UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22039
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FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
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(Exact name of registrant as specified in charter)
1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
LISLE, IL 60532
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-241-4141
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Date of fiscal year end: NOVEMBER 30
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Date of reporting period: MAY 31, 2008
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
(GRAPHIC)
FIRST TRUST/GALLATIN
SPECIALTY FINANCE
AND FINANCIAL
OPPORTUNITIES FUND
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
MAY 31, 2008
(FIRST TRUST LOGO) (GALLATIN LOGO)
ASSET MANAGEMENT(SM)
TABLE OF CONTENTS
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2008
Shareholder Letter .................... 1
At a Glance ........................... 2
Portfolio Commentary .................. 3
Portfolio of Investments .............. 6
Statement of Assets and Liabilities ... 8
Statement of Operations ............... 9
Statement of Changes in Net Assets .... 10
Statement of Cash Flows ............... 11
Financial Highlights .................. 12
Notes to Financial Statements ......... 13
Additional Information ................ 19
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, 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 Gallatin Asset Management, Inc. ("Gallatin" or the "Sub-Advisor") and
their respective representatives, taking into account the information currently
available to them. Forward-looking statements include all statements that do not
relate solely to current or historical fact. For example, forward-looking
statements include the use of words such as "anticipate," "estimate," "intend,"
"expect," "believe," "plan," "may," "should," "would" or other words that convey
uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this report, you are cautioned not to
place undue reliance on these forward-looking statements, which reflect the
judgment of the Advisor and/or Gallatin and their respective representatives
only as of the date hereof. We undertake no obligation to publicly revise or
update these forward-looking statements to reflect events and circumstances that
arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. 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 the relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Gallatin are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, this report, and other regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2008
Dear Shareholders:
The year 2007 and the first half of 2008 have been challenging for the financial
markets and for many investors. Yet, regardless of the market, First Trust
Advisors L.P. ("First Trust") believes that in order to be successful in
reaching your financial goals, you should be invested for the long-term. We also
believe that investors should seek professional help from a financial advisor
who has been through many types of markets, knows the range of investments
available, and is committed to bringing you investments suitable to your
particular situation.
Our goal at First Trust has always been to offer a wide range of investment
products, including our family of closed-end funds, to help financial advisors
give you the opportunity to meet your financial objectives. We have continued to
expand our product line to ensure that you have many choices to fit your
investment needs.
The report you hold contains detailed information about your investment in First
Trust/Gallatin Specialty Finance and Financial Opportunities Fund. It contains a
portfolio commentary from the Fund's current portfolio management team that
provides a market recap for the period, a performance analysis and a market and
Fund outlook. In connection with the resignation of Gallatin Asset Management,
Inc. ("Gallatin"), after July 31, 2008, Gallatin will no longer serve as
investment Sub-Advisor to the Fund. Additionally, the report provides the Fund's
unaudited financial statements for the period covered by this report. I
encourage you to read this document and discuss it with your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to giving you up-to-date information about
your investments so you and your financial advisor are always current 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/Gallatin
Specialty Finance and Financial
Opportunities Fund
Page 1
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
"AT A GLANCE"
AS OF MAY 31, 2008 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FGB
Common Share Price $ 12.46
Common Share Net Asset Value $ 12.44
Premium (Discount) to NAV 0.16%
Net Assets Applicable to Common Shares $176,243,603
Current Quarterly Distribution per Common Share (1) $ 0.370
Current Annualized Distribution per Common Share $ 1.480
Current Distribution Rate on Closing Common Share Price (2) 11.88%
Current Distribution Rate on NAV (2) 11.90%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Market NAV
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5/31/2007 $20.49 $19.06
6/8/2007 $20.26 $18.95
6/15/2007 $20.20 $19.02
6/22/2007 $20.10 $18.62
6/29/2007 $19.90 $18.25
7/6/2007 $19.62 $18.70
7/13/2007 $19.99 $18.37
7/20/2007 $18.41 $17.86
7/27/2007 $16.99 $16.39
8/3/2007 $15.85 $15.45
8/10/2007 $16.40 $16.20
8/17/2007 $15.67 $15.88
8/24/2007 $15.64 $15.95
8/31/2007 $16.49 $15.75
9/7/2007 $16.16 $15.18
9/14/2007 $15.00 $15.72
9/21/2007 $15.77 $16.34
9/28/2007 $15.84 $16.24
10/5/2007 $15.85 $16.95
10/12/2007 $15.62 $16.52
10/19/2007 $14.31 $15.39
10/26/2007 $14.07 $15.61
11/2/2007 $14.10 $14.81
11/9/2007 $14.07 $14.39
11/16/2007 $14.01 $14.41
11/23/2007 $13.81 $13.53
11/30/2007 $14.23 $13.74
12/7/2007 $13.49 $14.35
12/14/2007 $12.60 $13.74
12/21/2007 $11.85 $14.21
12/28/2007 $12.10 $13.86
1/4/2008 $12.09 $13.08
1/11/2008 $12.08 $13.02
1/18/2008 $11.24 $12.32
1/25/2008 $12.32 $13.23
2/1/2008 $13.49 $14.34
2/8/2008 $13.23 $13.66
2/15/2008 $12.54 $13.42
2/22/2008 $13.39 $13.06
2/29/2008 $13.67 $12.93
3/7/2008 $11.84 $11.67
3/14/2008 $12.19 $11.50
3/20/2008 $12.61 $12.05
3/28/2008 $13.05 $11.87
4/4/2008 $13.05 $12.55
4/11/2008 $12.69 $11.77
4/18/2008 $12.51 $12.54
4/25/2008 $13.25 $12.52
5/2/2008 $13.53 $13.04
5/9/2008 $13.77 $12.67
5/16/2008 $14.03 $13.00
5/23/2008 $12.57 $12.40
5/30/2008 $12.46 $12.44
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (5/25/07)
5/31/2008 5/31/2008 to 5/31/2008
-------------- ------------ -------------------
Fund Performance
NAV (3) -4.11% -27.48% -27.26%
Market Value (4) -7.27% -32.44% -30.37%
Index Performance
Blended Benchmark (5) -10.32% -32.72% -30.82%
MSCI U.S. Investable Market Financials Index -17.18% -31.32% -30.21%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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CapitalSource, Inc. 6.2%
Enerplus Resources Fund 5.9
Ares Capital Corp. 5.8
Apollo Investment Corp. 5.4
Gramercy Capital Corp. 5.0
MVC Capital, Inc. 4.9
NorthStar Realty Finance Corp. 4.8
Allied Capital Corp. 4.7
Prospect Energy Corp. 4.4
Redwood Trust, Inc. 3.9
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Total 51.0%
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% OF TOTAL
INDUSTRY INVESTMENTS
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Capital Markets 54.2%
Real Estate Investment Trusts 35.0
Oil, Gas & Consumable Fuels 7.9
Diversified Financial Services 2.9
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Total 100.0%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-------------------- -----------
Business Development Companies 56.2%
Specialty Finance/Hybrid REITs 25.6
Residential Mortgage REITs 9.4
Canadian Income Trusts 7.9
Domestic Common Stock 0.9
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Total 100.0%
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(1) Most recent distribution paid or of record through 5/31/08. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or of record through the report date and then dividing by
market price or NAV, as applicable, as of 5/31/08.
