where the Policies provide that the
voting decision will be made on a "case-by-case" basis, Chartwell will either
request the client to make the voting decision, or the vote will be cast in
accordance with the recommendations of RMG/ISS or another independent proxy
voting service retained by Chartwell for that purpose. Chartwell also will not
provide advice to clients on proxy votes without first disclosing any material
conflicts to the client requesting such advice.
WHEN CHARTWELL DOES NOT VOTE PROXIES. Chartwell may not vote proxies respecting
client securities in certain circumstances, including, but not limited to,
situations where (a) the securities are no longer held in a client's account;
(b) the proxy and other relevant materials are not received in sufficient time
to allow analysis or an informed vote by the voting deadline; (c) Chartwell
concludes that the cost of voting the proxy will exceed the expected potential
benefit to the client; (d) the securities have been loaned out pursuant to a
client's securities lending program and are unavailable to vote; or (e) in the
case of voting in accordance with AFL-CIO Key Votes Survey recommendations, a
client has instructed Chartwell not to vote in accordance with such
recommendations but to vote in accordance with these Policies (which may or may
not be the same on a given proxy issue).
PROXY VOTING GUIDELINES
Generally, Chartwell votes all proxies in accordance with the RiskMetrics
guidelines. These guidelines may be changed or supplemented from time to time.
Votes on matters not covered by these guidelines will be determined in
accordance with the principles set forth above. Client guidelines may be
inconsistent with these guidelines and may cause Chartwell to vote differently
for different clients on the same matter.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF MARCH 8, 2010
Chartwell Investment Partners, L.P. ("Chartwell" or the "Sub-Adviser"), founded
in 1997, is an employee-owned investment firm focusing on institutional,
sub-advisory and private client relationships. The firm is a research-based
equity and fixed-income manager with a disciplined, team-oriented investment
process. The Portfolio Management Team consists of the following:
PORTFOLIO MANAGEMENT TEAM
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 38 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity
strategies. As the lead portfolio manager for the Fund since 2007, he focuses on
securities in the Energy, Financials and Consumer Staples sectors. He was
employed as a Senior Portfolio Manager at Delaware Investment Advisers from 1990
to 1997, managing two closed-end equity income funds that utilized option
strategies to generate portfolio gains. Mr. Schaffer earned a Bachelor's degree
in Economics from Villanova University and an MBA from the University of
Pennsylvania's Wharton School.
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 12 years of investment industry experience. His areas of
focus include the Transportation and Consumer Discretionary sectors of the
market. He has been a portfolio manager for the Fund since 2007. From 1993 to
2003, he held several positions at Morgan Stanley Investment Management (Miller
Anderson & Sherrerd) including Head of Mutual Fund Administration and Vice
President and Treasurer of the MAS Funds, Junior Associate in the Equity
Department, and his last position held prior to joining Chartwell was Senior
Associate and Analyst for the Large Cap Value team. Prior to joining Morgan
Stanley, he was an Assistant Vice President and Senior Accounting Officer at
Provident Financial Processing Corporation. Mr. Kugler is a member of the CFA
(Chartered Financial Analysts) Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. Mr. Kugler earned a
Bachelor's degree in Accounting from the University of Delaware.
KEVIN A. MELICH, CFA
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Melich is a founding partner of Chartwell and has 45 years of investment
industry experience. He is a member of Chartwell's large-cap equity portfolio
management team and implements portfolio management decisions for high-yield
equity institutional portfolios, including the Fund. He has been a portfolio
manager for the Fund since 2007. His areas of focus are in the Automotive,
Machinery, Office Electronics and REITs sectors. He was employed as a Senior
Portfolio Manager at Delaware Investment Advisers from 1983 to 1997. There he
managed over $1.6 billion for institutional accounts in the value style. From
1979 to 1983, Mr. Melich was a Partner with the economics consulting firm A.B.
