0001445546-15-000037.txt : 20150105 0001445546-15-000037.hdr.sgml : 20150105 20150105145322 ACCESSION NUMBER: 0001445546-15-000037 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20141031 FILED AS OF DATE: 20150105 DATE AS OF CHANGE: 20150105 EFFECTIVENESS DATE: 20150105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST TRUST STRATEGIC HIGH INCOME FUND II CENTRAL INDEX KEY: 0001329388 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-21842 FILM NUMBER: 15504119 BUSINESS ADDRESS: STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400 CITY: WHEATON STATE: IL ZIP: 60187 BUSINESS PHONE: 630-765-8000 MAIL ADDRESS: STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400 CITY: WHEATON STATE: IL ZIP: 60187 FORMER COMPANY: FORMER CONFORMED NAME: First Trust Dow Select MicroCap Index Fund DATE OF NAME CHANGE: 20050607 N-CSR 1 fhy_ncsr.txt ANNUAL REPORT TO SHAREHOLDERS 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 811-21842 ----------- First Trust Strategic High Income Fund II ---------------------------------------------------------------- (Exact name of registrant as specified in charter) 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 ---------------------------------------------------------------- (Address of principal executive offices) (Zip code) W. Scott Jardine, Esq. First Trust Portfolios L.P. 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 ---------------------------------------------------------------- (Name and address of agent for service) registrant's telephone number, including area code: 630-765-8000 Date of fiscal year end: October 31 ------------ Date of reporting period: October 31, 2014 ------------------ 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. FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) ANNUAL REPORT FOR THE YEAR ENDED OCTOBER 31, 2014 FIRST TRUST BROOKFIELD -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) ANNUAL REPORT OCTOBER 31, 2014 Shareholder Letter ......................................................... 1 At a Glance ................................................................ 2 Portfolio Commentary ....................................................... 3 Portfolio of Investments ................................................... 6 Statement of Assets and Liabilities ........................................ 15 Statement of Operations .................................................... 16 Statements of Changes in Net Assets ........................................ 17 Statement of Cash Flows .................................................... 18 Financial Highlights ....................................................... 19 Notes to Financial Statements .............................................. 20 Report of Independent Registered Public Accounting Firm .................... 27 Additional Information ..................................................... 28 Board of Trustees and Officers ............................................. 34 Privacy Policy ............................................................. 36 CAUTION REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. ("First Trust" or the "Advisor") and/or Brookfield Investment Management Inc. ("Brookfield" 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 Strategic High Income Fund II (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 Sub-Advisor 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 by investing in the Fund. See "Risk Considerations" in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and common share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment. It includes details about the Fund and presents data and analysis that provide insight into the Fund's performance and investment approach. By reading the portfolio commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund's performance. The statistical information that follows may help you understand the Fund's performance compared to that of relevant market benchmarks. It is important to keep in mind that the opinions expressed by personnel of Brookfield are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, this report and other Fund regulatory filings. -------------------------------------------------------------------------------- SHAREHOLDER LETTER -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) ANNUAL LETTER FROM THE CHAIRMAN AND CEO OCTOBER 31, 2014 Dear Shareholders: I am pleased to present you with the annual report for your investment in First Trust Strategic High Income Fund II (the "Fund"). This report provides detailed information about the Fund, including a performance review and the financial statements for the past 12 months. I encourage you to read this document and discuss it with your financial advisor. Although markets have seemed choppy over the past 12 months, the U.S. has shown sustained growth over the period. In fact, the S&P 500(R) Index, as measured on a total return basis, rose 17.27% during the period. First Trust Advisors L.P. ("First Trust") believes that staying invested in quality products through different types of markets can benefit investors over the long term. First Trust offers a variety of products that we believe could fit the financial plans for many investors seeking long-term investment success. We invite you to look at our investment products with your financial advisor to determine if any of them might fit your financial goals. We believe that regularly discussing your financial objectives and investment options with your financial advisor can help keep you on track. First Trust will continue to make available up-to-date information about your investments so you and your financial advisor are current on any First Trust investments you own. We value our relationship with you, and thank you for the opportunity to assist you in achieving your financial goals. Sincerely, /s/ James A. Bowen James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 1 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) "AT A GLANCE" AS OF OCTOBER 31, 2014 (UNAUDITED) ---------------------------------------------------------------------- FUND STATISTICS ---------------------------------------------------------------------- Symbol on New York Stock Exchange FHY Common Share Price $15.60 Common Share Net Asset Value ("NAV") $16.64 Premium (Discount) to NAV (6.25)% Net Assets Applicable to Common Shares $140,736,869 Current Monthly Distribution per Common Share (1) $0.12 Current Annualized Distribution per Common Share $1.44 Current Distribution Rate on Closing Common Share Price (2) 9.23% Current Distribution Rate on NAV (2) 8.65% ---------------------------------------------------------------------- COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE) ---------------------------------------------------------------------- Common Share Price NAV 10/13 15.97 17.52 15.78 17.42 15.65 17.41 15.87 17.43 15.70 17.46 11/13 15.82 17.50 15.59 17.41 15.54 17.43 15.62 17.45 12/13 15.81 17.48 15.70 17.43 15.81 17.53 15.83 17.60 15.95 17.57 1/14 15.54 17.09 15.45 17.00 15.62 17.14 15.75 17.23 2/14 15.98 17.37 15.73 17.25 15.80 17.23 15.88 17.25 3/14 15.88 17.30 15.90 17.26 15.84 17.26 15.93 17.30 4/14 16.03 17.32 16.03 17.28 16.07 17.35 16.15 17.39 16.14 17.39 5/14 16.25 17.40 16.11 17.38 16.22 17.41 16.31 17.50 6/14 16.34 17.49 16.07 17.39 16.14 17.35 15.96 17.25 7/14 16.01 17.26 15.56 16.94 15.50 17.00 15.65 17.18 15.72 17.27 8/14 15.77 17.28 15.60 17.08 15.38 16.94 15.54 16.96 9/14 15.38 16.68 15.25 16.64 15.20 16.42 15.10 16.50 15.47 16.65 10/14 15.60 16.64
--------------------------------------------------------------------------------------------------- PERFORMANCE --------------------------------------------------------------------------------------------------- Average Annual Total Return ------------------------------------ 1 Year Ended 5 Years Ended Inception (3/28/2006) 10/31/2014 10/31/2014 to 10/31/2014 FUND PERFORMANCE (3) NAV 4.03% 13.70% -1.97% Market Value 6.99% 13.98% -3.23% INDEX PERFORMANCE Barclays Capital Ba U.S. High Yield Index 7.18% 10.19% 8.85% BofA Merrill Lynch U.S. High Yield Master II Index 5.85% 10.26% 8.47% ---------------------------------------------------------------------------------------------------
------------------------------------------------------- % OF TOTAL ASSET CLASSIFICATION INVESTMENTS ------------------------------------------------------- Corporate Bonds and Notes 71.4% Foreign Corporate Bonds and Notes 13.9 Residential Mortgage-Backed Securities 5.7 Manufactured Housing Loans 3.8 Senior Floating-Rate Loan Interests 1.9 Equity 1.9 Commercial Mortgage-Backed Securities 1.2 Collateralized Debt Obligations 0.0* ------------------------------------------------------- Total 100.0% ====== * Amount is less than 0.1% ------------------------------------------------------- % OF TOTAL FIXED-INCOME CREDIT QUALITY (4) INVESTMENTS ------------------------------------------------------- AAA 0.5% AA- 0.6 BBB- 3.0 BB+ 5.5 BB 15.6 BB- 11.3 B+ 8.6 B 17.4 B- 15.1 CCC+ 10.2 CCC 3.5 CCC- 1.7 CC 1.9 C 1.1 D 0.8 NR 3.2 ------------------------------------------------------- Total 100.0% ====== (1) Most recent distribution paid or declared through 10/31/2014. Subject to change in the future. (2) Distribution rates are calculated by annualizing the most recent distribution paid or declared through the report date and then dividing by Common Share price or NAV, as applicable, as of 10/31/2014. Subject to change in the future. (3) Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan and changes in NAV per share for NAV returns and changes in Common Share price for market value returns. Total returns do not reflect sales load and are not annualized for periods less than one year. Past performance is not indicative of future results. (4) The credit quality and ratings information presented above reflects the ratings assigned by one or more nationally recognized statistical rating organizations (NRSROs), including Standard & Poor's Ratings Group, a division of the McGraw Hill Companies, Inc., Moody's Investors Service, Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a security is rated by more than one NRSRO and the ratings are not equivalent, the highest ratings are used. Sub-investment grade ratings are those rated BB+/Ba1 or lower. Investment grade ratings are those rated BBB-/Baa3 or higher. The credit ratings shown related to the creditworthiness of the issuers of the underlying securities in the Fund, and not to the Fund or its shares. Credit ratings are subject to change. NR Not rated. Page 2 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) ANNUAL REPORT OCTOBER 31, 2014 SUB-ADVISOR BROOKFIELD INVESTMENT MANAGEMENT INC. Brookfield Investment Management Inc. ("Brookfield" or the "Sub-Advisor") serves as the Fund's sub-advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset Management, a global alternative asset manager with approximately $200 billion in assets under management as of September 30, 2014. Brookfield Asset Management has over a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. The company offers a range of public and private investment products and services, which leverage its expertise and experience and provide it with a competitive advantage in the markets where it operates. On behalf of its clients, Brookfield Asset Management is also an active investor in the public securities markets, where its experience extends over 30 years. Over this time, the company has successfully developed several investment operations and built expertise in the management of institutional portfolios, retail mutual funds and various commingled vehicles. Brookfield Asset Management's public market activities are conducted by Brookfield, a registered investment advisor. These activities complement Brookfield Asset Management's core competencies and include global listed real estate and infrastructure equities, corporate credit and securitized credit strategies. Headquartered in New York, NY, Brookfield Investment Management maintains offices and investment teams in Toronto, Chicago, Boston and London and had over $17 billion of assets under management as of September 30, 2014. PORTFOLIO MANAGEMENT TEAM DANA E. ERIKSON, CFA, MANAGING DIRECTOR ANTHONY BREAKS, CFA, SENIOR DIRECTOR COMMENTARY FIRST TRUST STRATEGIC HIGH INCOME FUND II The primary investment objective of the First Trust Strategic High Income Fund II (the "Fund") is to seek a high level of current income. The Fund seeks capital growth as a secondary objective. The Fund seeks to achieve its investment objectives by investing in a diversified portfolio of below investment-grade and investment-grade debt securities and equity securities that the Sub-Advisor believes offer attractive yield and/or capital appreciation potential. There can be no assurance that the Fund will achieve its investment objectives. The Fund may not be appropriate for all investors. MARKET RECAP AND OUTLOOK High Yield TAPERING AND INTERNATIONAL EVENTS FUEL MARKETS The 12-month period ended October 31, 2014 was characterized by worldwide central bank moves and global geopolitical turmoil. At the beginning of the period, the Federal Reserve finally announced the start of the long-awaited tapering of its bond-buying program. The markets reacted and pushed interest rates above 3% on the combination of the tapering news and stronger year-end economic growth in North America. While most investors expected interest rates to rise even further, the bond market surprised everyone and moved interest rates sharply lower over the next 10 months, ending at 2.34% as of October 31, 2014. As the 2014 calendar year began, international events influenced markets as investors grew particularly concerned about emerging market declines. Russian troops entered Crimea, and once again China's growth prospects came into question. Investors were later unnerved when Russian troops supported anti-government rebels in the Ukraine and the radical group Islamic State made territorial gains in Iraq and Syria. The spread of the Ebola virus in Western Africa concerned investors as well. Risk markets corrected sharply in September but confidence returned when the Japanese Central Bank announced a bond buying program to counteract slow growth in that country, and some expected the European Central Bank to follow suit in the wake of weak numbers out of Europe, especially Germany. HIGH YIELD UNDERPERFORMS The high-yield market produced a positive return of 5.85% for the 12-month period ended October 31, 2014, as measured by the BofA Merrill Lynch U.S. High Yield Master II Index. The asset class benefited from strong fundamentals, and lower interest rates, offset by fund redemptions triggered by investors' macro concerns. For the 12-month period, higher-quality BB bonds outperformed riskier Page 3 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- CCC bonds. By industry, the market saw outperformance in utilities, banking, and transportation, which were up 11.5%, 9.9%, and 9.5%, respectively(1). Underperforming sectors included energy, services, and basic industries, which rose 3.0%, 3.7%, and 3.9%, respectively.(1) CREDIT CONDITIONS The fiscal year ended October 31, 2014 saw an increase in the high-yield default rate, bringing the 12-month default rate to 1.9%, which remains well below the long-term average of 3.9%.1 We believe defaults will remain low for the foreseeable future. One of the defining characteristics of the credit cycle, which has been in place since 2009, has been the long-term, consistent improvement in credit as measured by the credit rating agencies' "upgrade to downgrade ratio," which ended the period at 1.35x, meaning that the rating agencies are upgrading 1.35 times as many companies as they are downgrading. OUTLOOK The current credit cycle has now lasted six years. It has been characterized by modest economic growth punctuated by repeated geopolitical, economic, and financial market scares. Typically, by this point in the cycle, lower-rated companies are aggressively re-leveraging their balance sheets in order to multiply lackluster equity returns. Typically, investors would expect to see heavy mergers and acquisitions activity and leveraged buyout issuance. While we have seen some increasing trends in these areas, we continue to see responsible behavior on the part of corporate treasurers in managing balance sheet risk. We believe this is a direct result of slow economic growth and geopolitical concerns, which has resulted in a credit cycle already exceeding the prior cycle in length. The market correction in the third quarter has restored substantial value to the high-yield bond market, with the spread moving to 420 basis points over U.S. Treasuries.