(3) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gain distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load. Past performance is
not indicative of future results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(5) Blended benchmark consists of the following:
Red Rocks Listed Private Equity Index (40%)
FTSE NAREIT Mortgage REIT Index (20%)
FTSE NAREIT Hybrid REIT Index (20%)
Merrill Lynch Preferred Stock Index (10%)
Russell 2000 Financial Services Index (10%)
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Gallatin Asset Management, Inc., a registered investment advisor, ("Gallatin" or
the "Sub-Advisor") currently serves as the Sub-Advisor to First Trust/Gallatin
Specialty Finance and Financial Opportunities Fund ("FGB" or the "Fund"). After
July 31, 2008, Gallatin will no longer serve as Sub-Advisor to the Fund.
PORTFOLIO MANAGEMENT TEAM
THOMAS W. DUGAN, CFA, EQUITY ANALYST
Mr. Dugan serves as an equity analyst for Gallatin. Prior to joining Gallatin in
2007, Mr. Dugan was an equity analyst with Martin Capital Management in Elkhart,
Indiana. Mr. Dugan is a CFA charterholder. He holds a Bachelors of Science in
business administration from Rockhurst University and a Masters of Business
Administration from Indiana University.
CHRISTOPHER HANAWAY, CFA, ASSOCIATE VICE PRESIDENT, EQUITY PORTFOLIO MANAGER
Mr. Hanaway has managed equity portfolios for individuals and foundations since
1994. Mr. Hanaway began his career with A.G. Edwards Trust Company as an equity
analyst with the trust investment team, then joined the separately managed
accounts department in 2001. He earned a Bachelors of Arts and a Masters of
Business Administration from Washington University in St. Louis. He holds a
Masters of Arts from the University of Chicago and is a CFA charterholder.
F. CHRISTIAN STEIN, ASSOCIATE VICE PRESIDENT, EQUITY PORTFOLIO MANAGER
Mr. Stein serves as a portfolio manager for Gallatin. For the past seven years,
he has managed equity portfolios with a value discipline. He is also a member of
the investment team that provides equity recommendations to A.G. Edwards Trust
Company. Prior to joining Gallatin, Mr. Stein was an associate analyst with A.G.
Edwards Securities Research. Mr. Stein graduated from the University of Dayton
with degrees in Finance and Accounting. He earned his Masters of Business
Administration from Saint Louis University.
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
The primary investment objective of the First Trust/Gallatin Specialty Finance
and Financial Opportunities Fund is to seek a high level of current income. As a
secondary objective, the Fund seeks an attractive total return. The Fund pursues
its investment objectives by investing at least 80% of its managed assets in a
portfolio of securities of specialty finance and other financial companies that
the Fund's Sub-Advisor believes offer attractive opportunities for income and
capital appreciation. There can be no assurance that the Fund's investment
objectives will be achieved. The Fund may not be appropriate for all investors.
MARKET RECAP
The turmoil in the financial markets, which began in 2007, continued into 2008.
The past five months have included accelerated write-downs among many of the
world's largest banks and brokerages, a spike in credit spreads reflecting
investor's current intolerance for risk, and most notably, the near failure of
Bear Stearns.
The Federal Reserve's decision to back-stop $30 billion worth of Bear Stearns
illiquid investments, open up its discount window to brokers and primary
dealers, and accept new forms of collateral to lend against likely marked an
important turning point in the current liquidity crisis. These actions clearly
reflect the Federal Reserve's ("Fed's") concerns as expressed by Vice Chairman
Donald Kohn in a recent speech "that a run on a major broker-dealer when markets
are already disrupted by a flight to safety and liquidity could, through a chain
of actions and reactions, threaten financial stability." It is our opinion that
recent Fed actions provide the ingredients necessary to prevent the liquidity
crisis from getting materially worse. To be sure, many problems still need to be
resolved. Housing prices have not yet stabilized and economic conditions
continue to show deterioration. Both of these have the potential of negatively
impacting collateral values, putting pressure on financial institutions to raise
additional capital. Even as these issues linger, however, we believe it is
likely markets will move forward once the size and scope of losses can be
quantified.
The majority of the Fund's holdings, approximately 56% of Fund assets as of May
31, 2008, are in Business Development Companies ("BDCs"). The role of a BDC is
to provide financing for small and middle-market companies. Opportunities to
make such loans at attractive risk-adjusted returns have improved for many BDCs
as traditional lending institutions, which operate with far greater leverage,
appear to be husbanding capital in anticipation of further write-downs. BDCs are
statutorily required to have at least one dollar in equity for every dollar in
debt. Lower leverage generally means greater financial flexibility during times
of stress.
Page 3
PORTFOLIO COMMENTARY - (CONTINUED)
The question currently facing BDCs is one of credit risk, or to what extent will
the slowing economy impair the business fundamentals at the companies they lend
to. BDCs are not permitted to take reserves for expected loan losses like a bank
does. Rather, they adjust book value on a quarterly basis to reflect any
degradation in their investment portfolio. Several BDCs marked down their
portfolio holdings in the first half of the year, and many are trading at
discounts to stated book values, reflecting an expectation for further
impairments. The weakening economic picture, escalating energy costs, and the
tight credit environment all present risks to the underlying portfolio companies
within BDCs. It is important to note, however, that BDCs tend to be more capable
and willing to "work out" troubled loans as opposed to taking permanent losses.
As such, patience should be rewarded when the current pressures dissipate, in
our opinion.