Laffer Associates. From 1964 to 1979, he was the Senior Investment Officer and
Manager of the Trust and Investment Division of Security Trust Company. Mr.
Melich is a member of the CFA Institute and the CFA Society of Philadelphia. He
holds the Chartered Financial Analyst designation. He earned a Bachelor of
Science degree in Economics from St. John Fisher College.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
INFORMATION PROVIDED AS OF DECEMBER 31, 2009
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
(assets in millions).
Total Assets
# of Accounts For Which
Total # of Managed For Which Advisory Fee
Name Of Portfolio Accounts Advisory Fee is is Based on
Manager or Team Member Type of Accounts Managed Total Assets Based on Performance Performance
----------------------- --------------------------------- ---------- ------------ -------------------- ------------
1. Bernard P. Schaffer Registered Investment Companies: 1 $ 45.5 0 $0
Other Pooled Investment Vehicles: 0 $ 0 0 $0
Other Accounts: 21 $357.6 0 $0
2. Kevin A. Melich Registered Investment Companies: 1 $ 45.5 0 $0
Other Pooled Investment Vehicles: 0 $ 0 0 $0
Other Accounts: 21 $357.6 0 $0
3. Douglas W. Kugler Registered Investment Companies: 1 $ 45.5 0 $0
Other Pooled Investment Vehicles: 0 $ 0 0 $0
Other Accounts: 21 $357.6 0 $0
POTENTIAL CONFLICTS OF INTERESTS
The portfolio managers manage other accounts for Chartwell including the
Chartwell Dividend and Income Fund, (CWF) and institutional portfolios of
similar investment styles. None of these portfolio managers manage any hedge
funds nor any accounts with performance-based fees.
When registered funds and investment accounts are managed side-by-side, firm
personnel must strictly follow the policies and procedures outlined in our Trade
Allocation Policy to ensure that accounts are treated in a fair and equitable
manner, and that no client or account is favored over another. When registered
funds and investment accounts are trading under the same investment product, and
thus trading the same securities, shares are allocated on a pro-rata basis based
on market value, and all portfolios obtain the same average price.
On a monthly basis, a member of Chartwell's Compliance Group, oversees the
performance calculation process handled in Operations, and completes a
spreadsheet of monthly portfolio returns by client. This person provides this
spreadsheet to the CEO, CCO and various investment personnel for their review.
Any performance dispersion noted by anyone on the distribution list is
investigated by a member of Chartwell's Compliance Group by reviewing the
underlying transactional detail, holdings & security weightings by portfolio.
This monthly process ensures that all portfolios that are managed under the same
investment product are treated fairly, and traded in accordance with firm
policy.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF MARCH 8, 2010
The compensation paid to a Chartwell portfolio manager and analyst consists of
base salary, annual bonus, ownership distribution, and an annual profit-sharing
contribution to the firm's retirement plan.
A portfolio manager's and analyst's base salary is determined by Chartwell's
Compensation Committee and is reviewed at least annually. A portfolio manager's
and analyst's experience, historical performance, and role in firm or product
team management are the primary considerations in determining the base salary.
Industry benchmarking is utilized by the Compensation Committee on an annual
basis.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm.
Ownership distributions are paid to a portfolio manager and analyst based on the
portfolio manager's and analyst's ownership interest, or percentage limited
partnership interest, in Chartwell multiplied by total net cash distributions
paid during the year.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF DECEMBER 31, 2009:
Name of Portfolio Dollar Range of Fund Shares
Manager or Team Member Beneficially Owned
---------------------- ---------------------------
Bernard P. Schaffer $0
Kevin A. Melich $0
Douglas W. Kugler $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the
registrant last provided disclosure in response to the requirements of Item
407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15)
of Schedule 14A (17 CFR 240.14a-101)), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Enhanced Equity Income Fund
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date February 19, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date February 19, 2010
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date February 19, 2010
* Print the name and title of each signing officer under his or her
signature.