(2) The correction has also restored some upside potential to the high-yield market by removing a portion of the embedded price premium. There can be little question that the high-yield market may have difficulty advancing when the Federal Reserve drains the system of liquidity; however, we believe that modest and erratic growth and elevated geopolitical risk has tied the Federal Reserve's hands at least for the near future. Consequently, we believe high-yield investors may continue to enjoy coupon-clipping returns for the foreseeable future barring a "risk-off" move on the part of global investors, which we do not expect. SECURITIZED PRODUCTS Within the Securitized Products universe, Agency Residential Mortgage-Backed Securities ("RMBS"), non-Agency RMBS and Commercial Mortgage-Backed Securities ("CMBS") all had strong returns for the fiscal year ended October 31, 2014, driven by improving collateral performance and strong investor demand. Away from Agency RMBS issuance, we are seeing little supply from dealer conduits and real estate investment trusts, historically a source of non-Agency mortgages. The Government Sponsored Enterprises ("GSEs") have turned into a material source of new issue mortgage credit through the issuance of risk-sharing securities. These securities convey a slice of risk from the GSEs guarantee portfolio. Issuance of these securities has picked up and the Federal Housing Finance Agency ("FHFA") director signaled an interest in tripling the pace of issuance. In the Fund's fiscal year, Fannie Mae and Freddie Mac issued a combined $8.9 billion, still small in the context of non-Agency RMBS issuance historically, but notable given overall low levels of supply. CMBS issuance has slowed a bit with $60 billion in new unguaranteed deals and $53 billion in Agency-guaranteed CMBS for the period. Within commercial real estate, top-tier properties in major markets continue to improve and indeed prices now exceed peak levels from 2007. Secondary and tertiary markets continue to recover and the pace of recovery has increased since the middle of 2013. The availability of commercial mortgage credit has greatly improved, and the deal making has now broadened beyond major markets. Oversupply has not been an issue in this real estate cycle, as new construction virtually came to a halt during the financial crisis in 2008 and 2009 and, with the exception of the multifamily sector, remains low. The relative lack of new construction should also assist further recovery in values as demand for space returns and the lead times required to deliver new space keeps supply in check. One area that continues to struggle is retail. Department store sales continue to decline and the malls they anchor have struggled in certain markets. We see no reason to see the trend reversing and choose to avoid CMBS with a larger exposure to these weak retail properties. We remain positive on most securitized products for the next year, based on continued improvement in forecasts for collateral performance. Expansion of credit for borrowers has slowed versus market expectations and this remains an area of potential improvement for the Fund's markets. Banks have been slow to expand borrowing beyond agency eligible loans and non-agency eligible loans to otherwise very clean, typically high net worth borrowers. Putback risk for banks has been somewhat reduced through actions of the FHFA, but banks remain very cautious in their underwriting of even Agency eligible loans. That said, home prices continue to increase and rates remain low. As a result, we believe more borrowers should be able to ----------------------------- 1 J.P. Morgan, High Yield Market Monitor, November 1, 2014, page 3. 2 Merrill Lynch, Bloomberg. Page 4 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- refinance their mortgage, and homes which are for sale should attract a broader audience of buyers. Rents have been rising for several years, and with interest rates still low, many households have a financial incentive to purchase rather than rent. All of these dynamics support the current increase in home prices and potential for further increases, in our opinion. PERFORMANCE ANALYSIS For the one-year period ended October 31, 2014, the Fund had a total return(3) of 4.03% based on net asset value ("NAV"). For the period, the Fund traded from a discount to NAV of -8.85% to a discount of -6.25%, resulting in a total return of 6.99%, based on market price. The total return for the Fund's benchmark, the Barclays Capital Ba U.S. High Yield Index, was 7.18% for the one-year period ended October 31, 2014. While the benchmark contains mostly corporate debt, it is important to note that the Fund maintained exposure to structured finance and mortgage-related securities during the period. An important factor impacting the return of the Fund relative to its benchmark was the Fund's use of financial leverage through the use of bank borrowings. As of October 31, 2014, the Fund's leverage was approximately 29.48% of Managed Assets. Leverage contributed positively to the Fund's performance during the period. The Fund may utilize leverage in an amount up to 33.33% of Managed Assets. The Fund uses leverage because its managers believe that, over time, leverage provides opportunities for additional income and capital growth for common shareholders. However, the use of leverage also can expose common shareholders to additional volatility. For example, as the prices of securities held by the Fund decline, the negative impact of the valuation changes on common share net asset value and common shareholder total return is magnified by the use of leverage. Conversely, leverage may enhance common share returns during periods when the prices of securities held by the Fund are rising generally. Contributors to relative performance over the reporting period included the Fund's allocation to the services sector where positive security selection in the Fund's gaming holdings added return. The Fund was also overweight in the telecommunications sector and saw positive security selection in telecommunications bonds, which also added to performance. The Fund's investment in the consumer cyclical sector also contributed to performance due, in part, to positive security selection in food and drug retail bonds. Detractors from performance included the Fund's overweight in the basic industry sector, where the Fund's holdings of bonds in the coal sector underperformed. Additionally, lack of exposure to the banking sector detracted from performance. The Fund also saw underperformance from its credit weighting, due to an underweight position in the outperforming BB sector, and an overweight in the underperforming CCC sector. Finally, the Fund was more conservatively positioned in terms of duration in order to protect against higher interest rates, and this worked against performance in the period since interest rates moved lower, not higher. The Fund's portfolio holdings are subject to change without notice. The mention of specific securities is not a recommendation or solicitation for any person to buy, sell or hold any particular security. There is no assurance that the Fund currently holds these securities. These views represent the opinions of Brookfield Investment Management Inc. and are not intended to predict or depict the performance of any investment. These views are as of the close of business on October 31, 2014 and subject to change based on subsequent developments. ----------------------------- 3 Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan and changes in NAV per share for NAV returns and changes in Common Share price for market value returns and does not reflect sales load. Past performance is not indicative of future results. Page 5 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS OCTOBER 31, 2014
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ---------------------------------------------- --------- ------------ ------------ CORPORATE BONDS AND NOTES - 98.7% AUTOMOTIVE - 4.4% $ 1,275,000 American Axle & Manufacturing, Inc. (a)....... 6.25% 03/15/21 $ 1,345,125 1,050,000 American Axle & Manufacturing, Inc. (a)....... 6.63% 10/15/22 1,126,125 1,750,000 Chrysler Group LLC/Chrysler Group Co-Issuer, Inc. (a)................................... 8.25% 06/15/21 1,964,375 1,500,000 Ford Motor Co. (a)............................ 6.50% 08/01/18 1,737,847 ------------ 6,173,472 ------------ BASIC INDUSTRY - 12.8% 800,000 Alpha Natural Resources, Inc. (a) (b)......... 7.50% 08/01/20 642,000 2,075,000 Alpha Natural Resources, Inc. (a)............. 6.25% 06/01/21 996,000 3,275,000 Arch Coal, Inc. (a)........................... 7.25% 06/15/21 1,228,125 1,750,000 Associated Materials LLC/AMH New Finance, Inc. (a)................................... 9.13% 11/01/17 1,717,187 500,000 Building Materials Corp. of America (b)....... 6.75% 05/01/21 537,500 2,450,000 Hexion US Finance Corp. (a)................... 9.00% 11/15/20 2,272,375 1,100,000 Huntsman International LLC (a)................ 8.63% 03/15/21 1,204,500 500,000 Ply Gem Industries, Inc....................... 6.50% 02/01/22 493,750 1,540,000 Polymer Group, Inc. (a)....................... 7.75% 02/01/19 1,609,300 2,100,000 Pulte Group, Inc. (a)......................... 6.38% 05/15/33 2,115,750 1,000,000 Steel Dynamics, Inc. (a)...................... 7.63% 03/15/20 1,060,000 2,100,000 USG Corp. (a) (c)............................. 9.75% 01/15/18 2,430,750 1,650,000 Xerium Technologies, Inc. (a)................. 8.88% 06/15/18 1,743,843 ------------ 18,051,080 ------------ CAPITAL GOODS - 4.4% 1,700,000 Crown Cork & Seal Co., Inc. (a)............... 7.38% 12/15/26 1,887,000 1,565,000 Mueller Water Products, Inc. (a).............. 7.38% 06/01/17 1,596,300 590,000 Tekni-Plex, Inc. (b).......................... 9.75% 06/01/19 647,525 650,000 Terex Corp.................................... 6.50% 04/01/20 687,375 1,350,000 Terex Corp. (a)............................... 6.00% 05/15/21 1,410,750 ------------ 6,228,950 ------------ CONSUMER GOODS - 3.8% 1,800,000 New Albertsons, Inc. (a)...................... 7.75% 06/15/26 1,710,000 1,850,000 Post Holdings, Inc. (a)....................... 7.38% 02/15/22 1,900,875 1,900,000 Roundy's Supermarkets, Inc. (a) (b)........... 10.25% 12/15/20 1,729,000 ------------ 5,339,875 ------------ ENERGY - 18.5% 2,100,000 Atlas Pipeline Partners LP/Atlas Pipeline Finance Corp. (a).......................... 5.88% 08/01/23 2,189,250 1,750,000 Breitburn Energy Partners LP/Breitburn Finance Corp. (a).......................... 8.63% 10/15/20 1,793,750 250,000 Breitburn Energy Partners LP/Breitburn Finance Corp............................... 7.88% 04/15/22 241,094 1,925,000 Calfrac Holdings LP (a) (b)................... 7.50% 12/01/20 1,973,125 2,410,000 EV Energy Partners LP/EV Energy Finance Corp. (a).................................. 8.00% 04/15/19 2,385,900 1,850,000 Ferrellgas Partners LP/Ferrellgas Partners Finance Corp. (a).......................... 8.63% 06/15/20 1,933,250
Page 6 See Notes to Financial Statements FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ---------------------------------------------- --------- ------------ ------------ CORPORATE BONDS AND NOTES (CONTINUED) ENERGY (CONTINUED) $ 1,950,000 Global Partners LP/GLP Finance Corp. (b)...... 6.25% 07/15/22 $ 1,940,250 816,163 GMX Resources, Inc. (d) (e)................... 11.00% 12/01/17 709,042 1,700,000 Hilcorp Energy I LP/Hilcorp Finance Co. (a) (b)................................ 8.00% 02/15/20 1,793,500 1,000,000 ION Geophysical Corp.......................... 8.13% 05/15/18 945,000 1,750,000 Key Energy Services, Inc. (a)................. 6.75% 03/01/21 1,566,250 950,000 Linn Energy LLC/Linn Energy Finance Corp. (a).................................. 8.63% 04/15/20 957,125 800,000 Linn Energy LLC/Linn Energy Finance Corp...... 7.75% 02/01/21 788,000 1,275,000 Pioneer Natural Resources Co. (a)............. 6.65% 03/15/17 1,413,416 1,300,000 RKI Exploration & Production LLC/RKI Finance Corp. (b).......................... 8.50% 08/01/21 1,277,250 1,850,000 Tesoro Logistics L.P./Tesoro Logistics Finance Corp............................... 6.13% 10/15/21 1,910,125 2,100,000 Venoco, Inc. (a).............................. 8.88% 02/15/19 1,753,500 415,000 W&T Offshore, Inc............................. 8.50% 06/15/19 406,700 ------------ 25,976,527 ------------ HEALTHCARE - 8.0% 1,925,000 CHS/Community Health Systems, Inc. (a)........ 7.13% 07/15/20 2,086,219 1,375,000 DJO Finance LLC/DJO Finance Corp. (a)......... 9.88% 04/15/18 1,454,062 1,750,000 HCA, Inc. (a)................................. 8.00% 10/01/18 2,012,500 1,000,000 HCA, Inc...................................... 5.88% 05/01/23 1,077,500 607,000 inVentiv Health, Inc. (b) (f)................. 10.00% 08/15/18 549,335 438,000 inVentiv Health, Inc. (b)..................... 11.00% 08/15/18 313,170 1,725,000 Jaguar Holdings Co./Merger (a) (b)............ 9.50% 12/01/19 1,856,531 2,000,000 Kindred Healthcare, Inc. (b).................. 6.38% 04/15/22 1,980,000 ------------ 11,329,317 ------------ LEISURE - 9.9% 1,000,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. (a).......................... 5.50% 04/01/23 1,010,000 2,000,000 Boyd Gaming Corp. (a)......................... 9.00% 07/01/20 2,167,500 1,950,000 Chester Downs & Marina LLC (a) (b)............ 9.25% 02/01/20 1,745,250 2,450,000 GLP Capital LP/GLP Financing II, Inc. (a)..... 5.38% 11/01/23 2,590,875 1,300,000 MGM Resorts International (a)................. 7.63% 01/15/17 1,421,875 1,786,979 MTR Gaming Group, Inc. (a).................... 11.50% 08/01/19 1,970,144 1,250,000 National Cinemedia LLC........................ 6.00% 04/15/22 1,271,875 1,725,000 Palace Entertainment Holdings LLC/Palace Entertainment Holdings Corp. (a) (b)....... 8.88% 04/15/17 1,771,359 ------------ 13,948,878 ------------ MEDIA - 8.5% 1,850,000 Cablevision Systems Corp. (a)................. 8.63% 09/15/17 2,095,125 1,700,000 CCO Holdings LLC/CCO Holdings Capital Corp. (a).................................. 8.13% 04/30/20 1,806,250 1,875,000 Cumulus Media Holdings, Inc. (a).............. 7.75% 05/01/19 1,928,906 1,700,000 iHeartCommunications, Inc. (a)................ 9.00% 03/01/21 1,706,375 1,875,000 Lamar Media Corp.............................. 5.38% 01/15/24 1,950,000 2,350,000 Mediacom Broadband LLC/Mediacom Broadband Corp....................................... 6.38% 04/01/23 2,491,000 ------------ 11,977,656 ------------
See Notes to Financial Statements Page 7 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ---------------------------------------------- --------- ------------ ------------ CORPORATE BONDS AND NOTES (CONTINUED) REAL ESTATE - 1.3% $ 1,750,000 Realogy Corp. (a) (b)......................... 7.88% 02/15/19 $ 1,848,438 ------------ RETAIL - 5.8% 2,000,000 ACCO Brands Corp. (a)......................... 6.75% 04/30/20 2,135,000 1,775,000 L Brands, Inc. (a)............................ 7.60% 07/15/37 1,943,625 1,750,000 Levi Strauss & Co. (a)........................ 7.63% 05/15/20 1,865,937 2,100,000 Reynolds Group Issuer, Inc. (a)............... 9.00% 04/15/19 2,205,000 ------------ 8,149,562 ------------ SERVICES - 6.4% 2,550,000 Casella Waste Systems, Inc. (a)............... 7.75% 02/15/19 2,613,750 2,275,000 Iron Mountain, Inc. (a)....................... 6.00% 08/15/23 2,411,500 950,000 Jurassic Holdings III (b)..................... 6.88% 02/15/21 959,500 1,000,000 Sotheby's (b)................................. 5.25% 10/01/22 985,000 875,000 United Rentals North America, Inc............. 8.25% 02/01/21 958,125 900,000 United Rentals North America, Inc............. 7.63% 04/15/22 1,008,000 ------------ 8,935,875 ------------ TECHNOLOGY & ELECTRONICS - 2.2% 500,000 CyrusOne LP/CyrusOne Finance Corp............. 6.38% 11/15/22 528,750 1,570,000 First Data Corp. (a).......................... 11.25% 01/15/21 1,813,350 665,000 Freescale Semiconductor, Inc. (a)............. 8.05% 02/01/20 703,238 ------------ 3,045,338 ------------ TELECOMMUNICATIONS - 11.3% 2,000,000 Centurylink, Inc. (a)......................... 7.65% 03/15/42 2,015,000 936,000 Cincinnati Bell, Inc. (a)..................... 8.75% 03/15/18 970,164 1,200,000 Fairpoint Communications, Inc. (a) (b)........ 8.75% 08/15/19 1,272,000 1,750,000 Frontier Communications Corp. (a)............. 7.13% 03/15/19 1,938,125 900,000 Frontier Communications Corp.................. 7.13% 01/15/23 963,000 1,750,000 Level 3 Communications, Inc. (a).............. 8.88% 06/01/19 1,885,625 475,000 Level 3 Financing, Inc. (b)................... 6.13% 01/15/21 499,938 1,700,000 PAETEC Holding Corp. (a)...................... 9.88% 12/01/18 1,799,450 500,000 Qwest Capital Funding, Inc.................... 6.88% 07/15/28 510,000 1,875,000 T-Mobile USA, Inc. (a)........................ 6.63% 04/01/23 1,987,500 1,925,000 Windstream Corp. (a).......................... 7.50% 06/01/22 2,052,531 ------------ 15,893,333 ------------ UTILITY - 1.4% 2,025,000 AES Corp...................................... 4.88% 05/15/23 2,030,063 ------------ TOTAL CORPORATE BONDS AND NOTES............................................. 138,928,364 (Cost $137,421,050) ------------