PERFORMANCE ANALYSIS
As detailed in the table below, FGB outperformed the relative benchmarks for the
six-month period ended May 31, 2008. The Fund's Net Asset Value ("NAV") fell by
a lesser amount than the trading price of the Fund as the premium to NAV
declined from 3.57% on November 30, 2007 to 0.16% on May 31, 2008. During the
six months ending May 31, 2008, FGB paid dividends per share of $0.74, which
equates to an annualized yield of 11.88%, based on the closing price of the Fund
on May 31, 2008.
FGB's NAV outperformed the blended benchmark by 6.21% during the period. As
discussed in the November 2007 shareholder letter, the blended benchmark is
meant to be a broad representation of the Fund's investment universe, so a
direct comparison of underlying performance is difficult. In general, the Fund's
major sectors (BDCs, mortgage REITs, and hybrid REITs) outperformed the
corresponding components of the benchmark (private equity, mortgage REITs, and
hybrid REITs) which returned -10%, -6%, and -24%, respectively.
FOR SIX-MONTH PERIOD ENDED 5/31/08
Blended Benchmark(a) -10.32%
MSCI U.S. Investable
Market Financials Index -17.18%
FGB Market Value(b) -7.27%
FGB NAV(c) -4.11%
SOURCE: BLOOMBERG
(a) The blended benchmark is based upon the following blend: 40% Red Rocks
Listed Private Equity Index; 20% FTSE NAREIT Mortgage REIT Index; 20% FTSE
NAREIT Hybrid REIT Index; 10% Merrill Lynch Preferred Stock Index; and 10%
Russell 2000 Financial Services Index.
(b) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(c) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load.
The Fund's performance was mixed across sectors. For instance, the BDC sector
contained some of the best and worst performing investments over the past six
months as company specific factors, such as management, portfolio
diversification, and underwriting, tend to drive a BDC's performance more than
sector trends. During the six-month period, Kohlberg Capital Corporation and
NGP Capital Resources, which are both business development companies, had total
returns of 36.5% and 19.1%, respectively. MCG Capital, TICC Capital, and Pennant
Park Investments were the Fund's poorest performing BDCs over the six-month
period with total returns of -47.1%, -31.4%, and -25.6%, respectively.
The Fund's REIT performance was mixed as well. Our mortgage REITs were subject
to the volatility within the broader financial sector, but managed to generate
positive total returns through a combination of disciplined management,
intelligent funding, and asset quality. While there was some impact on book
value, both Redwood Trust and Annaly Capital, for example, maintained and even
grew their dividends. REITs with broader exposures tended to have more
difficulty sidestepping the market's trouble spots. However, we believe in these
management teams and their ability to work through the current environment. The
only other sector of note was Canadian Royalty Trusts, specifically, the Fund's
exposure to Enerplus Resources Fund and Penn West Energy Trust, which generated
total returns of 22% and 33%, respectively.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
MARKET & FUND OUTLOOK
The current turmoil in the financial markets accentuates many risks and makes
the future all the more uncertain. Some financial firms are paying dearly for
excessive risks they took, and as a result, most financial firms (good and bad)
are being avoided by investors. With conservative amounts of leverage on their
own balance sheets, BDCs are well positioned to take advantage of the lack of
credit available to their target borrowers. Ultimately, the greatest risk to
BDCs and FGB would originate from Main Street, not Wall Street, as a long and
deep recession could severely impact the profitability of their primary
borrowers, small and medium private businesses.
Page 5
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (A)
MAY 31, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ------------------------------------------------------------------------ ------------
COMMON STOCKS - 113.0%
CAPITAL MARKETS - 66.5%
515,660 Allied Capital Corp. ................................................... $ 10,241,008
250,000 American Capital Strategies, Ltd. ...................................... 8,000,000
646,706 Apollo Investment Corp. ................................................ 11,673,043
1,013,333 Ares Capital Corp. ..................................................... 12,555,196
650,000 BlackRock Kelso Capital Corp. .......................................... 7,774,000
460,000 Gladstone Capital Corp. ................................................ 8,178,800
183,333 Gladstone Investment Corp. ............................................. 1,642,664
50,000 GSC Investment Corp. ................................................... 522,000
506,205 Hercules Technology Growth Capital, Inc. ............................... 5,249,346
50,000 Highland Distressed Opportunities, Inc. ................................ 387,500
15,000 Invesco, Ltd., Sponsored ADR ........................................... 417,450
571,667 Kohlberg Capital Corp. ................................................. 7,631,754
472,000 MCG Capital Corp. ...................................................... 2,704,560
690,000 MVC Capital, Inc. ...................................................... 10,570,800
406,737 NGPCapital Resources Co. ............................................... 6,723,363
550,000 Patriot Capital Funding, Inc. .......................................... 5,593,498
585,000 PennantPark Investment Corp. ........................................... 4,767,750
655,152 Prospect Energy Corp. .................................................. 9,473,498
463,785 TICC Capital Corp. ..................................................... 3,060,981
------------
117,167,211
------------
DIVERSIFIED FINANCIAL SERVICES - 3.6%
85,211 Financial Federal Corp. ................................................ 2,069,775
446,000 Medallion Financial Corp. .............................................. 4,303,900
100 WisdomTree Investments, Inc. (b) ....................................... 265
------------
6,373,940
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 42.9%
350,000 Annaly Capital Management, Inc. ........................................ 6,233,500
330,000 Arbor Realty Trust, Inc. ............................................... 4,636,500
225,000 Capital Trust, Inc. - Class A .......................................... 6,513,750
870,000 CapitalSource, Inc. .................................................... 13,363,200
576,923 Cypress Sharpridge Investments, Inc. (b) (c) (e) ....................... 3,000,000
640,000 Gramercy Capital Corp. ................................................. 10,720,000
100,000 Hatteras Financial Corp. (b) ........................................... 2,665,000
420,000 iStar Financial, Inc. .................................................. 8,030,400
1,030,000 NorthStar Realty Finance Corp. ......................................... 10,300,000
200,000 RAIT Financial Trust ................................................... 1,780,000
250,000 Redwood Trust, Inc. .................................................... 8,437,500
------------
75,679,850
------------
TOTAL COMMON STOCKS .................................................... 199,221,001
------------
(Cost $283,873,542)
Page 6 See Notes to Financial Statements.