Page 8 See Notes to Financial Statements FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014
PRINCIPAL VALUE (LOCAL STATED STATED VALUE CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLAR) ---------------- ---------------------------------------------- --------- ------------ ------------ FOREIGN CORPORATE BONDS AND NOTES - 19.3% AUTOMOTIVE - 2.1% 1,300,000 Jaguar Land Rover Automotive PLC (USD) (b).... 8.13% 05/15/21 $ 1,436,500 1,117,997 Servus Luxembourg Holding S.C.A. (EUR) (b).... 7.75% 06/15/18 1,481,995 ------------ 2,918,495 ------------ BASIC INDUSTRY - 4.0% 1,540,000 Cascades, Inc. (USD) (a)...................... 7.88% 01/15/20 1,617,000 1,000,000 Cascades, Inc. (USD) (a) (b).................. 5.50% 07/15/22 991,250 1,150,000 FMG Resources (August 2006) Pty Ltd. (USD) (a) (b).............................. 6.88% 04/01/22 1,191,687 1,750,000 Masonite International Corp. (USD) (a) (b).... 8.25% 04/15/21 1,881,250 ------------ 5,681,187 ------------ CAPITAL GOODS - 4.5% 2,000,000 Ardagh Packaging Finance PLC/Ardagh Holdings USA, Inc. (USD) (a) (b).................... 6.75% 01/31/21 2,050,000 1,900,000 INEOS Group Holdings S.A. (USD) (b)........... 5.88% 02/15/19 1,902,375 800,000 KraussMaffei Group GmbH (EUR)................. 8.75% 12/15/20 1,092,385 1,283,000 Trinseo Materials Operating S.C.A./Trinseo Materials Finance, Inc. (USD) (a).......... 8.75% 02/01/19 1,359,980 ------------ 6,404,740 ------------ ENERGY - 2.4% 645,000 Precision Drilling Corp. (USD)................ 6.63% 11/15/20 667,575 700,000 Puma International Financing S.A. (USD) (b)... 6.75% 02/01/21 722,750 2,000,000 Teekay Offshore Partners LP/Teekay Offshore Finance Corp. (USD) (a).................... 6.00% 07/30/19 1,937,500 ------------ 3,327,825 ------------ MEDIA - 1.4% 1,900,000 Numericable Group S.A. (USD) (b).............. 6.00% 05/15/22 1,945,125 ------------ SERVICES - 0.7% 700,000 Bilbao Luxembourg S.A. (EUR) (g).............. 10.50% 12/01/18 925,450 ------------ TELECOMMUNICATIONS - 1.9% 1,900,000 Intelsat Luxembourg S.A. (USD) (a)............ 7.75% 06/01/21 1,992,625 700,000 Wind Acquisition Finance S.A. (USD) (b)....... 7.38% 04/23/21 686,000 ------------ 2,678,625 ------------ TRANSPORTATION - 0.9% 1,400,000 Dynagas LNG Partners LP/Dynagas Finance, Inc. (USD) (a).................................. 6.25% 10/30/19 1,337,000 ------------ UTILITY - 1.4% 1,800,000 LBC Tank Terminals Holding Netherlands BV (USD) (b).................................. 6.88% 05/15/23 1,926,000 ------------ TOTAL FOREIGN CORPORATE BONDS AND NOTES..................................... 27,144,447 (Cost $27,032,528) ------------
See Notes to Financial Statements Page 9 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ---------------------------------------------- --------- ------------ ------------ MORTGAGE-BACKED SECURITIES - 9.6% COLLATERALIZED MORTGAGE OBLIGATIONS - 7.9% Citicorp Mortgage Securities, Inc. $ 1,749,037 Series 2007-2, Class 1A3................... 6.00% 02/25/37 $ 1,846,264 Countrywide Alternative Loan Trust 990,223 Series 2006-29T1, Class 2A6................ 6.50% 10/25/36 917,065 154,222 Series 2007-11T1, Class A37 (h)............ 39.11% 05/25/37 272,191 1,114,486 Series 2007-OA3, Class 1A1 (h)............. 0.29% 04/25/47 940,658 Countrywide Home Loan Mortgage Pass-Through Trust 203,038 Series 2006-21, Class A8................... 5.75% 02/25/37 193,170 HarborView Mortgage Loan Trust 845,565 Series 2005-9, Class B10 (d) (h) (i)....... 1.91% 06/20/35 9 Home Equity Asset Trust 1,190,000 Series 2006-4, Class 2A4 (h)............... 0.43% 08/25/36 1,009,108 1,261,000 Series 2006-7, Class 2A3 (h)............... 0.30% 01/25/37 891,759 Nomura Resecuritization Trust 3,925 Series 2014-1R, Class 2A6 (b).............. (j) 02/25/37 1 2,757,000 Series 2014-1R, Class 2A11 (b) (h)......... 0.29% 02/26/37 1,449,939 Residential Accredit Loans, Inc. 162,443 Series 2007-Q56, Class A2 (h).............. 54.32% 04/25/37 372,608 Securitized Asset Backed Receivables LLC Trust 1,338,363 Series 2007, Class BR4 (h)................. 0.35% 05/25/37 881,468 1,754,910 Series 2007-BR3, Class A2B (h)............. 0.37% 04/25/37 1,171,608 Washington Mutual Alternative Mortgage Pass-Through Certificates 47,317 Series 2007-5, Class A11 (h)............... 38.57% 06/25/37 93,697 Wells Fargo Mortgage Backed Securities Trust 735,055 Series 2006-8, Class A15................... 6.00% 07/25/36 746,387 279,985 Series 2007-8, Class 2A2................... 6.00% 07/25/37 277,387 ------------ 11,063,319 ------------ COMMERCIAL MORTGAGE-BACKED SECURITIES - 1.7% Banc of America Large Loan, Inc. 1,548,035 Series 2005-MIB1, Class L (h) (i) (k)...... 3.15% 03/15/22 77,897 Greenwich Capital Commercial Funding Corp. 1,180,000 Series 2007-GG11, Class AJ (h)............. 6.26% 12/10/49 1,236,575 Vornado DP LLC 930,000 Series 2010-VNO, Class D (b)............... 6.36% 09/13/28 1,077,961 ------------ 2,392,433 ------------ TOTAL MORTGAGE-BACKED SECURITIES............................................ 13,455,752 (Cost $12,202,143) ------------ ASSET-BACKED SECURITIES - 5.3% Ace Securities Corp. 961,670 Series 2003-MH1, Class A4 (b).............. 6.50% 08/15/30 1,025,152 BankAmerica Manufactured Housing Contract Trust II 2,300,000 Series 1997-1, Class B1 (i)................ 6.94% 06/10/21 2,706,117 Bombardier Capital Mortgage Securitization Corp. 272,837 Series 1999-B, Class A1B................... 6.61% 12/15/29 147,270 Citigroup Mortgage Loan Trust, Inc. 2,301,000 Series 2003-HE3, Class M4 (h).............. 3.15% 12/25/33 1,149,369
Page 10 See Notes to Financial Statements FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ---------------------------------------------- --------- ------------ ------------ ASSET-BACKED SECURITIES (CONTINUED) Green Tree Financial Corp. $ 77,872 Series 1997-4, Class B1.................... 7.23% 02/15/29 $ 5,542 681,654 Series 1998-4, Class M1.................... 6.83% 04/01/30 443,219 1,305,982 Series 1999-3, Class M1.................... 6.96% 02/01/31 81,773 GSAMP Trust 2,903,792 Series 2006-S5, Class A1 (h)............... 0.33% 09/25/36 85,745 IMC Home Equity Loan Trust 2,055,926 Series 1997-3, Class B..................... 7.87% 08/20/28 1,077,965 2,216,913 Series 1997-5, Class B (i)................. 7.59% 11/20/28 504,757 Oakwood Mortgage Investors, Inc. 712,065 Series 1999-B, Class M1.................... 7.18% 12/15/26 246,289 ------------ TOTAL ASSET-BACKED SECURITIES............................................... 7,473,198 (Cost $5,186,156) ------------ SENIOR FLOATING-RATE LOAN INTERESTS - 2.6% CONSUMER GOODS - 0.5% 668,271 Albertsons, Inc., Term Loan B-2 (h)........... 4.75% 03/21/19 666,600 ------------ FOOD & STAPLES RETAILING - 0.3% 547,250 Roundy's Supermarkets, Tranche B Term Loan (h)........................................ 5.75% 02/21/21 485,684 ------------ LEISURE - 0.7% 997,500 Caesars Growth Properties, LLC, Term Loan B (h)................................. 6.25% 05/08/21 940,144 ------------ TELECOMMUNICATIONS - 0.7% 985,000 Fairpoint Communications, Inc., Term Loan (h).............................. 7.50% 02/14/19 991,777 ------------ UTILITY - 0.4% 834,744 Texas Competitive Electric Holdings Co., LLC, Tranche B2 (e) (h)......................... 4.65% 10/10/17 606,976 ------------ TOTAL SENIOR FLOATING-RATE LOAN INTERESTS................................... 3,691,181 (Cost $4,009,668) ------------
SHARES DESCRIPTION VALUE ---------------- ---------------------------------------------------------------------------- ------------ COMMON STOCKS - 2.6% AUTOMOTIVE - 0.3% 33,500 Ford Motor Co............................................................... 472,015 ------------ BASIC INDUSTRY - 0.4% 94,150 Cascades, Inc............................................................... 523,775 ------------ INDUSTRIAL CONGLOMERATES - 0.4% 20,275 General Electric Co......................................................... 523,298 ------------ SERVICES - 0.3% 13,250 Iron Mountain, Inc.......................................................... 477,928 ------------ TELECOMMUNICATIONS - 0.8% 170,934 Frontier Communications Corp................................................ 1,117,908 ------------ UTILITY - 0.4% 36,000 AES Corp.................................................................... 506,520 ------------ TOTAL COMMON STOCKS......................................................... 3,621,444 (Cost $3,212,665) ------------
See Notes to Financial Statements Page 11 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014
SHARES/UNITS DESCRIPTION VALUE ---------------- ---------------------------------------------------------------------------- ------------ MASTER LIMITED PARTNERSHIPS - 0.1% ENERGY - 0.1% 4,411 EV Energy Partners, LP...................................................... $ 143,137 ------------ TOTAL MASTER LIMITED PARTNERSHIPS........................................... 143,137 (Cost $150,804) ------------ PREFERRED SECURITIES - 0.0% 4,000 Soloso CDO, Ltd., Series 2005-1 (j) (k)..................................... 40,000 ------------ TOTAL PREFERRED SECURITIES.................................................. 40,000 (Cost $0) ------------ PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ---------------------------------------------- --------- ------------ ------------ STRUCTURED NOTES - 0.0% $ 5,750,000 Preferred Term Securities XXV, Ltd. (k)....... (j) 06/22/37 575 Preferred Term Securities XXVI, Ltd. 2,500,000 Subordinated Note (k)...................... (j) 09/22/37 250 ------------ TOTAL STRUCTURED NOTES...................................................... 825 (Cost $0) ------------ TOTAL INVESTMENTS - 138.2%.................................................. 194,498,348 (Cost $189,215,014) (l) OUTSTANDING LOAN - (41.8%).................................................. (58,850,000) NET OTHER ASSETS AND LIABILITIES - 3.6%..................................... 5,088,521 ------------ NET ASSETS - 100.0%......................................................... $140,736,869 ============
----------------------------- (a) All or a portion of this security serves as collateral on the outstanding loan. (b) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the Securities Act of 1933, as amended (the "1933 Act"), and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Fund's Board of Trustees, this security has been determined to be liquid by Brookfield Investment Management Inc., the Fund's sub-advisor. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security specific factors and assumptions, which require subjective judgment. At October 31, 2014, securities noted as such amounted to $44,088,656 or 31.33% of net assets. (c) Multi-Step Coupon Bond - Coupon steps up or down based upon ratings changes by Standard & Poor's Ratings Group or Moody's Investors Service, Inc. The interest rate shown reflects the rate in effect at October 31, 2014. (d) The issuer is in default. Income is not being accrued. (e) This issuer has filed for protection in federal bankruptcy court. (f) This security is a Payment-in-Kind ("PIK") Toggle Note whereby the issuer may elect to pay interest in cash at the stated coupon or in PIK at 12.00%. The first interest payment is scheduled for February 15, 2015. (g) This security is a PIK Toggle Note whereby the issuer may elect to pay interest in cash at the stated coupon or in PIK at 11.25%. The security paid interest in cash. (h) Floating rate security. The interest rate shown reflects the rate in effect at October 31, 2014. (i) Security missed one or more of its interest payments. (j) Zero coupon security. (k) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the 1933 Act, 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). Page 12 See Notes to Financial Statements FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014 (l) Aggregate cost for federal income tax purposes is $208,903,771. As of October 31, 2014, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $11,584,614 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $25,990,037. CDO Collateralized Debt Obligation CAD Canadian Dollar EUR Euro USD United States Dollar ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of October 31, 2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 10/31/2014 PRICES INPUTS INPUTS ------------- ------------- ------------- ------------- Corporate Bonds and Notes*......................... $ 138,928,364 $ -- $ 138,928,364 $ -- Foreign Corporate Bonds and Notes*................. 27,144,447 -- 27,144,447 -- Mortgage-Backed Securities: Collateralized Mortgage Obligations............. 11,063,319 -- 11,063,319 -- Commercial Mortgage-Backed Securities........... 2,392,433 -- 2,392,433 -- Asset-Backed Securities............................ 7,473,198 -- 7,473,198 -- Senior Floating-Rate Loan Interests*............... 3,691,181 -- 3,691,181 -- Common Stocks*..................................... 3,621,444 3,621,444 -- -- Master Limited Partnerships*....................... 143,137 143,137 -- -- Preferred Securities............................... 40,000 -- -- 40,000 Structured Notes................................... 825 -- -- 825 ------------- ------------- ------------- ------------- Total Investments.................................. 194,498,348 3,764,581 190,692,942 40,825 Forward Foreign Currency Contracts**............... 237,190 -- 237,190 -- ------------- ------------- ------------- ------------- Total.............................................. $ 194,735,538 $ 3,764,581 $ 190,930,132 $ 40,825 ============= ============= ============= =============
* See Portfolio of Investments for industry breakout. ** See the Schedule of Forward Foreign Currency Contracts for contract and currency detail. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. As of October 31, 2014, the Fund transferred Structured Notes valued at $825 from Level 2 to Level 3 of the fair value hierarchy. The Structured Notes that transferred from Level 2 to Level 3 did so primarily as a result of using a price obtained from a broker and not from an independent third party pricing service. Level 3 Structured Notes and Preferred Securities are valued using broker quotes. These values are based on unobservable and non-quantitative inputs. The Fund's Board of Trustees has adopted valuation procedures that are utilized by the Pricing Committee to oversee the day-to-day valuation of the Fund's investments. The Pricing Committee, through the Fund's fund accounting agent, monitors daily pricing via tolerance checks and stale and unchanged price reviews. The Pricing Committee also reviews monthly back testing of pricing service prices by comparing sales prices of Fund investments to prior day pricing service prices. Additionally, the Pricing Committee reviews periodic information from the Fund's third party pricing service that compares secondary market trade prices to their daily valuations. See Notes to Financial Statements Page 13 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) OCTOBER 31, 2014 The following table presents the activity of the Fund's investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period presented. Beginning Balance at October 31, 2013 Preferred Securities $ 88,500 Structured Notes -- Net Realized Gain (Loss) -- Net Change in Unrealized Appreciation/Depreciation Preferred Securities (48,500) Structured Notes -- Purchases -- Sales -- Transfers In Preferred Securities -- Structured Notes 825 Transfers Out -- ENDING BALANCE AT OCTOBER 31, 2014 Preferred Securities 40,000 Structured Notes 825 ---------- Total Level 3 holdings $ 40,825 ========== There was no net change in unrealized appreciation (depreciation) from Level 3 investments held as of October 31, 2014.
FORWARD FOREIGN CURRENCY CONTRACTS -------------------------------------------------- PURCHASE SALE UNREALIZED SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION DATE COUNTERPARTY PURCHASED (a) SOLD (a) OCTOBER 31, 2014 OCTOBER 31, 2014 (DEPRECIATION) ---------- ------------ --------------- --------------- ---------------- ---------------- -------------- 11/17/14 BNYM USD 517,466 CAD 566,030 $ 517,466 $ 502,013 $ 15,453 11/17/14 BNYM USD 3,439,149 EUR 2,567,180 3,439,149 3,217,412 221,737 -------------- Net unrealized appreciation (depreciation)....................................................... $ 237,190 ==============
(a) Please see Portfolio of Investments for currency description. Counterparty Abbreviations: BNYM Bank of New York Mellon Page 14 See Notes to Financial Statements FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2014
ASSETS: Investments, at value (Cost $189,215,014)......................................................................... $ 194,498,348 Cash........................................................................................... 1,678,893 Foreign currency (Cost $15,584)................................................................ 14,539 Unrealized appreciation on forward foreign currency contracts.................................. 237,190 Receivables: Interest.................................................................................... 3,391,627 Dividends................................................................................... 53,953 Prepaid expenses............................................................................... 7,468 ------------- Total Assets............................................................................. 199,882,018 ------------- LIABILITIES: Outstanding loan............................................................................... 58,850,000 Payables: Investment advisory fees.................................................................... 151,959 Audit and tax fees.......................................................................... 70,200 Administrative fees......................................................................... 25,472 Printing fees............................................................................... 21,015 Interest and fees on loan................................................................... 7,346 Transfer agent fees......................................................................... 6,343 Custodian fees.............................................................................. 6,065 Legal fees.................................................................................. 3,676 Trustees' fees and expenses................................................................. 1,515 Financial reporting fees.................................................................... 771 Other liabilities.............................................................................. 787 ------------- Total Liabilities........................................................................ 59,145,149 ------------- NET ASSETS..................................................................................... $ 140,736,869 ============= NET ASSETS CONSIST OF: Paid-in capital................................................................................ $ 189,158,694 Par value...................................................................................... 84,589 Accumulated net investment income (loss)....................................................... 7,880,267 Accumulated net realized gain (loss) on investments, forward foreign currency contracts and foreign currency transactions................................................. (61,900,329) Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts and foreign currency translation......................................... 5,513,648 ------------- NET ASSETS..................................................................................... $ 140,736,869 ============= NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 16.64 ============= Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 8,458,869 =============
See Notes to Financial Statements Page 15 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2014
INVESTMENT INCOME: Interest....................................................................................... $ 14,968,007 Dividends (net of foreign withholding tax of $519)............................................. 117,950 Other.......................................................................................... 2,827 ------------- Total investment income.................................................................. 15,088,784 ------------- EXPENSES: Investment advisory fees....................................................................... 1,823,391 Interest and fees on loan...................................................................... 841,957 Legal fees..................................................................................... 220,549 Administrative fees............................................................................ 206,396 Audit and tax fees............................................................................. 71,904 Printing fees.................................................................................. 69,638 Transfer agent fees............................................................................ 39,641 Custodian fees................................................................................. 23,018 Trustees' fees and expenses.................................................................... 18,302 Financial reporting fees....................................................................... 9,251 Other.......................................................................................... 94,493 ------------- Total expenses........................................................................... 3,418,540 ------------- NET INVESTMENT INCOME (LOSS)................................................................... 11,670,244 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments................................................................................. (1,440,305) Forward foreign currency contracts.......................................................... 103,606 Foreign currency transactions............................................................... 106,504 ------------- Net realized gain (loss)....................................................................... (1,230,195) ------------- Net change in unrealized appreciation (depreciation) on: Investments................................................................................. (5,935,646) Forward foreign currency contracts.......................................................... 183,673 Foreign currency translation................................................................ (8,673) ------------- Net change in unrealized appreciation (depreciation)........................................... (5,760,646) ------------- NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (6,990,841) ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 4,679,403 =============
Page 16 See Notes to Financial Statements FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR ENDED ENDED 10/31/2014 10/31/2013 -------------- -------------- OPERATIONS: Net investment income (loss)........................................................ $ 11,670,244 $ 12,538,550 Net realized gain (loss)............................................................ (1,230,195) 1,897,930 Net change in unrealized appreciation (depreciation)................................ (5,760,646) 1,770,493 -------------- -------------- Net increase (decrease) in net assets resulting from operations..................... 4,679,403 16,206,973 -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................................................... (10,063,829) (5,633,114) Return of capital................................................................... (2,116,942) (6,652,538) -------------- -------------- Total distributions to shareholders................................................. (12,180,771) (12,285,652) -------------- -------------- CAPITAL TRANSACTIONS: Proceeds from Common Shares sold through at the market offering..................... -- 112,291 -------------- -------------- Net increase (decrease) in net assets resulting from capital transactions........... -- 112,291 -------------- -------------- Total increase (decrease) in net assets............................................. (7,501,368) 4,033,612 NET ASSETS: Beginning of period................................................................. 148,238,237 144,204,625 -------------- -------------- End of period....................................................................... $ 140,736,869 $ 148,238,237 ============== ============== Accumulated net investment income (loss) at end of period........................... $ 7,880,267 $ 5,900,853 ============== ============== CAPITAL TRANSACTIONS WERE AS FOLLOWS: Common Shares at beginning of period................................................ 8,458,869 8,452,416 Common Shares sold through at the market offerings.................................. -- 6,453 -------------- -------------- Common Shares at end of period...................................................... 8,458,869 8,458,869 ============== ==============
See Notes to Financial Statements Page 17 FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) STATEMENT OF CASH FLOWS FOR THE YEAR ENDED OCTOBER 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES: Net increase (decrease) in net assets resulting from operations................. $ 4,679,403 Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities: Purchases of investments.................................................. (59,911,464) Sales, maturities and paydowns of investments............................. 57,455,935 Net amortization/accretion of premiums/discounts on investments........... (344,717) Net realized gain/loss on investments..................................... 1,440,305 Net change in unrealized appreciation/depreciation on forward foreign currency contracts.................................................... (183,673) Net change in unrealized appreciation/depreciation on investments......... 5,935,646 CHANGES IN ASSETS AND LIABILITIES: Decrease in interest receivable........................................... 616,889 Increase in dividends receivable.......................................... (53,953) Decrease in prepaid expenses.............................................. 11,306 Decrease in other assets.................................................. 6,042 Increase in interest and fees on loan payable............................. 2,724 Decrease in investment advisory fees payable.............................. (2,228) Decrease in legal fees payable............................................ (1,511) Decrease in printing fees payable......................................... (1,408) Increase in administrative fees payable................................... 5,465 Decrease in custodian fees payable........................................ (18,074) Increase in transfer agent fees payable................................... 1,181 Decrease in Trustees' fees and expenses payable........................... (341) Increase in other liabilities payable..................................... 787 -------------- CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 9,638,314 -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to Common Shareholders from net investment income........... (10,063,829) Distributions to Common Shareholders from return of capital............... (2,116,942) Proceeds from borrowing................................................... 16,150,000 Repayment of borrowing.................................................... (12,700,000) -------------- CASH USED IN FINANCING ACTIVITIES............................................... (8,730,771) -------------- Increase in cash and foreign currency (a)....................................... 907,543 Cash and foreign currency at beginning of period................................ 785,889 -------------- CASH AND FOREIGN CURRENCY AT END OF PERIOD...................................... $ 1,693,432 ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest and fees............................... $ 839,233 ==============
(a) Includes net change in unrealized appreciation (depreciation) on foreign currency of ($1,045). Page 18 See Notes to Financial Statements FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) FINANCIAL HIGHLIGHTS FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED 10/31/2014 10/31/2013 10/31/2012 10/31/2011 10/31/2010 (a) (b) -------------- -------------- -------------- -------------- ------------------ Net asset value, beginning of period...... $ 17.52 $ 17.06 $ 16.17 $ 15.87 $ 14.22 ---------- ---------- ---------- ---------- ---------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss).............. 1.38 1.48 1.52 0.59 1.86 Net realized and unrealized gain (loss) (0.82) 0.43 0.90 0.32 1.17 ---------- ---------- ---------- ---------- ---------- Total from investment operations.......... 0.56 1.91 2.42 0.91 3.03 ---------- ---------- ---------- ---------- ---------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income..................... (1.19) (0.66) (0.61) (0.54) -- Return of capital......................... (0.25) (0.79) (0.94) (0.07) (1.38) ---------- ---------- ---------- ---------- ---------- Total distributions....................... (1.44) (1.45) (1.55) (0.61) (1.38) ---------- ---------- ---------- ---------- ---------- Premiums from shares sold in at the market offerings.............................. -- 0.00 (d) 0.02 -- -- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period............ $ 16.64 $ 17.52 $ 17.06 $ 16.17 $ 15.87 ========== ========== ========== ========== ========== Market value, end of period............... $ 15.60 $ 15.97 $ 17.69 $ 14.51 $ 14.49 ========== ========== ========== ========== ========== TOTAL RETURN BASED ON NET ASSET VALUE (c).............................. 4.03% 12.19% 16.11% 13.60% 23.46% ========== ========== ========== ========== ========== TOTAL RETURN BASED ON MARKET VALUE (c).... 6.99% (1.38)% 34.16% 11.64% 21.71% ========== ========== ========== ========== ========== ----------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's)...... $ 140,737 $ 148,238 $ 144,205 $ 131,109 $ 50,468 Ratio of total expenses to average net assets................................. 2.34% 2.22% 2.52% 2.35% 2.29% Ratio of total expenses to average net assets excluding interest expense...... 1.77% 1.71% 1.93% 1.93% 2.21% Ratio of net investment income (loss) to average net assets..................... 8.00% 8.55% 9.52% 9.65% 12.54% Portfolio turnover rate................... 28% 27% 33% 49% 332% (e) INDEBTEDNESS: Total loan outstanding (in 000's)......... $ 58,850 $ 55,400 $ 54,400 $ 54,400 N/A Asset coverage per $1,000 of indebtedness (f)....................... $ 3,391 $ 3,676 $ 3,651 $ 3,410 N/A