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (A) - (CONTINUED)
MAY 31, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ------------------------------------------------------------------------ ------------
CANADIAN INCOME TRUSTS - 9.7%
OIL, GAS & CONSUMABLE FUELS - 9.7%
100 ARC Energy Trust ....................................................... $ 2,931
274,100 Enerplus Resources Fund ................................................ 12,838,844
129,800 Penn West Energy Trust ................................................. 4,269,122
100 Progress Energy Trust .................................................. 1,449
------------
17,112,346
------------
TOTAL CANADIAN INCOME TRUSTS ........................................... 17,112,346
------------
(Cost $16,723,286)
RIGHTS - 0.1%
CAPITAL MARKETS - 0.1%
463,785 TICC Capital Corp. (b) ................................................. 134,451
------------
TOTAL RIGHTS ........................................................... 134,451
------------
(Cost $0)
WARRANTS - 0.0%
REAL ESTATE INVESTMENT TRUST (REIT) - 0.0%
576,923 Cypress Sharpridge Investments, Inc., expires 04/30/11 (b) (c) ......... 0
------------
TOTAL WARRANTS ......................................................... 0
------------
(Cost $0)
TOTAL INVESTMENTS - 122.8% ............................................. 216,467,798
(Cost $300,596,828) (d)
LOAN OUTSTANDING - (23.9)% ............................................. (42,100,000)
NET OTHER ASSETS AND LIABILITIES - 1.1% ................................ 1,875,805
------------
NET ASSETS - 100.0% .................................................... $176,243,603
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Non-income producing security.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. (See note 2C-Restricted
Securities in the Notes to Financial Statements).
(d) Aggregate cost for federal income tax and financial reporting purposes.
(e) This security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
ADR American Depository Receipt
See Notes to Financial Statements. Page 7
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2008 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $300,596,828) ..................................................................................... $216,467,798
Cash ....................................................................................................... 1,909,700
Prepaid expenses ........................................................................................... 41,658
Dividends receivable ....................................................................................... 332,415
------------
Total Assets ......................................................................................... 218,751,571
------------
LIABILITIES:
Payables:
Outstanding loan ..................................................................................... 42,100,000
Investment advisory fees ............................................................................. 200,995
Interest and fees due on loan ........................................................................ 135,166
Audit and tax fees ................................................................................... 20,393
Administrative fees .................................................................................. 19,467
Printing fees ........................................................................................ 7,551
Custodian fees ....................................................................................... 3,846
Transfer agent fees .................................................................................. 3,731
Legal fees ........................................................................................... 1,746
Trustees' fees and expenses .......................................................................... 1,311
Accrued expenses and other liabilities ..................................................................... 13,762
------------
Total Liabilities .................................................................................... 42,507,968
------------
NET ASSETS ................................................................................................. $176,243,603
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................................ $269,301,117
Par value .................................................................................................. 141,698
Accumulated net investment income (loss) ................................................................... 1,764,492
Accumulated net realized gain (loss) on investments ........................................................ (10,834,674)
Net unrealized appreciation (depreciation) of investments .................................................. (84,129,030)
------------
NET ASSETS ................................................................................................. $176,243,603
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) ....................................... $ 12.44
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ................ 14,169,805
============
Page 8 See Notes to Financial Statements.
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2008 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $181,577) ..................................................... $ 14,879,999
------------
Total investment income ................................................................................. 14,879,999
------------
EXPENSES:
Investment advisory fees ................................................................................... 1,132,420
Interest and fees on loan .................................................................................. 924,335
Excise tax expense ......................................................................................... 142,159
Administrative fees ........................................................................................ 110,595
Printing fees .............................................................................................. 32,685
Audit and tax fees ......................................................................................... 30,798
Legal fees ................................................................................................. 30,689
Trustees' fees and expenses ................................................................................ 20,157
Transfer agent fees ........................................................................................ 17,510
Custodian fees ............................................................................................. 11,674
Other ...................................................................................................... 30,693
------------
Total expenses .......................................................................................... 2,483,715
------------
NET INVESTMENT INCOME ...................................................................................... 12,396,284
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ............................................................................................. (4,084,403)
Foreign currency transactions ........................................................................... (5)
------------
Net realized gain (loss) ................................................................................... (4,084,408)
------------
Net change in unrealized appreciation (depreciation) on investments ........................................ (16,166,010)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) .................................................................... (20,250,418)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................................ $ (7,854,134)
============
See Notes to Financial Statements. Page 9
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
5/31/2008 PERIOD ENDED
(UNAUDITED) 11/30/2007 (a)
------------- --------------
OPERATIONS:
Net investment income (loss) .............................................. $ 12,396,284 $ 9,806,749
Net realized gain (loss) .................................................. (4,084,408) (6,750,282)
Net change in unrealized appreciation (depreciation) ...................... (16,166,010) (67,963,020)
------------- -------------
Net increase (decrease) in net assets resulting from operations ........... (7,854,134) (64,906,553)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ..................................................... (10,464,843) (9,973,682)
------------- -------------
Total distributions to shareholders ....................................... (10,464,843) (9,973,682)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from sale of 0 and 14,030,236 Common Shares, respectively ........ -- 267,977,508
Proceeds from 105,639 and 33,930 Common Shares reinvested, respectively.... 1,406,816 534,400
Offering costs ............................................................ 85,301 (561,210)
------------- -------------
Total capital transactions ................................................ 1,492,117 267,950,698
------------- -------------
Net increase (decrease) in net assets ..................................... (16,826,860) 193,070,463
NET ASSETS:
Beginning of period ....................................................... 193,070,463 --
------------- -------------
End of period ............................................................. $ 176,243,603 $ 193,070,463
============= =============
Accumulated net investment income (loss) at end of period ................. $ 1,764,492 $ (166,949)
============= =============
----------
(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.
Page 10 See Notes to Financial Statements.