----------------------------- (a) On September 20, 2010, the Fund's Board of Trustees approved a new investment management agreement with First Trust Advisors L.P. and a new sub-advisory agreement with Brookfield Investment Management Inc. ("Brookfield"), and on December 20, 2010, the shareholders voted to approve both agreements. (b) All share amounts, net asset values and market values have been adjusted as a result of the 1-for-3 reverse share split on September 30, 2011. (c) Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan, and changes in net asset value per share for net asset value returns and changes in Common Share price for market value returns. Total returns do not reflect sales load and are not annualized for periods less than one year. Past performance is not indicative of future results. (d) Amount represents less than $0.01 per share. (e) For the fiscal year ended October 31, 2010, the Fund's portfolio turnover rate reflects mortgage pool forward commitments as purchases and sales. This caused the reported portfolio turnover rate to be higher than in subsequent fiscal years. The turnover rate may vary greatly from year to year as well as within a year. (f) Calculated by subtracting the Fund's total liabilities (not including the loan outstanding) from the Fund's total assets, and dividing by the outstanding loan balance in 000's. N/A Not applicable. See Notes to Financial Statements Page 19 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 1. ORGANIZATION First Trust Strategic High Income Fund II (the "Fund") is a diversified, closed-end management investment company organized as a Massachusetts business trust on January 18, 2006, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FHY 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 capital growth as a secondary objective. The Fund seeks to achieve its investment objectives by investing in a diversified portfolio of below-investment grade and investment grade debt securities, and equity securities that Brookfield Investment Management Inc. ("Brookfield" or the "Sub-Advisor") believes offer attractive yield and/or capital appreciation potential. The Fund may invest up to 100% of its Managed Assets in below-investment grade debt securities (commonly referred to as "high-yield" or "junk" bonds). Managed Assets means the average daily total asset value of the Fund minus the sum of the Fund's liabilities other than the principal amount of borrowings or reverse repurchase agreements, if any. There can be no assurance that the Fund will achieve its investment objectives. The Fund may not be appropriate for all investors. 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 ("U.S. GAAP") 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. If the NYSE closes early on a valuation day, the NAV is determined as of that time. 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 absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third party pricing service or are determined by the Pricing Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor") in accordance with valuation procedures adopted by the Fund's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund's investments are valued as follows: Corporate bonds, notes, U.S. government securities, mortgage-backed securities, asset-backed securities and other debt securities are valued on the basis of valuations provided by dealers who make markets in such securities or by an independent pricing service approved by the Fund's Board of Trustees, which may use the following valuation inputs when available: 1) benchmark yields; 2) reported trades; 3) broker/dealer quotes; 4) issuer spreads; 5) benchmark securities; 6) bids and offers; and 7) reference data including market research publications. Common stocks and other equity securities listed on any national or foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and the London Stock Exchange Alternative Investment Market ("AIM")) are valued at the last sale price on the exchange on which they are principally traded or, for NASDAQ and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the principal market for such securities. Securities traded in an over-the-counter market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. Page 20 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 The Senior Floating-Rate Loan interests ("Senior Loans")(1) held in the Fund are not listed on any securities exchange or board of trade. Senior Loans are typically bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an over-the-counter secondary market, although typically no formal market-makers exist. This market, while having grown substantially since its inception, generally has fewer trades and less liquidity than the secondary market for other types of securities. Some Senior Loans have few or no trades, or trade infrequently, and information regarding a specific Senior Loan may not be widely available or may be incomplete. Accordingly, determinations of the market value of Senior Loans may be based on infrequent and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of Senior Loans than for other types of securities. Typically, Senior Loans are fair valued using information provided by a third party pricing service. The third party pricing service primarily uses over-the-counter pricing from dealer runs and broker quotes from indicative sheets to value the Senior Loans. Forward foreign currency contracts are fair valued at the current day's interpolated foreign exchange rate, as calculated using the current day's spot rate, and the thirty, sixty, ninety, and one-hundred eighty day forward rates provided by an independent pricing service. Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discounts (amortized cost), provided the Advisor's Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer specific conditions existing at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following: 1) the credit conditions in the relevant market and changes thereto; 2) the liquidity conditions in the relevant market and changes thereto; 3) the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates); 4) issuer-specific conditions (such as significant credit deterioration); and 5) any other market-based data the Advisor's Pricing Committee considers relevant. In this regard, the Advisor's Pricing Committee may use last-obtained market-based data to assist it when valuing portfolio securities using amortized cost. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Fund's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended (the "1933 Act")) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of the Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the fundamental business data relating to the issuer; 2) an evaluation of the forces which influence the market in which these securities are purchased and sold; 3) the type, size and cost of a security; 4) the financial statements of the issuer; 5) the credit quality and cash flow of the issuer, based on the Sub-Advisor's or external analysis; 6) the information as to any transactions in or offers for the security; 7) the price and extent of public trading in similar securities (or equity securities) of the issuer/borrower, or comparable companies; 8) the coupon payments; 9) the quality, value and salability of collateral, if any, securing the security; 10) the business prospects of the issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the issuer's management; 11) the prospects for the issuer's industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry; and 12) other relevant factors. (1) The terms "security" and "securities" used throughout the Notes to Financial Statements include Senior Loans. Page 21 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 The Fund invests a significant portion of its assets in below-investment grade debt securities, including structured finance securities and corporate bonds. Structured finance securities include: asset-backed securities, including home equity, manufactured housing, etc.; commercial mortgage-backed securities; residential mortgage-backed or private-label collateralized mortgage obligations; and collateralized debt obligations. The value and related income of these securities is sensitive to changes in economic conditions, including delinquencies and/or defaults. The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: o Level 1 - Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund's investments as of October 31, 2014, is included with the Fund's Portfolio of Investments. 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. Interest income is recorded daily on the accrual basis. Amortization of premiums and accretion of discounts are recorded using the effective interest method. The Fund invests in certain lower credit quality securitized assets (for example, asset-backed securities, collateralized mortgage obligations and commercial mortgage-backed securities), as well as interest-only securities, that have contractual cash flows. For these securities, if there is a change in the estimated cash flows, based on an evaluation of current information, then the estimated yield is adjusted. Additionally, if the evaluation of current information indicates a permanent impairment of the security, the cost basis of the security is written down and a loss is recognized. Debt obligations may be placed on non-accrual status, and related interest income may be reduced by ceasing current accruals and amortization/accretion and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured. Securities purchased on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At October 31, 2014, the Fund had no when-issued, delayed-delivery or forward purchase commitments. C. RESTRICTED SECURITIES: The Fund invests in restricted securities, which are securities that may not be offered for public sale without first being registered under the 1933 Act. Prior to registration, restricted securities may only be resold in transactions exempt from registration under Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of October 31, 2014, the Fund held restricted securities as shown in the following table that the Sub-Advisor has deemed illiquid pursuant to procedures adopted by the Fund's Board of Trustees. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security-specific factors and assumptions, which require subjective judgment. 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 note (Note 2A) and are not expressed as a discount to the carrying value of a comparable unrestricted security. There are no unrestricted securities with the same maturity dates and yields for these issuers. Page 22 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014
% OF ACQUISITION PRINCIPAL CARRYING NET SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS ------------------------------------------------------------------------------------------------------------------------ Banc of America Large Loan, Inc. Series 2005-MIB1, Class L, 3.15%, 03/15/22 06/26/06 $ 1,548,035 $ 5.03 $ 312,657 $ 77,897 0.06% Preferred Term Securities XXV, Ltd. Zero Coupon, 06/22/37 03/27/07 $ 5,750,000 0.00* -- 575 0.00** Preferred Term Securities XXVI, Ltd. Subordinated Note, Zero Coupon, 09/22/37 06/06/07 $ 2,500,000 0.00* -- 250 0.00** Soloso CDO, Ltd., Series 2005-1 04/24/06 4,000 10.00 -- 40,000 0.03 ---------- --------- ---------- $ 312,657 $ 118,722 0.09% ========== ========= ========== * Amount is less than $0.01. ** Amount is less than 0.01%.
D. INTEREST-ONLY SECURITIES: An interest-only security ("IO Security") is the interest-only portion of a mortgage-backed security that receives some or all of the interest portion of the underlying mortgage-backed security and little or no principal. A reference principal value called a notional value is used to calculate the amount of interest due to the IO Security. IO Securities are sold at a deep discount to their notional principal amount. Generally speaking, when interest rates are falling and prepayment rates are increasing, the value of an IO Security will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of an IO Security will rise. These securities, if any, are identified on the Portfolio of Investments. E. COLLATERALIZED DEBT OBLIGATIONS: A collateralized debt obligation ("CDO") is an asset-backed security whose underlying collateral is typically a portfolio of bonds or bank loans. Where the underlying collateral is a portfolio of bonds, a CDO is referred to as a collateralized bond obligation ("CBO"). Where the underlying collateral is a portfolio of bank loans, a CDO is referred to as a collateralized loan obligation ("CLO"). Investors in CDOs bear the credit risk of the underlying collateral. Multiple tranches of securities are issued by the CDO, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of risk. If there are defaults or the CDO's collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. CDOs, similar to other asset-backed securities, are subject to prepayment risk. F. FORWARD FOREIGN CURRENCY CONTRACTS: The Fund is subject to foreign currency risk in the normal course of pursuing its investment objectives. Forward foreign currency contracts are agreements to exchange one currency for another at a future date and at a specified price. The Fund uses forward foreign currency contracts to facilitate transactions in foreign securities and to manage the Fund's foreign currency exposure. These contracts are valued daily, and the Fund's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in "Unrealized appreciation (depreciation) on forward foreign currency contracts" on the Statement of Assets and Liabilities. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or the cost of) the closing transaction and the Fund's basis in the contract. This realized gain or loss is included in "Net realized gain (loss) on forward foreign currency contracts" on the Statement of Operations. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in currency and securities values and interest rates. Due to the risks, the Fund could incur losses in excess of the net unrealized value shown on the Schedule of Forward Foreign Currency Contracts. G. FOREIGN CURRENCY: The books and records of the Fund are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. Unrealized gains and losses on assets and liabilities, other than investments in securities, which result from changes in foreign currency exchange rates have been included in "Net change in unrealized appreciation (depreciation) on foreign currency translation" on the Statement of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are shown in "Net change in unrealized appreciation (depreciation) on investments" on the Statement of Operations. Net realized foreign currency gains and losses include the effect of changes in exchange rates between trade date and settlement date on investment security transactions, foreign currency transactions and interest and dividends received. The portion of foreign currency gains and losses related to fluctuation in exchange rates between the initial purchase trade date and subsequent sale trade date is included in "Net realized gain (loss) on foreign currency transactions" on the Statement of Operations. Page 23 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund will distribute to holders of its Common Shares monthly dividends of all or a portion of its net income after the payment of interest and dividends in connection with leverage, if any. 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 U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These permanent differences are primarily due to the varying treatment of income and gain/loss on portfolio securities held by the Fund and have no impact on net assets or NAV per share. Temporary differences, which arise from recognizing certain items of income, expense and gain/loss in different periods for financial statement and tax purposes, will reverse at some point in the future. Permanent differences incurred during the fiscal year ended October 31, 2014, primarily as a result of differing book/tax treatment on recognition of amortization/accretion on portfolio holdings, have been reclassified at year end to reflect an increase in accumulated net investment income (loss) of $372,999, an increase in accumulated net realized gain (loss) on investments of $3,544,423 and a decrease to paid-in capital of $3,917,422. Net assets were not affected by this reclassification. The tax character of distributions paid during the fiscal year ended October 31, 2014, and October 31, 2013, was as follows: Distributions paid from: 2014 2013 Ordinary income.................................. $ 10,063,829 $ 5,633,114 Capital gain..................................... -- -- Return of capital................................ 2,116,942 6,652,538 As of October 31, 2014, the distributable earnings and net assets on a tax basis were as follows: Undistributed ordinary income.................... $ -- Undistributed capital gains...................... -- -------------- Total undistributed earnings..................... -- Accumulated capital and other losses............. (34,094,115) Net unrealized appreciation (depreciation)....... (14,412,299) -------------- Total accumulated earnings (losses).............. (48,506,414) Other............................................ -- Paid-in capital.................................. 189,243,283 -------------- Net assets....................................... $ 140,736,869 ============== I. 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. However, due to the timing and amount of distributions, the Fund may be subject to an excise tax of 4% of the amount by which approximately 98% of the Fund's taxable income exceeds the distributions from such taxable income for the calendar year. Under the Regulated Investment Company Modernization Act of 2010 (the "Act"), net capital losses arising in taxable years after December 22, 2010, may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses. At October 31, 2014, for federal income tax purposes, the Fund had capital loss carryforwards available that are shown in the following table, to the extent provided by regulations, to offset future capital gains through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains offset will not be distributed to Fund shareholders.