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2008 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations ...................... $ (7,854,134)
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash used for operating activities:
Purchases of investments .................................................. (17,223,114)
Sales of investments ................................................... 13,907,421
Net realized loss on investments ....................................... 4,084,403
Net change in unrealized appreciation/depreciation on investments ...... 16,166,010
CHANGES IN ASSETS AND LIABILITIES:
Decrease in dividends receivable ....................................... 691,171
Increase in prepaid expenses ........................................... (41,658)
Decrease in distributions payable to Common Shareholders ............... (5,063,100)
Increase in investment advisory fees payable ........................... 8,849
Decrease in interest and fees due on loan .............................. (46,973)
Decrease in offering costs payable ..................................... (115,591)
Decrease in printing fees payable ...................................... (29,788)
Decrease in audit and tax fees payable ................................. (13,452)
Decrease in Trustees' fees and expenses payable ........................ (9,219)
Increase in administrative fees payable ................................ 809
Decrease in transfer agent fees payable ................................ (401)
Increase in custodian fees payable ..................................... 514
Decrease in legal fees payable ......................................... (758)
Increase in accrued expenses and other liabilities ..................... 5,372
-------------
CASH PROVIDED BY OPERATING ACTIVITIES ..................................... $ 4,466,361
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested .................................... 1,406,816
Offering costs ............................................................ 85,301
Distributions to Common Shareholders ...................................... (10,464,843)
Issuances of loan ......................................................... 9,100,000
Repayments of loan ........................................................ (3,000,000)
-------------
CASH USED FOR FINANCING ACTIVITIES ........................................ (2,872,726)
-------------
Increase in cash .......................................................... 1,593,635
Cash at beginning of period ............................................... 316,065
-------------
Cash at end of period ..................................................... $ 1,909,700
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees ......................... $ 971,308
=============
See Notes to Financial Statements. Page 11
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS PERIOD
ENDED ENDED
5/31/2008 11/30/07 (a)
----------- -------------
Net asset value, beginning of period ...................................... $ 13.73 $ 19.10(b)
----------- -------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .............................................. 0.88 0.70
Net realized and unrealized gain (loss) ................................... (1.43) (5.32)
----------- -------------
Total from investment operations .......................................... (0.55) (4.62)
----------- -------------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ..................................................... (0.74) (0.71)
----------- -------------
Total from distributions .................................................. (0.74) (0.71)
----------- -------------
Common Shares offering costs charged to paid-in capital ................... -- (0.04)
----------- -------------
Net asset value, end of period ............................................ $ 12.44 $ 13.73
============= =============
Market value, end of period ............................................... $ 12.46 $ 14.23
============= =============
TOTAL RETURN BASED ON NET ASSET VALUE (c) (e) ............................. (4.11)% (24.53)%
============= =============
TOTAL RETURN BASED ON MARKET VALUE (d) (e) ................................ (7.27)% (25.36)%
============= =============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ...................................... $ 176,244 $ 193,070
Ratio of total expenses to average net assets ............................. 2.71%(f) 1.99%(f)
Ratio of total expenses to average net assets excluding interest expense
and fees ............................................................... 1.70%(f) 1.41%(f)
Ratio of net investment income to average net assets ...................... 13.53%(f) 8.64%(f)
Portfolio turnover rate ................................................... 6% 3%
INDEBTEDNESS:
Loan outstanding (in 000's) ............................................... $ 42,100 $ 36,000
Asset Coverage per $1,000 of indebtedness (g) ............................. $ 5,186 $ 6,363
----------
(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.
(b) Net of sales load of $0.90 per share on initial offering.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(d) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(e) Total return is not annualized for periods less than one year.
(f) Annualized.
(g) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the
outstanding loan balance in 000's.
Page 12 See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (UNAUDITED)
1. FUND DESCRIPTION
First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (the
"Fund") is a non-diversified, closed-end management investment company organized
as a Massachusetts business trust on March 20, 2007, and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FGB
on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund will invest at least 80% of its Managed
Assets in a portfolio of securities of specialty finance and other financial
companies that Gallatin Asset Management, Inc. ("Gallatin" or the "Sub-Advisor")
believes offer attractive opportunities for income and capital appreciation.
There can be no assurance that the Fund's investment objectives will be
achieved. Under normal market conditions, the Fund will concentrate its
investments in securities of companies within industries in the financial
sector. Managed Assets are defined as the value of the securities and other
investments the Fund holds plus cash and other assets, including interest
accrued but not yet received, minus accrued liabilities other than the principal
amount of any borrowings.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The 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. Domestic debt securities and foreign
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The NAV per Common Share is calculated by dividing
the value of all assets of the Fund (including accrued interest and dividends),
less all liabilities (including accrued expenses, dividends declared but unpaid
and any borrowings of the Fund) by the total number of Common Shares
outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, First Trust Advisors L.P. ("First Trust") may use a fair value
method to value the Fund's securities and 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 investments. The use of fair value pricing by
the Fund is governed by valuation procedures adopted by the Fund's Board of
Trustees and in accordance with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days are valued at amortized cost.
In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements ("FAS 157"),
effective for fiscal years beginning after November 15, 2007. This standard
clarifies the definition of fair value for financial reporting, establishes a
framework for measuring fair value and requires additional disclosures about the
use of fair value measurements. FAS 157 became effective for the Fund as of
December 1, 2007, the beginning of its current fiscal year. The three levels of
the fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds,
credit risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
Page 13
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (UNAUDITED)
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 net assets as of May 31, 2008 is as
follows:
INVESTMENTS
VALUATION INPUTS IN SECURITIES
------------------------------------------------- -------------
Level 1 - Quoted Prices ......................... $213,467,798
Level 2 - Other Significant Observable Inputs ... --
Level 3 - Significant Unobservable Inputs ....... 3,000,000
-------------
TOTAL ........................................... 216,467,798
=============
Following is a reconciliation of Level 3 investments for which significant
unobservable inputs were used to determined fair value:
INVESTMENTS
VALUATION INPUTS IN SECURITIES
------------------------------------------------- -------------
BALANCE AS OF 11/30/07 .......................... $ 0
Net purchases (sales) ........................... 3,000,000
----------
BALANCE AS OF 5/31/08 ........................... $3,000,000
==========
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended. Prior to registration, restricted securities may only be
resold in transactions exempt from registration. As of May 31, 2008, the Fund
held restricted securities as shown in the following table. The Fund does not
have the right to demand that such securities be registered. These securities
are valued according to the valuation procedures as stated in the Portfolio
Valuation footnote (Note 2A) and are not expressed as a discount to the carrying
value of comparable unrestricted securities.
ACQUISITION VALUE PER CURRENT % OF
SECURITY DATE SHARES SHARE CARRYING COST VALUE NET ASSETS
------------------------------------ ----------- --------- --------- ------------- ---------- ----------
Cypress Sharpridge Investments, Inc. 5/19/08 576,923 $5.20 $3,000,000 $3,000,000 1.70%
Cypress Sharpridge Investments, Inc.
Warrants 5/30/08 576,923 0 0 0 0
--------- ---------- ---------- ----
1,153,846 $3,000,000 $3,000,000 1.70%
========= ========== ========== ====
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income, if any, of the Fund are declared and paid
quarterly or as the Board of Trustees may determine from time to time.