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS AVAILABLE AVAILABLE AVAILABLE POST EFFECTIVE - TOTAL CAPITAL THROUGH 2017 THROUGH 2018 THROUGH 2019 NO EXPIRATION LOSS AVAILABLE -------------- -------------- -------------- ---------------- --------------- $ 5,621,803 $ 15,342,938 $ 7,053,888 $ 6,075,486 $ 34,094,115
Of these losses, $27,984,014 are subject to loss limitation resulting from reorganization activity. These limitations generally reduce the utilization of these losses to a maximum of $4,318,194 per year. The Fund is subject to certain limitations under the U.S. tax rules on the use of capital loss carryforwards and net unrealized built-in losses. These limitations apply when there has been a 50% change in ownership. Page 24 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ending 2011, 2012, 2013 and 2014 remain open to federal and state audit. As of October 31, 2014, management has evaluated the application of these standards to the Fund and has determined that no provision for income tax is required in the Fund's financial statements for uncertain tax positions. J. EXPENSES: The Fund will pay all expenses directly related to its operations. 3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the ongoing monitoring of the Fund's investment portfolio, managing the Fund's business affairs and providing certain administrative services necessary for the management of the Fund. For these investment management services, First Trust is entitled to a monthly fee calculated at an annual rate of 0.90% of the Fund's Managed Assets. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250. Brookfield 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 0.45% of Managed Assets that is paid by First Trust from its investment advisory fee. BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's administrator, fund accountant and transfer agent in accordance with certain fee arrangements. As administrator and fund accountant, BNYM IS is responsible for providing certain administrative and accounting services to the Fund, including maintaining the Fund's books of account, records of the Fund's securities transactions, and certain other books and records. As transfer agent, BNYM IS is responsible for maintaining shareholder records for the Fund. The Bank of New York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain fee arrangements. As custodian, BNYM is responsible for custody of the Fund's assets. Each Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates ("Independent Trustees") is paid a fixed annual retainer that is allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, or is an index fund. Additionally, the Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairmen rotate every three years. The officers and "Interested" Trustee receive no compensation from the Trust for acting in such capacities. 4. PURCHASES AND SALES OF SECURITIES The cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended October 31, 2014, were $59,911,464 and $55,366,448, respectively. 5. DERIVATIVES TRANSACTIONS The following table presents the type of derivative held by the Fund at October 31, 2014, the primary underlying risk exposure and the location of these instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES -------------------------------------- -------------------------------------- DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION FAIR VALUE LIABILITIES LOCATION FAIR VALUE ------------------ --------------- -------------------------- ---------- -------------------------- ---------- Unrealized appreciation on Unrealized depreciation on Forward foreign forward foreign currency forward foreign currency currency contracts Currency Risk contracts $ 237,190 contracts $ --
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the year ended October 31, 2014, on derivative instruments, as well as the primary underlying risk exposure associated with each instrument. STATEMENT OF OPERATIONS LOCATION ------------------------------------------------------------------------------- CURRENCY RISK EXPOSURE Net realized gain (loss) on forward foreign currency contracts $ 103,606 Net change in unrealized appreciation (depreciation) on forward foreign currency contracts 183,673 Page 25 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 During the year ended October 31, 2014, the amount of notional values of forward foreign currency contracts opened and closed were $50,671,392 and $32,139,297, respectively. The Fund does not have the right to offset financial assets and financial liabilities related to forward foreign currency contracts on the Statement of Assets and Liabilities. 6. BORROWINGS The Fund entered into a committed facility agreement with BNP Paribas Prime Brokerage Inc. ("BNP") that has a maximum commitment amount of $66,000,000. Absent certain events of default or failure to maintain certain collateral requirements, BNP may not terminate the committed facility agreement except upon 180 calendar days' prior notice. Effective July 24, 2013, $13,850,000 of the commitment was converted to fixed-rate financing of 2.79% for a seven-year period. The borrowing rate on the floating rate financing amount is equal to 1-month LIBOR plus 70 basis points. Under the facility, the Fund pays a commitment fee of 0.80% on the undrawn amount of such facility. The average amount outstanding for the year ended October 31, 2014 was $56,811,233, with a weighted average interest rate of 1.33%. As of October 31, 2014, the Fund had outstanding borrowings of $58,850,000 under this committed facility agreement on the floating rate financing amount, the high and low annual interest rates for the year ended October 31, 2014 were 0.87% and 0.85%, respectively. The weighted average interest rate at October 31, 2014 was 1.31%. 7. COMMON SHARE OFFERINGS On June 8, 2012, the Fund, Advisor and Sub-Advisor entered into a sales agreement with JonesTrading Institutional Services, LLC ("JonesTrading") whereby the Fund may offer and sell up to 1,000,000 Common Shares from time to time through JonesTrading as agent for the offer and sale of the Common Shares. Sales of Common Shares pursuant to the sales agreement may be made in negotiated transactions or transactions that are deemed to be "at the market" as defined in Rule 415 under the 1933 Act, including sales made directly on the NYSE or sales made through a market maker other than on an exchange, at an offering price equal to or in excess of the net asset value per share of the Fund's Common Shares at the time such Common Shares are initially sold. The Fund used the net proceeds from the sale of the Common Shares in accordance with its investment objectives and policies. Sales of Common Shares made under the sales agreement will be made pursuant to a "shelf" registration statement on Form N-2 (the "Registration Statement") that will require the Fund to obtain effectiveness from the SEC on an annual basis. The Registration Statement has not been effective since February 2013 and therefore Common Shares have not been offered under the sales agreement since that time. Any future sales of Common Shares under the sales agreement will be made pursuant to an effective Registration Statement. For the year ended October 31, 2013, transactions related to offerings under such sales agreement were as follows: COMMON NET PROCEEDS SHARES NET PROCEEDS NET ASSET VALUE RECEIVED IN SOLD RECEIVED OF SHARES SOLD EXCESS OF NET ASSET VALUE ---------- -------------- --------------- ------------------------- 6,453 $ 112,291 $ 109,427 $ 2,864 8. 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. 9. LITIGATION On February 14, 2014, the Fund settled the previously-reported class action lawsuit filed by Lehman Brothers Special Finance, Inc. in the United States Bankruptcy Court for the Southern District of New York (the "Class Litigation"). The settlement fully disposes of all outstanding claims asserted against the Fund and the Fund is no longer a party to the Class Litigation. The settlement is included in "Net realized gain (loss) on investments" on the Statement of Operations. 10. SUBSEQUENT EVENTS Management has evaluated the impact of all subsequent events to the Fund through the date the financial statements were issued, and has determined that there were the following subsequent events: On November 20, 2014, the Fund declared a dividend of $0.1200 per share to Common Shareholders of record on December 3, 2014, payable December 10, 2014. Page 26 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST STRATEGIC HIGH INCOME FUND II: We have audited the accompanying statement of assets and liabilities of First Trust Strategic High Income Fund II (the "Fund"), including the portfolio of investments, as of October 31, 2014, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2014 by correspondence with the Fund's custodian, brokers, and agent banks; where replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of First Trust Strategic High Income Fund II as of October 31, 2014, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Chicago, Illinois December 23, 2014 Page 27 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (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 BNY Mellon Investment Servicing (US) 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 the 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 net asset value ("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 (866) 340-1104, 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 BNY Mellon Investment Servicing (US) 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 investments 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 ("SEC") website located at http://www.sec.gov. Page 28 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED) PORTFOLIO HOLDINGS The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. NYSE CERTIFICATION INFORMATION In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE") Listed Company Manual, the Fund's President has certified to the NYSE that, as of April 28, 2014, he was not aware of any violation by the Fund of NYSE corporate governance listing standards. In addition, the Fund's reports to the SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's principal executive officer and principal financial officer that relate to the Fund's public disclosure in such reports and are required by Rule 30a-2 under the 1940 Act. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy Income and Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund, First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance and Financial Opportunities Fund, First Trust Dividend and Income Fund (formerly First Trust Active Dividend Income Fund), First Trust High Income Long/Short Fund and First Trust Energy Infrastructure Fund, was held on April 23, 2014 (the "Annual Meeting"). At the Annual Meeting, Trustee Robert F. Keith was elected by the Common Shareholders of the First Trust Strategic High Income Fund II as the Class II Trustee for a three-year term expiring at the Fund's annual meeting of shareholders in 2017. The number of votes cast in favor of Mr. Keith was 7,274,840, the number of votes against was 125,717 and the number of broker non-votes was 1,058,312. James A. Bowen, Niel B. Nielson, Richard E. Erickson, and Thomas R. Kadlec are the other current and continuing Trustees. TAX INFORMATION Of the ordinary income (including short-term capital gain) distributions made by the Fund during the year ended October 31, 2014, none qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income. RISK CONSIDERATIONS Risks are inherent in all investing. The following summarizes some of the risks that should be considered for the Fund. For additional information about the risks associated with investing in the Fund, please see the Fund's prospectus and statement of additional information, as well as other Fund regulatory filings. INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject to investment risk, including the possible loss of the entire principal invested. An investment in Common Shares represents an indirect investment in the securities owned by the Fund. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. Common Shares at any point in time may be worth less than the original investment, even after taking into account the reinvestment of Fund dividends and distributions. Security prices can fluctuate for several reasons including the general condition of the securities markets, or when political or economic events affecting the issuers occur, including the risk that borrowers do not pay their mortgages. When the Advisor or Sub-Advisor determines that it is temporarily unable to follow the Fund's investment strategy or that it is impractical to do so (such as when a market disruption event has occurred and trading in the securities is extremely limited or absent), the Advisor or Sub-Advisor may take temporary defensive positions. RESIDENTIAL MORTGAGE-BACKED SECURITIES RISK: MBS's may have less potential for capital appreciation than comparable fixed-income securities due to the likelihood of increased prepayments of mortgages as interest rates decline. If the Fund buys MBS's at a premium, mortgage foreclosures and prepayments of principal by mortgagors (which usually may be made at any time without penalty) may result in some loss of the Fund's principal investment to the extent of the premium paid. Alternatively, in a rising interest rate environment, the value of MBS's may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security's effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The value of MBS's may also change due to shifts in the market's perception of issuers and regulatory or tax changes adversely affecting the markets as a whole. In addition, MBS's are subject to the credit risk associated with the performance of the underlying mortgage properties. In certain instances, Page 29 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED) third-party guarantees or other forms of credit support can reduce the credit risk. The Fund may also invest in MBS's which are interest-only securities ("IO") and principal-only ("PO") securities. Generally speaking, when interest rates are falling and prepayment rates are increasing, the value of a PO security will rise and the value of an IO security will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, generally the value of a PO will fall and the value of an IO security will rise. In addition to the foregoing, residential MBS's are subject to additional risks, including, but not limited to: (i) the United States residential mortgage market has recently encountered various difficulties and changed economic conditions. In addition, recently, residential property values in various states have declined or remained stable after extended periods of appreciation. A continued decline or an extended flattening in those values may result in additional increases in delinquencies and losses on residential mortgage loans generally; (ii) if a residential mortgage obligation is secured by a junior lien it will be subordinate to the rights of the mortgagees or beneficiaries under the related senior mortgages or deeds of trust; and (iii) depending on the length of a residential mortgage obligation underling a residential MBS, unscheduled or early payments of principal and interest may shorten the security's effective maturity and prevailing interest rates may be higher or lower than the current yield of the Fund's portfolio at the time the Fund receives the payments for reinvestment. VALUE INVESTING RISK: The Sub-Advisor focuses the Fund's investments on securities that they believe are undervalued or inexpensive relative to other investments. Such securities are subject to the risk of misestimating certain fundamental factors. Disciplined adherence to a "value" investment mandate during periods in which that style is "out of favor" can result in significant underperformance relative to overall market indices and other managed investment vehicles that pursue growth style investments and/or flexible style mandates. BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment grade securities. The market values for high-yield securities tend to be very volatile, and these securities are less liquid than investment grade debt securities. For these reasons, an investment in the Fund is subject to the following specific risks: (a) increased price sensitivity to changing interest rates and to a deteriorating economic environment; (b) greater risk of loss due to default or declining credit quality; (c) adverse issuer specific events are more likely to render the issuer unable to make interest and/or principal payments; and (d) a negative perception of the high-yield market may depress the price and liquidity of high-yield securities. DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by companies in a bankruptcy reorganization proceeding, subject to some other form of a public or private debt restructuring or otherwise in default or in significant risk of default in the payment of interest or repayment of principal or trading at prices substantially below other below-investment grade debt securities of companies in similar industries. Distressed securities frequently do not produce income while they are outstanding. The Fund may be required to incur certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation through investment in distressed securities; the ability to achieve current income may be diminished. ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely to lead to a weakened capacity of a high-yield issuer to make principal payments and interest payments than an investment grade issuer. An economic downturn could severely affect the ability of highly leveraged issuers to service their debt obligations or to repay their obligations upon maturity. Under adverse market or economic conditions, the secondary market for high-yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer and these securities may become illiquid. As a result, the Sub-Advisor could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded. FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities, are subject to certain risks, including: (i) issuer risk, which is the risk that the value of fixed-income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods and services or, in the case of asset-backed issuers, a decline in the value and/or cash flows of the underlying assets; (ii) reinvestment risk, which is the risk that income from the Fund's portfolio will decline if the proceeds from matured, traded or called bonds are reinvested at market interest rates that are below the portfolio's current earnings rate; (iii) prepayment risk, which is the risk that during periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the reinvestment in lower yielding securities; and (iv) credit risk, which is the risk that a security in the Fund's portfolio will decline in price or the issuer fails to make interest payments when due because the issuer of the security experiences a decline in its financial status. INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk. Interest rate risk is the risk that fixed-income securities will decline in value because of changes in market interest rates. Investments in debt securities with long-term maturities may experience significant price declines if long-term interest rates increase. LEVERAGE RISK: The Fund may borrow an amount up to 33-1/3% (or such other percentage as permitted by law) of its assets (including the amount borrowed) less liabilities other than borrowings. The Fund may use leverage for investment purposes and to meet cash requirements. Its leveraged capital structure creates special risks not associated with unleveraged funds having similar investment Page 30 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED) objectives and policies. These include the possibility of higher volatility of the NAV of the Fund. The Fund previously leveraged its assets through the use of reverse repurchase agreements. Reverse repurchase agreements are subject to the risks that the market value of the securities sold by the Fund may decline below the price of the securities the Fund is obligated to repurchase, and that the securities may not be returned to the Fund. The Fund may from time to time consider changing the amount of the leverage in response to actual or anticipated changes in interest rates or the value of the Fund's investment portfolio. There can be no assurance that the leverage strategies will be successful. FOREIGN SECURITIES RISK: The Fund may invest in securities (equity or debt) of foreign issuers. Investing in securities of foreign issuers, which are generally denominated in foreign currencies, may involve certain risks not typically associated with investing in securities of U.S. issuers. These risks include: (i) there may be less publicly available information about foreign issuers or markets due to less rigorous disclosure or accounting standards or regulatory practices; (ii) foreign markets may be smaller, less liquid and more volatile than the U.S. market; (iii) potential adverse effects of fluctuations in currency exchange rates or controls on the value of the Fund's investments; (iv) the economies of foreign countries may grow at slower rates than expected or may experience a downturn or recession; (v) the impact of economic, political, social or diplomatic events; (vi) certain foreign countries may impose restrictions on the ability of foreign issuers to make payments of principal and interest to investors located in the United States due to blockage of foreign currency exchanges or otherwise; and (vii) withholding and other foreign taxes may decrease the Fund's return. These risks may be more pronounced to the extent that the Fund invests a significant amount of its assets in companies located in one region and to the extent that the Fund invests in securities of issuers in emerging markets. ADVISORY AND SUB-ADVISORY AGREEMENTS BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND INVESTMENT SUB-ADVISORY AGREEMENTS The Board of Trustees of First Trust Strategic High Income Fund II (the "Fund"), including the Independent Trustees, unanimously approved the continuation of the Investment Management Agreement (the "Advisory Agreement") between the Fund and First Trust Advisors L.P. (the "Advisor") and the Investment Sub Advisory Agreement (the "Sub Advisory Agreement" and together with the Advisory Agreement, the "Agreements") among the Fund, the Advisor and Brookfield Investment Management Inc. (the "Sub-Advisor"), at a meeting held on June 8-9, 2014. The Board of Trustees determined that the continuation of the Agreements is in the best interests of the Fund in light of the extent and quality of the services provided and such other matters as the Board considered to be relevant in the exercise of its reasonable business judgment. To reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the "1940 Act"), as well as under the general principles of state law in reviewing and approving advisory contracts; the requirements of the 1940 Act in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in voting on such agreements. To assist the Board in its evaluation of the Agreements, the Independent Trustees received a separate report from each of the Advisor and the Sub-Advisor in advance of the Board meeting responding to a request for information from counsel to the Independent Trustees. The reports, among other things, outlined the services provided by the Advisor and the Sub-Advisor (including the relevant personnel responsible for these services and their experience); the advisory and sub-advisory fees for the Fund as compared to fees charged to other clients of the Advisor and the Sub-Advisor and as compared to fees charged by investment advisors and sub-advisors to comparable funds; expenses of the Fund as compared to expense ratios of comparable funds; the nature of expenses incurred in providing services to the Fund and the potential for economies of scale, if any; financial data on the Advisor and the Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and information on the Advisor's and the Sub-Advisor's compliance programs. Following receipt of this information, counsel to the Independent Trustees posed follow-up questions to the Advisor, and the Independent Trustees and their counsel met separately to discuss the information provided by the Advisor and the Sub Advisor, including the supplemental responses. The Board applied its business judgment to determine whether the arrangements