Distributions of any net capital gains earned by the Fund are distributed at
least annually. Distributions will automatically be reinvested into additional
Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
Page 14
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (UNAUDITED)
The tax character of distributions paid during the fiscal period ended November
30, 2007 was as follows:
Distributions paid from:
Ordinary Income .............................. $9,973,682
As of November 30, 2007, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ................ $ 4,896,152
Net Unrealized Appreciation (Depreciation) ... (67,963,028)
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 loss and offset such loss against any future realized capital gains. At
November 30, 2007, the Fund had an available realized capital loss of $6,750,256
to offset future net capital gains through the fiscal year ending 2015.
In June 2006, Financial Accounting Standards Board ("FASB") Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109 ("FIN 48"), was issued and is effective for fiscal years beginning
after December 15, 2006. This Interpretation prescribes a minimum threshold for
financial statement recognition of the benefit of a tax position taken or
expected to be taken in a tax return. As of May 31, 2008, management has
evaluated the application of FIN 48 to the Fund, and has determined that there
is no material impact resulting from the adoption of this Interpretation on the
Fund's financial statements.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ORGANIZATION AND OFFERING COSTS:
Organization costs consist of costs incurred to establish the Fund and enable it
to legally do business. These costs include filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's Common Shares offered for sale, registration fees, underwriting
fees, and printing of the initial prospectus, among other fees. First Trust and
Gallatin have paid all organization costs and all offering costs of the Fund
(other than sales load) that exceeded $0.04 per Common Share. The Fund's share
of Common Share offering costs, $561,210, was recorded as a reduction of the
proceeds from the sale of Common Shares during the fiscal period ended November
30, 2007. During the six months ended May 31, 2008, it was determined that
actual offering costs were less than the estimated offering costs by $85,301.
Therefore, paid-in-capital was increased by that amount.
H. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. The
application of FAS 161 is required for fiscal years beginning after November 15,
2008 and interim periods within those fiscal years. Management is currently
evaluating the impact the adoption of FAS 161 will have on the Fund's financial
statement disclosures, if any.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets.
Gallatin currently serves as the Fund's sub-advisor and manages the Fund's
portfolio subject to First Trust's supervision. The Sub-Advisor receives a
portfolio management fee at an annual rate of 0.50% of Managed Assets that is
paid by First Trust from its investment advisory fee. Effective July 31, 2008,
Gallatin will no longer serve as the Fund's Sub-advisor. See Note 9. Subsequent
Event.
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (UNAUDITED)
PNC Global Investment Servicing (U.S.) Inc. ("PNC"), formerly known as PFPC,
Inc., serves as the Fund's Administrator and Transfer Agent in accordance with
certain fee arrangements. PFPC Trust Company, 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 added to 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.
Additionally, the Lead Independent Trustee is paid $10,000 annually and the
Chairman of the Audit Committee is paid $5,000 annually, with such compensation
paid by the trusts in the First Trust Fund Complex and divided 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.
Effective January 1, 2008, each of the chairmen of the Nominating and Governance
Committee and the 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 divided among those trusts. Also, effective January 1, 2008, the
Lead Independent Trustee and each Committee chairman will serve two year terms.
For the six months ended May 31, 2008, the Fund paid brokerage commissions to
A.G. Edwards & Sons, Inc., an affiliate of the Sub-Advisor, totaling $305.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
U.S. government and short-term investments, for the six months ended May 31,
2008, were $17,223,114 and $13,907,421, respectively.
As of May 31, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $1,767,813
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $85,896,843.
5. COMMON SHARES
As of May 31, 2008, 14,169,805 of $0.01 par value Common Shares were issued. An
unlimited number of Common Shares has been authorized for the Fund's Dividend
Reinvestment Plan.
6. LOAN AND PLEDGE AGREEMENT
On July 11, 2007, the Fund entered into a Loan and Pledge Agreement with
Custodial Trust Company, which provides for an uncommitted credit facility to be
used as leverage for the Fund. The credit facility provides for a secured,
uncommitted line of credit for the Fund, where Fund assets are pledged against
advances made to the Fund. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, must have an "asset coverage" of at least
300% (33-1/3% of the Fund's total assets after borrowings). The total amount of
loans that may be outstanding at any one time under the Loan and Pledge
Agreement is $120,000,000. For the six months ended May 31, 2008, the average
amount outstanding was $40,754,645. The high and low annual interest rates
during the six months ended May 31, 2008 were 5.87% and 3.40%, respectively, and
the weighted average interest rate was 4.52%. The interest rate at May 31, 2008
was 3.40%.
7. 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.
8. RISK CONSIDERATIONS
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 equity market, or when political or economic events
affecting the issuers occur.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (UNAUDITED)
FINANCIAL SECTOR CONCENTRATION RISK: Under normal market conditions, the Fund
will invest at least 25% of its total assets in securities of companies within
industries in the financial sector. A fund concentrated in a single industry or
group of industries is likely to present more risks than a fund that is broadly
diversified over several industries or groups of industries. Compared to the
broad market, an individual sector may be more strongly affected by changes in
the economic climate, broad market shifts, moves in a particular dominant stock,
or regulatory changes. Specialty finance and other financial companies in
general are subject to extensive government regulation, which may change
frequently. The profitability of specialty finance and other financial companies
is largely dependent upon the availability and cost of capital funds, and may
fluctuate significantly in response to changes in interest rates, as well as
changes in general economic conditions. From time to time, severe competition
may also affect the profitability of specialty finance and other financial
companies. Financial companies can be highly dependent upon access to capital
markets and any impediments to such access, such as general economic conditions
or a negative perception in the capital markets of a company's financial
condition or prospects, could adversely affect its business. Leasing companies
can be negatively impacted by changes in tax laws which affect the types of
transactions in which such companies engage.
BUSINESS DEVELOPMENT COMPANY ("BDC") RISK: Investments in closed-end funds that
elect to be treated as BDCs may be subject to a high degree of risk. BDCs
typically invest in small and medium-sized private and certain public companies
that may not have access to public equity markets or capital raising. As a
result, a BDC's portfolio typically will include a substantial amount of
securities purchased in private placements, and its portfolio may carry risks
similar to those of a private equity or venture capital fund. Securities that
are not publicly registered may be difficult to value and may be difficult to
sell at a price representative of their intrinsic value. Investments in BDCs are
subject to various risks, including management's ability to meet the BDC's
investment objective, and to manage the BDC's portfolio when the underlying
securities are redeemed or sold, during periods of market turmoil and as
investors' perceptions regarding a BDC or its underlying investments change. BDC
shares are not redeemable at the option of the BDC shareholder and, as with
shares of other closed-end funds, they may trade in the secondary market at a
discount to their NAV.
REIT, MORTGAGE-RELATED AND ASSET-BACKED SECURITIES RISKS: Investing in REITs
involves certain unique risks in addition to investing in the real estate
industry in general. REITs are subject to interest rate risks (especially
mortgage REITs) and the risk of default by lessees or borrowers. An equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A mortgage REIT may be affected by the ability of the issuers of its
portfolio mortgages to repay their obligations. REITs whose underlying assets
are concentrated in properties used by a particular industry are also subject to
risks associated with such industry. REITs may have limited financial resources,
their securities may trade less frequently and in a limited volume, and their
securities may be subject to more abrupt or erratic price movements than larger
company securities.
In addition to REITs, the Fund may invest in a variety of other mortgage-related
securities, including commercial mortgage securities and other mortgage-backed
instruments. Rising interest rates tend to extend the duration of
mortgage-related securities, making them more sensitive to changes in interest
rates, and may reduce the market value of the securities. In addition,
mortgage-related securities are subject to prepayment risk-the risk that
borrowers may pay off their mortgages sooner than expected, particularly when
interest rates decline. This can reduce the Fund's returns because the Fund may
have to reinvest that money at lower prevailing interest rates.
The Fund's investments in other asset-backed securities are subject to risks
similar to those associated with mortgage-backed securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to the payment of dividends or upon liquidation. The Fund may not be
permitted to declare dividends or other distributions or purchase Common Shares.
NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (UNAUDITED)
9. SUBSEQUENT EVENT
Effective July 31, 2008, Gallatin will no longer serve as the Sub-advisor to the
Fund. Following recent personnel changes within the Gallatin equity team,
Gallatin conducted an internal review of capabilities and resources and
determined it was in the best interests of shareholders and Gallatin to resign
from the business. First Trust, the Fund's investment advisor, is currently
evaluating the impact of Gallatin's resignation on the Fund, and is assessing
long-term alternatives to ensure continuity of portfolio management for the
Fund.
Page 18
ADDITIONAL INFORMATION
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (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 NYSE 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 19
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2008 (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.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
At a special shareholder meeting of the Fund held on February 20, 2008,
shareholders voted to approve a new investment sub-advisory agreement with
Gallatin. Gallatin was previously a wholly-owned subsidiary of A.G. Edwards,
Inc. On May 31, 2007, Wachovia Corp. announced that it had reached an agreement
in principle with A.G. Edwards, Inc. under which Wachovia Corp. would acquire
A.G. Edwards, Inc. (the "Acquisition"). The Acquisition was completed on October
1, 2007. The consummation of the Acquisition resulted in a change of control of
Gallatin, which constituted an "assignment" under federal securities laws of the
original investment sub-advisory agreement among the Fund, Gallatin and First
Trust. Accordingly, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Gallatin effective October 1, 2007, whereby Gallatin
would continue to serve as the Fund's sub-advisor for a maximum period of 150
days. The new sub-advisory agreement, approved by Shareholders on February 20,
2008, is substantially similar to the Fund's original sub-advisory agreement
with Gallatin. The number of votes cast in favor of the new sub-advisory
agreement was 6,739,848, the number of votes against was 256,656, and the number
of abstentions was 7,376,629.
The Joint Annual meeting of Shareholders of the Common Shares 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/Aberdeen Emerging Opportunity Fund, First Trust/Gallatin Specialty
Finance and Financial Opportunities Fund and First Trust Active Dividend Income
Fund and Shareholders of the Preferred Shares of First Trust Tax-Advantaged
Preferred Income Fund, was held on April 14, 2008. At the Annual Meeting,
Independent Trustee Robert F. Keith was elected for a three-year term. The
number of votes cast in favor of Mr. Keith was 13,764,464, the number of votes
against was 173,146 and the number of abstentions was 0.
Page 20
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
1001 Warrenville Road
Lisle, IL 60532
INVESTMENT SUB-ADVISOR
Gallatin Asset Management, Inc.
One North Jefferson
St. Louis, MO 63103
ADMINISTRATOR, CUSTODIAN,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
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.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. 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.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(B)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
All investment decisions for the registrant, as well as other investment
strategies of Gallatin Asset Management, Inc. ("Gallatin"), are made utilizing a
team approach by which no one member can make decisions unilaterally. All
portfolios are developed based on research conducted internally by Gallatin's
research committee which is comprised of ten members, including portfolio
managers which all serve as security analysts also. Each member of the research
committee has general sector/industry areas of concentration and is responsible
for making security recommendations to the research committee. The research team
generally meets a couple times each week to discuss new security
recommendations, new security ideas in progress, as well as securities already
held in any of the portfolio models.
Once a new security has been approved by the research committee, the Portfolio
Management Team for the registrant, comprised of the following three portfolio
managers, is responsible for reviewing the appropriateness and fit of every new
security that has been approved for investment by the research committee.
NAME TITLE Length of BUSINESS EXPERIENCE PAST 5 YEARS
----- ------ SERVICE --------------------------------
--------
1. Thomas W. Dugan CFA, Equity Analyst 1.5 years Equity Analyst, Martin Capital Management
(2004-2007); Equity Analyst, Gallatin Asset
Management (2007-present)
2. Christopher Hanaway CFA, Associate Vice 13.5 years Portfolio Manager, AGE Asset Management
President, Equity (2000-2005); Portfolio Manager, Gallatin Asset
Portfolio Manager Management (2005 -present)
3. H. Christian Stein Associate Vice 9.5 years Portfolio Manager, AGE Asset Management
President, Equity (2000-2005); Portfolio Manager, Gallatin Asset
Portfolio Manager Management (2005- present)
(B)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM
MEMBER AND POTENTIAL CONFLICTS OF INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
The information in the table below is as of May 31, 2008.
No. of
Accounts Total Assets in
Total where Accounts where
Name of Portfolio Manager No. of Advisory Fee Advisory Fee is
or Accounts is Based on Based on
TEAM MEMBER TYPE OF ACCOUNTS MANAGED TOTAL ASSETS PERFORMANCE PERFORMANCE
----------- ---------------- ------- ------------ ----------- -----------
1. Thomas W. Dugan Registered Investment Companies: N/A N/A N/A N/A
Other Pooled Investment Vehicles: N/A N/A N/A N/A
Other Accounts: 7,300 $ 1.3 billion N/A N/A
2. Christopher Hanaway Registered Investment Companies: N/A N/A N/A N/A
Other Pooled Investment Vehicles: N/A N/A N/A N/A
Other Accounts: 7,300 $ 1.3 billion N/A N/A
3. H. Christian Stein Registered Investment Companies: N/A N/A N/A N/A
Other Pooled Investment Vehicles: N/A N/A N/A N/A
Other Accounts: 7,300 $ 1.3 billion N/A N/A
POTENTIAL CONFLICTS OF INTERESTS
Gallatin recognizes its fiduciary responsibility as an adviser which requires a
duty of loyalty to all of its clients, including the registrant. Such duty
requires that the adviser act in the best interest of all its clients and always
place the clients' interests first and foremost. Acknowledging this, Gallatin
has adopted policies and procedures to mitigate conflicts of interests that
could arise because members of the registrant's Management team also manage
other equity portfolios where similar investments to those of the registrant,
are appropriate. These conflicts could include such things as: the allocation of
investment opportunities amongst clients, employee trading, implementation and
proxy voting.