between the Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are reasonable business arrangements from the Fund's perspective as well as from the perspective of shareholders. The Board considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor and the Sub-Advisor manage the Fund. In reviewing the Agreements, the Board considered the nature, extent and quality of services provided by the Advisor and the Sub-Advisor under the Agreements. The Board considered the Advisor's statements regarding the incremental benefits associated with the Fund's advisor/sub-advisor management structure. With respect to the Advisory Agreement, the Board considered that the Advisor is responsible for the overall management and administration of the Fund and reviewed the services provided by the Advisor to the Fund, including the oversight of the Sub-Advisor. The Board noted the compliance program that had been developed by the Advisor and considered that it Page 31 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED) includes a robust program for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's investment objectives and policies. With respect to the Sub-Advisory Agreement, the Board noted the background and experience of the Sub-Advisor's portfolio management team. The Board reviewed the materials provided by the Sub Advisor and considered the services that the Sub-Advisor provides to the Fund, including the Sub-Advisor's day-to-day management of the Fund's investments. In light of the information presented and the considerations made, the Board concluded that the nature, extent and quality of services provided to the Fund by the Advisor and the Sub-Advisor under the Agreements have been and are expected to remain satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has managed the Fund consistent with its investment objectives and policies. The Board considered the advisory and sub-advisory fees paid under the Agreements. The Board considered the advisory fees charged by the Advisor to similar funds and other non-fund clients, noting that the Advisor does not provide advisory services to other funds with investment objectives and policies similar to the Fund's, but does provide services to certain separately managed accounts that may have investment objectives and policies similar to the Fund's. The Board noted that the Advisor charges a lower advisory fee rate to the separately managed accounts, as well as the Advisor's statement that the nature of the services provided to the separately managed accounts is not comparable to those provided to the Fund. The Board considered the sub-advisory fee and how it relates to the Fund's overall advisory fee structure and noted that the sub-advisory fee is paid by the Advisor from its advisory fee. The Board also considered information provided by the Sub-Advisor as to the fees it charges to other closed-end funds it manages, noting that the sub-advisory fee rate is lower than the advisory fee rate charged by the Sub-Advisor to the other funds it manages. In addition, the Board reviewed data prepared by Lipper Inc. ("Lipper"), an independent source, showing the advisory fees and expense ratios of the Fund as compared to the management fees and expense ratios of an expense peer group selected by Lipper and similar data from the Advisor for a separate peer group selected by the Advisor. The Board noted that the Lipper and Advisor peer groups did not include any overlapping peer funds. The Board discussed with representatives of the Advisor the limitations in creating a relevant peer group for the Fund, including that (i) the Fund is unique in its composition, which makes assembling peers with similar strategies and asset mix difficult; (ii) peer funds may use different amounts and types of leverage which have different costs associated with them or may use no leverage; (iii) most peer funds do not employ an advisor/sub-advisor management structure; and (iv) many of the peer funds are larger than the Fund, which causes the Fund's fixed expenses to be higher on a percentage basis as compared to the larger peer funds. The Board took these limitations into account in considering the peer data. In reviewing the peer data, the Board noted that the Fund's contractual advisory fee was equal to the median of the Lipper expense peer group. The Board also considered performance information for the Fund, noting that the performance information included the Fund's quarterly performance report, which is part of the process that the Board has established for monitoring the Fund's performance and portfolio risk on an ongoing basis. The Board determined that this process continues to be effective for reviewing the Fund's performance. In addition to the Board's ongoing review of performance, the Board also received data prepared by Lipper comparing the Fund's performance to a performance peer universe selected by Lipper and to two benchmarks. In reviewing the Fund's performance as compared to the performance of the Lipper performance peer universe, the Board took into account the limitations described above with respect to creating a relevant peer group for the Fund. The Board also considered the Fund's dividend yield as of March 31, 2014 and information provided by the Advisor on the Fund's leverage, including that leverage was accretive to the Fund's total return in 2013. In addition, the Board compared the Fund's premium/discount over the past eight quarters to the average and median premium/discount of the Advisor peer group over the same period and considered the factors that may impact a fund's premium/discount. On the basis of all the information provided on the fees, expenses and performance of the Fund, the Board concluded that the advisory and sub-advisory fees were reasonable and appropriate in light of the nature, extent and quality of services provided by the Advisor and Sub-Advisor under the Agreements. The Board noted that the Advisor has continued to invest in personnel and infrastructure and considered whether fee levels reflect any economies of scale for the benefit of shareholders. The Board determined that due to the Fund's closed-end structure, the potential for realization of economies of scale as Fund assets grow was not a material factor to be considered. The Board also considered the costs of the services provided and profits realized by the Advisor from serving as investment advisor to the Fund for the twelve months ended December 31, 2013, as well as product-line profitability data for the same period, as set forth in the materials provided to the Board. The Board noted the inherent limitations in the profitability analysis, and concluded that the Advisor's estimated profitability appeared to be not excessive in light of the services provided to the Fund. In addition, the Board considered fall-out benefits described by the Advisor that may be realized from its relationship with the Fund, including the Advisor's compensation for fund reporting services pursuant to a separate Fund Reporting Services Agreement. The Board noted the Sub-Advisor's expenses in providing investment services to the Fund and considered the Sub-Advisor's statement that it does not expect economies of scale to be present in connection with its provision of services to the Fund. The Board considered that the sub advisory fee rate was negotiated at arm's length between the Advisor and the Sub-Advisor, an unaffiliated third party. The Board also Page 32 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED) considered data provided by the Sub-Advisor with respect to the profitability of the Sub-Advisory Agreement to the Sub-Advisor. The Board noted the inherent limitations in the profitability analysis and concluded that the profitability analysis for the Advisor was more relevant, although the profitability of the Sub-Advisory Agreement appeared to be not excessive in light of the services provided to the Fund. The Board noted that the Sub-Advisor does not maintain any soft-dollar arrangements and that the Sub-Advisor indicated that it does not anticipate any material fall out benefits from its relationship to the Fund. Based on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined that the terms of the Agreements continue to be fair and reasonable and that the continuation of the Agreements is in the best interests of the Fund. No single factor was determinative in the Board's analysis. Page 33 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED)
NUMBER OF OTHER PORTFOLIOS IN TRUSTEESHIPS OR THE FIRST TRUST DIRECTORSHIPS NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST POSITION WITH THE FUND SERVICE(2) DURING PAST 5 YEARS TRUSTEE 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES ------------------------------------------------------------------------------------------------------------------------------------ Richard E. Erickson, Trustee o Indefinite Term Physician; President, Wheaton Orthopedics; 111 None c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate 120 E. Liberty Drive, o Since Inception Limited Partnership; Member, Suite 400 Sportsmed LLC Wheaton, IL 60187 D.O.B.: 04/51 Thomas R. Kadlec, Trustee o Indefinite Term President (March 2010 to Present), Senior 111 Director of ADM c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services, 120 E. Liberty Drive, o Since Inception (May 2007 to March 2010), ADM Inc., ADM Suite 400 Investor Services, Inc. (Futures Investor Services Wheaton, IL 60187 Commission Merchant) International, and D.O.B.: 11/57 Futures Industry Association Robert F. Keith, Trustee o Indefinite Term President (2003 to Present), 111 Director of c/o First Trust Advisors L.P. Hibs Enterprises (Financial and Trust Company 120 E. Liberty Drive, o Since Inception Management Consulting) of Illinois Suite 400 Wheaton, IL 60187 D.O.B.: 11/56 Niel B. Nielson, Trustee o Indefinite Term Managing Director and Chief Operating 111 Director of c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant 120 East Liberty Drive, o Since Inception Harapan Educational Foundation Transport, Inc. Suite 400 (Educational Products and Services); (May 2003 to Wheaton, IL 60187 President and Chief Executive Officer May 2014) D.O.B.: 03/54 (June 2012 to September 2014), Servant Interactive LLC (Educational Products and Services); President and Chief Executive Officer (June 2012 to September 2014), Dew Learning LLC (Educational Products and Services); President (June 2002 to June 2012), Covenant College ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE ------------------------------------------------------------------------------------------------------------------------------------ James A. Bowen(1), Trustee and o Indefinite Term Chief Executive Officer (December 2010 111 None Chairman of the Board to Present), President (until December 120 E. Liberty Drive, o Since Inception 2010), First Trust Advisors L.P. and First Suite 400 Trust Portfolios L.P.; Chairman of the Wheaton, IL 60187 Board of Directors, BondWave LLC D.O.B.: 09/55 (Software Development Company/ Investment Advisor) and Stonebridge Advisors LLC (Investment Advisor)
----------------------------- (1) Mr. Bowen is deemed an "interested person" of the Fund due to his position as Chief Executive Officer of First Trust Advisors L.P., investment advisor of the Trust. (2) Currently, Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B. Nielson, as Class III Trustees, are serving as trustees until the Fund's 2016 annual meeting of shareholders. Robert F. Keith, as a Class I Trustee, is serving as a trustee until the Fund's 2017 annual meeting of shareholders. Page 34 -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND OFFICERS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS ------------------------------------------------------------------------------------------------------------------------------------ OFFICERS(3) ------------------------------------------------------------------------------------------------------------------------------------ Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer(December 2010 to Present) 120 E. Liberty Drive, Executive Officer and Chief Financial Officer,First Trust Advisors Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial Wheaton, IL 60187 Officer, BondWave LLC (Software Development D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge Advisors LLC (Investment Advisor) James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), 120 E. Liberty Drive, Officer and Chief Senior Vice President (April 2007 to Suite 400 Accounting Officer o Since January 2012 Present), First Trust Advisors L.P. Wheaton, IL 60187 and First Trust Portfolios L.P. D.O.B.: 01/66 W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First 120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Suite 400 o Since Inception Counsel, BondWave LLC (Software Development Wheaton, IL 60187 Company/Investment Advisor) and Secretary, D.O.B.: 05/60 Stonebridge Advisors LLC (Investment Advisor) Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior 120 E. Liberty Drive, Vice President (September 2005 to July 2012), Suite 400 o Since Inception First Trust Advisors L.P. and First Trust Wheaton, IL 60187 Portfolios L.P. D.O.B.: 02/70 Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust 120 E. Liberty Drive, and Assistant Secretary Advisors L.P. and First Trust Portfolios L.P. Suite 400 o Chief Compliance Wheaton, IL 60187 Officer since D.O.B.: 12/66 January 2011 o Assistant Secretary since Fund Inception
----------------------------- (3) The term "officer" means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy making function. Page 35 -------------------------------------------------------------------------------- PRIVACY POLICY -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) OCTOBER 31, 2014 (UNAUDITED) Privacy Policy First Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed to protecting the security and confidentiality of your personal information. Sources of Information We collect nonpublic personal information about you from the following sources: o Information we receive from you and your broker-dealer, investment advisor or financial representative through interviews, applications, agreements or other forms; o Information about your transactions with us, our affiliates or others; o Information we receive from your inquiries by mail, e-mail or telephone; and o Information we collect on our website through the use of "cookies". For example, we may identify the pages on our website that your browser requests or visits. Information Collected The type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information, retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status, family relationships and other personal information. Disclosure of Information We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such information to unaffiliated companies for the following reasons: o In order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal information as described above to unaffiliated financial service providers and other companies that perform administrative or other services on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees, banks, financial representatives, proxy services, solicitors and printers. o We may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited circumstances (for example to protect your account from fraud). In addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust. Privacy Online We allow third-party companies, including AddThis (a social media sharing service), to collect certain anonymous information when you visit our website. These companies may use non-personally identifiable information during your visits to this and other websites in order to provide advertisements about goods and services likely to be of greater interest to you. These companies typically use a cookie, third party web beacon or pixel tags, to collect this information. To learn more about this behavioral advertising practice, you can visit www.networkadvertising.org. Confidentiality and Security With regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information. Policy Updates and Inquiries As required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however, if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com, or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors). Page 36 FIRST TRUST INVESTMENT ADVISOR First Trust Advisors L.P. 120 E. Liberty Drive, Suite 400 Wheaton, IL 60187 INVESTMENT SUB-ADVISOR Brookfield Investment Management Inc. Brookfield Place 250 Vesey Street, 15th Floor New York, NY 10281 ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT BNY Mellon Investment Servicing (US) Inc. 301 Bellevue Parkway Wilmington, DE 19809 CUSTODIAN The Bank of New York Mellon 101 Barclay Street, 20th Floor New York, NY 10286 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 [BLANK BACK COVER] ITEM 2. CODE OF ETHICS. (a) The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. (c) There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description. (d) The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item's instructions. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. As of the end of the period covered by the report, the Registrant's board of trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified to serve as audit committee financial experts serving on its audit committee and that each of them is "independent," as defined by Item 3 of Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees (Registrant) -- The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $65,000 for the fiscal year ended October 31, 2013 and $65,000 for the fiscal year ended October 31, 2014. (b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2013 and $0 for the fiscal year ended October 31, 2014. Audit-Related Fees (Investment Advisor) -- The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2013 and $0 for the fiscal year ended October 31, 2014. (c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were $5,200 for the fiscal year ended October 31, 2013 and $5,200 for the fiscal year ended October 31, 2014. These fees were for tax return preparation. Tax Fees (Investment Advisor) -- The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were $0 for the fiscal year ended October 31, 2013 and $0 for the fiscal year ended October 31, 2014. (d) All Other Fees (Registrant) -- The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant to the Registrant, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31, 2013 and $0 for the fiscal year ended October 31, 2014. All Other Fees (Investment Adviser) The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant to the Registrant, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31, 2013 and $0 for the fiscal year ended October 31, 2014. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee (the "Committee") is responsible for the pre-approval of all audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the registrant by its independent auditors. The Chairman of the Committee is authorized to give such pre-approvals on behalf of the Committee up to $25,000 and report any such pre-approval to the full Committee. The Committee is also responsible for the pre-approval of the independent auditor's engagements for non-audit services with the registrant's adviser (not including a sub-adviser whose role is primarily portfolio management and is sub-contracted or overseen by another investment adviser) and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant, if the engagement relates directly to the operations and financial reporting of the registrant, subject to the de minimis exceptions for non-audit services described in Rule 2-01 of Regulation S-X. If the independent auditor has provided non-audit services to the registrant's adviser (other than any sub-adviser whose role is primarily portfolio management and is sub-contracted with or overseen by another investment adviser) and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to its policies, the Committee will consider whether the provision of such non-audit services is compatible with the auditor's independence. (e)(2) The percentage of services described in each of paragraphs (b) through (d) for the Registrant and the Registrant's investment adviser of this Item that were approved by the audit committee pursuant to the pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows: (b) 0% (c) 0% (d) 0% (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than fifty percent. (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for the Registrant's fiscal year ended October 31, 2013 were $5,200 for the Registrant and $3,000 for the Registrant's investment adviser and for the Registrant's fiscal year ended October 31, 2014 were $5,200 for the Registrant and $43,500 for the Registrant's investment adviser. (h) The registrant's audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. (a) The Registrant has a separately designated audit committee consisting of all the independent directors of the Registrant. The members of the audit committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and Robert F. Keith. ITEM 6. INVESTMENTS. (a) Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. (b) Not applicable. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Proxy Voting Policies are attached herewith. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (A)(1) IDENTIFICATION OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS AND DESCRIPTION OF ROLE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS Information provided as of December 24, 2014. Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's Sub-Advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset Management, a global alternative asset manager with approximately $200 billion in assets under management as of September 30, 2014. Brookfield Asset Management has over a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity. The company offers a range of public and private investment products and services, which leverage its expertise and experience and provide it with a competitive advantage in the markets where it operates. On behalf of its clients, Brookfield Asset Management is also an active investor in the public securities markets, where its experience extends over 30 years. Over this time, the company has successfully developed several investment operations and built expertise in the management of institutional portfolios, retail mutual funds and various commingled vehicles. Brookfield Asset Management's public market activities are conducted by Brookfield Investment Management, a registered investment advisor. These activities complement Brookfield Asset Management's core competencies and include global listed real estate and infrastructure equities, corporate high-yield investments, opportunistic credit strategies and a dedicated insurance asset management division. Headquartered in New York, NY, Brookfield Investment Management maintains offices and investment teams in Toronto, Chicago, Boston and London and has over $17 billion of assets under management as of September 30, 2014. Dana E. Erikson, CFA, Managing Director Mr. Erikson, Portfolio Manager and the Head of the Global High Yield Team, is responsible for the firm's corporate high yield exposures and the establishment of portfolio objectives and strategies. Mr. Erikson has 27 years of investment experience. Prior to joining the firm in 2006, he was with Evergreen Investments or one of its predecessor firms since 1996. He was a senior portfolio manager and the Head of the High Yield team. Prior to that, he was Head of High Yield Research. Mr. Erikson received a BA in Economics from Brown University and an MBA, with honors, from Northeastern University. Mr. Erikson holds the Chartered Financial Analyst designation and he is a member of the Boston Security Analysts Society. Anthony Breaks, CFA, Director Mr. Breaks is a Portfolio Manager on the Securitized Products Investments team and has worked for the firm since May 2002. Mr. Breaks is a team leader in MBS/ABS and is a member of the team's securities analysis committee. Mr. Breaks also has managed securitized product vehicles, such as SIV, ABCP and CDOs, for Brookfield and has experience in insurance company asset management. Mr. Breaks earned a Bachelor of Science degree in Electrical Engineering from the Massachusetts Institute of Technology. He holds the Chartered Financial Analyst designation. (A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND POTENTIAL CONFLICTS OF INTEREST Information provided as of October 31, 2014.