ALLOCATION OF INVESTMENT OPPORTUNITIES: At times it is possible that security
----------------------------------------
ideas developed and approved by the research committee are potentially
appropriate for more than one of Gallatin's equity strategies. In these
instances, it is the portfolio management team's responsibility to review all of
the possible strategies to determine in which strategies the addition of the
security is appropriate. The portfolio management team looks at many factors
starting with a review of the current holdings in each of the possible
strategies to first determine if there is room (or available cash) for another
security in the strategy. They also compare the new security to similar
securities already held in the model to determine if the new security is more or
less attractive than what is already held, as well as sector weightings within
the strategy. At times the portfolio management team may decide that a new
security would be an equally attractive addition to more than one of its
strategies, in which case it is added to both. It is also possible that
continuously changing factors (such as a sale of a similar security) in an
equity strategy will cause the portfolio management team to add a security to a
second or additional strategy, at a later date.
EMPLOYEE TRADING - When advisory employees invest for their own accounts,
-----------------
conflicts of interest could arise between the registrant's and the employee's
interests. Potential conflicts would include taking an investment opportunity
from the registrant for an employee's own portfolio, using an employee's
advisory position to take advantage of available investments, or front running
(which may be an employee trading before making registrant transactions, thereby
taking advantage of information or using registrant assets to have an effect on
the market which is used to the employee's benefit). This potential conflict
exists because employees within Gallatin are responsible not only for the
research and selection of securities for the registrant but also for the trading
and implementation for the registrant. To mitigate such potential conflicts,
Gallatin has adopted stringent policies and procedures for trading by its
personnel which includes a trade pre-approval process that must occur BEFORE
trades in non-exempt securities may be placed, a black-out period for purchases,
as well as "last-in, last-out" provisions for sales of securities held in client
portfolios.
The supervision of trading in employee or related accounts is the responsibility
of the Chief Investment Officer and is affected through daily reviews of trades
in employee and family accounts, as well as initial holdings reviews for new
employees, and quarterly holding and transaction reviews. Reports utilized by
the CIO for purposes of supervision are dated and initialed, then filed in a
secure file to meet evidence and recordkeeping requirements.
PROXY VOTING - Gallatin retains the services of an unaffiliated third-party
-------------
proxy-voting agent to monitor corporate actions, analyze proxy voting issues and
provide voting recommendations and execute proxy votes based on its
predetermined voting policy. This predetermined voting policy is predicated on
general proxy-voting guidelines, which have been adopted by Gallatin Asset
Management. These guidelines are reviewed periodically by the Gallatin Proxy
Committee and are subject to change.
Because proxy issues and the circumstances of individual companies are so
varied, there may be rare situations when Gallatin may determine it appropriate
to deviate from these guidelines. As in all other cases, Gallatin has a
fiduciary duty to vote these proxies in what it believes to be the best interest
of the clients. However, Gallatin may occasionally be subject to conflicts of
interest in voting proxies due to business or personal relationships with
persons or entities having an interest in the outcome of certain votes. For
example, an affiliate company may provide custody, investment management,
brokerage, investment banking and related services to accounts owned or
controlled by companies whose management is soliciting proxies. Additionally,
Gallatin may have business or personal relationships with other proponents of
proxy proposals, corporate directors or candidates for directorship.
In instances where Gallatin determines it appropriate to deviate from the
pre-determined voting policy, it has adopted due diligence policies and
procedures to take reasonable steps to identify possible conflicts of interest
that could bias its voting decision. With respect to identifying possible
conflicts of interest resulting from BUSINESS RELATIONSHIPS, Gallatin's policies
and procedures include steps to determine whether any of the companies
(including their executive officers) involved in the proxy votes have accounts
or relationships with Edwards or their immediate family members, before a vote
may be changed.
IMPLEMENTATION: Gallatin has adopted policies and procedures by which trades are
--------------
aggregated and blocked across all portfolios whenever possible and clients
received an average price if the block is executed at multiple prices. Partially
executed trades are allocated using a computer generated, total random process.
In those cases where it is not possible to aggregate all orders of the same
security, Gallatin has adopted a trade rotation procedure for all of its
discretionary clients that it feels are fair and equitable to all clients with
no client being favored or disfavored over any other group.
Supervision of Gallatin's allocation processes is the responsibility of the
Gallatin Best Execution Committee, which is chaired by the Chief Investment
Officer and is comprised of equity and fixed income portfolio managers, as well
as implementation staff. The committee meets on a quarterly basis to review Best
Execution practices and is evidenced by meeting minutes.
(B)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Gallatin seeks to maintain a highly competitive compensation program designed to
attract and retain qualified investment professionals, which includes portfolio
managers and research analysts, and to align the interests of its investment
professionals with that of its clients and overall firm results. The principal
components of compensation for portfolio managers include a base salary, annual
bonus, restricted stock, annual discretionary merit cash and stock bonus, and
various retirement benefits including contributions to 401(k) plan and excess
profit sharing plan,
Compensation is based on a number of subjective factors, including overall
contribution of the employee to the firm and the department, and is not tied to
the performance of the registrant. Performance of accounts is not a factor in
determining compensation.
(B)(4) DISCLOSURE OF SECURITIES OWNERSHIP
The information below is as of May 31, 2008:
NAME DOLLAR RANGE OF FUND SHARES BENEFICIALLY OWNED
---- ----------------------------------------------
Thomas W. Dugan $1 - $10,000
Christopher Hanaway $ 0.00
H. Christian Stein $10,001- $50,000
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 trustees, 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) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FIRST TRUST/GALLATIN SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES
FUND
-------------------------------------------------------------------
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date JULY 17, 2008
----------------------------------------------------------------------------
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 JULY 17, 2008
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)
Date JULY 17, 2008
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.