# of Accounts Total Assets Managed for which for which Total Advisory Fee is Advisory Fee Name of Portfolio Manager or # of Accounts Based on is Based on Team Member Type of Accounts* Managed Total Assets Performance Performance ----------------------------- --------------------------------- ------------- ------------ ----------------- -------------- 1. Dana Erikson Registered Investment Companies: 2 $414M 0 $0 Other Pooled Investment Vehicles: 0 $0 1 $0 Other Accounts: 1 $22M 0 $0 2. Anthony Breaks Registered Investment Companies: 0 $0 0 $0 Other Pooled Investment Vehicles: 0 $0 0 $0 Other Accounts: 2 $430M 0 $0
PORTFOLIO MANAGER POTENTIAL CONFLICTS OF INTERESTS Potential conflicts of interest may arise when the portfolio managers have day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the portfolio managers of the Registrant. These potential conflicts may include: Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as the case may be if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies. Allocation of Limited Investment Opportunities. If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a client's ability to take full advantage of the investment opportunity. Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts. Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the investment adviser's management fee and/or the portfolio manager's compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the investment advisor and/or its affiliates have interests. Similarly, the desire to maintain or raise assets under management or to enhance the portfolio manager's performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager to lend preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager. Related Business Opportunities. The investment adviser or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of fund and/or accounts that provide greater overall returns to the investment manager and its affiliates. Brookfield has adopted compliance policies and procedures that are designed to address the various conflicts of interest that may arise for it and the individuals that it employs. For example, Brookfield seeks to minimize the effects of competing interests for the time and attention of portfolio managers by assigning portfolio managers to manage funds and accounts that share a similar investment style. Brookfield also has adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. (A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS PORTFOLIO MANAGER COMPENSATION Information provided as of October 31, 2014. Brookfield compensates its portfolio managers based on the scale and complexity of their portfolio responsibilities, the total return performance of funds and accounts managed by the portfolio manager on an absolute basis and versus appropriate peer groups of similar size and strategy, as well as the management skills displayed in managing their subordinates and the teamwork displayed in working with other members of the firm. Since the portfolio managers are responsible for multiple funds and accounts, investment performance is evaluated on an aggregate basis almost equally weighted among performance, management and teamwork. Base compensation for Brookfield's portfolio managers varies in line with a portfolio manager's seniority and position. The compensation of portfolio managers with other job responsibilities (such as acting as an executive officer of Brookfield or supervising various departments) includes consideration of the scope of such responsibilities and the portfolio manager's performance in meeting them. Brookfield seeks to compensate portfolio managers commensurate with their responsibilities and performance, and competitive with other firms within the investment management industry. Salaries, bonuses and stock-based compensation also are influenced by the operating performance of Brookfield and its parent company, Brookfield Asset Management Inc. While the salaries of Brookfield's portfolio managers are comparatively fixed, cash bonuses and stock-based compensation may fluctuate significantly from year to year. Bonuses are determined on a discretionary basis by the senior executives of Brookfield and measured by individual and team-oriented performance guidelines. The amount of the Long Term Incentive Plan (LTIP) is approved by the board of directors annually and there is a rolling vesting schedule to aid in retention of key people. A key component of this program is achievement of client objectives in order to properly align interests with our clients. Further, the incentive compensation of all investment personnel who work on each strategy is directly tied to the relative performance of the strategy and its clients. The compensation structure of each Portfolio Manager and other investment professionals has four primary components: o A base salary; o An annual cash bonus; o If applicable, long-term compensation consisting of restricted stock units or stock options of the Investment Adviser's ultimate parent company, Brookfield Asset Management, Inc. and o If applicable, long term compensation consisting of restricted stock units in private funds managed by the investment professional Each Portfolio Manager also receives certain retirement, insurance, and other benefits that are broadly available to all employees. Compensation of each Portfolio Manager is reviewed on an annual basis by senior management. (A)(4) DISCLOSURE OF SECURITIES OWNERSHIP Information provided as of October 31, 2014. Dollar Range of Fund Shares Name Beneficially Owned Dana Erikson $0 Anthony Breaks $0 (B) Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) First Trust Strategic High Income Fund II ------------------------------------------------------- By (Signature and Title)* /s/ Mark R. Bradley ---------------------------------------- Mark R. Bradley, President and Chief Executive Officer (principal executive officer) Date: December 23, 2014 -------------------- 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/ Mark R. Bradley ---------------------------------------- Mark R. Bradley, President and Chief Executive Officer (principal executive officer) Date: December 23, 2014 -------------------- By (Signature and Title)* /s/ James M. Dykas ---------------------------------------- James M. Dykas, Treasurer, Chief Financial Officer and Chief Accounting Officer (principal financial officer) Date: December 23, 2014 -------------------- * Print the name and title of each signing officer under his or her signature. EX-99.CODE ETH 2 ethics.txt CODE OF ETHICS SENIOR FINANCIAL OFFICER CODE OF CONDUCT I. INTRODUCTION This code of conduct is being adopted by the investment companies advised by First Trust Advisors L.P., from time to time, (the "FUNDS"). The reputation and integrity of the Funds are valuable assets that are vital to the Funds' success. Each officer of the Funds, and officers and employees of the investment adviser to the Funds who work on Fund matters, including each of the Funds' senior financial officers ("SFOS"), is responsible for conducting each Fund's business in a manner that demonstrates a commitment to the highest standards of integrity. SFOs include the Principal Executive Officer (who is the President), the Controller (who is the principal accounting officer), and the Treasurer (who is the principal financial officer), and any person who performs a similar function. The Funds, First Trust Advisors L.P. and First Trust Portfolios have adopted Codes of Ethics under Rule 17j-1 under the Investment Company Act of 1940 (the "RULE 17J-1 CODE"). These Codes of Ethics are designed to prevent certain conflicts of interest that may arise when officers, employees, or directors of the Funds and the foregoing entities know about present or future Fund transactions and/or have the power to influence those transactions, and engage in transactions with respect to those same securities in their personal account(s) or otherwise take advantage of their position and knowledge with respect to those securities. In an effort to prevent these conflicts and in accordance with Rule 17j-1, the Funds adopted their Rule 17j-1 Code to prohibit transactions and conduct that create conflicts of interest, and to establish compliance procedures. The Sarbanes-Oxley Act of 2002 was designed to address corporate malfeasance and to help assure investors that the companies in which they invest are accurately and completely disclosing financial information. Under Section 406 of the Act, all public companies (including the Funds) must either have a code of ethics for their SFOs, or disclose why they do not. The Act was intended to prevent future situations (such as occurred in well-reported situations involving such companies as Enron and WorldCom) where a company creates an environment in which employees are afraid to express their opinions or to question unethical and potentially illegal business practices. The Funds have chosen to adopt a senior financial officer Code of Conduct to encourage their SFOs, and other Fund officers and employees of First Trust Advisors or First Trust Portfolios to act ethically and to question potentially unethical or illegal practices, and to strive to ensure that the Funds' financial disclosures are complete, accurate, and understandable. II. PURPOSES OF THIS CODE OF CONDUCT The purposes of this Code are: A. To promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; B. To promote full, fair, accurate, timely, and understandable disclosure in reports and documents that the Funds file with, or submits to, the SEC and in other public communications the Funds make; C. To promote compliance with applicable governmental laws, rules and regulations; D. To encourage the prompt internal reporting to an appropriate person of violations of the Code; and E. To establish accountability for adherence to the Code. III. QUESTIONS ABOUT THIS CODE The Funds' Boards of Trustees have designated W. Scott Jardine or other appropriate officer designated by the President of the respective Funds to be the Compliance Coordinator for the implementation and administration of the Code. IV. HANDLING OF FINANCIAL INFORMATION The Funds have adopted guidelines under which its SFOs perform their duties. However, the Funds expect that all officers or employees of the adviser or distributor who participate in the preparation of any part of any Fund's financial statements follow these guidelines with respect to each Fund: A. Act with honesty and integrity and avoid violations of this Code, including actual or apparent conflicts of interest with the Fund in personal and professional relationships. B. Disclose to the Fund's Compliance Coordinator any material transaction or relationship that reasonably could be expected to give rise to any violations of the Code, including actual or apparent conflicts of interest with the Fund. You should disclose these transactions or relationships whether you are involved or have only observed the transaction or relationship. If it is not possible to disclose the matter to the Compliance Coordinator, it should be disclosed to the Fund's Principal Financial Officer or Principal Executive Officer. C. Provide information to the Fund's other officers and appropriate employees of service providers (adviser, administrator, outside auditor, outside counsel, custodian, etc.) that is accurate, complete, objective, relevant, timely, and understandable. D. Endeavor to ensure full, fair, timely, accurate, and understandable disclosure in the Fund's periodic reports. E. Comply with the federal securities laws and other applicable laws and rules, such as the Internal Revenue Code. F. Act in good faith, responsibly, and with due care, competence and diligence, without misrepresenting material facts or allowing your independent judgment to be subordinated. G. Respect the confidentiality of information acquired in the course of your work except when you have Fund approval to disclose it or where disclosure is otherwise legally mandated. You may not use confidential information acquired in the course of your work for personal advantage. H. Share and maintain skills important and relevant to the Fund's needs. I. Proactively promote ethical behavior among peers in your work environment. J. Responsibly use and control all assets and resources employed or entrusted to you. K. Record or participate in the recording of entries in the Fund's books and records that are accurate to the best of your knowledge. V. WAIVERS OF THIS CODE SFOs and other parties subject to this Code may request a waiver of a provision of this Code (or certain provisions of the Fund's Rule 17j-1 Code) by submitting their request in writing to the Compliance Coordinator for appropriate review. An executive officer of the Fund or the Audit Committee will decide whether to grant a waiver. All waivers of this Code must be disclosed to the Fund's shareholders to the extent required by SEC rules. A good faith interpretation of the provisions of this Code, however, shall not constitute a waiver. VI. ANNUAL CERTIFICATION Each SFO will be asked to certify on an annual basis that he/she is in full compliance with the Code and any related policy statements. VII. REPORTING SUSPECTED VIOLATIONS A. SFOs or other officers of the Funds or employees of the First Trust group who work on Fund matters who observe, learn of, or, in good faith, suspect a violation of the Code MUST immediately report the violation to the Compliance Coordinator, another member of the Funds' or First Trust's senior management, or to the Audit Committee of the Fund Board. An example of a possible Code violation is the preparation and filing of financial disclosure that omits material facts, or that is accurate but is written in a way that obscures its meaning. B. Because service providers such as an administrator, outside accounting firm, and custodian provide much of the work relating to the Funds' financial statements, you should be alert for actions by service providers that may be illegal, or that could be viewed as dishonest or unethical conduct. You should report these actions to the Compliance Coordinator even if you know, or think, that the service provider has its own code of ethics for its SFOs or employees. C. SFOs or other officers or employees who report violations or suspected violations in good faith will not be subject to retaliation of any kind. Reported violations will be investigated and addressed promptly and will be treated confidentially to the extent possible. VIII. VIOLATIONS OF THE CODE A. Dishonest, unethical or illegal conduct will constitute a violation of this Code, regardless of whether this Code specifically refers to that particular conduct. A violation of this Code may result in disciplinary action, up to and including termination of employment. A variety of laws apply to the Funds and their operations, including the Securities Act of 1933, the Investment Company Act of 1940, state laws relating to duties owed by Fund directors and officers, and criminal laws. The federal securities laws generally prohibit the Funds from making material misstatements in its prospectus and other documents filed with the SEC, or from omitting to state a material fact. These material misstatements and omissions include financial statements that are misleading or omit materials facts. B. Examples of criminal violations of the law include stealing, embezzling, misapplying corporate or bank funds, making a payment for an expressed purpose on a Fund's behalf to an individual who intends to use it for a different purpose; or making payments, whether corporate or personal, of cash or other items of value that are intended to influence the judgment or actions of political candidates, government officials or businesses in connection with any of the Funds' activities. The Funds must and will report all suspected criminal violations to the appropriate authorities for possible prosecution, and will investigate, address and report, as appropriate, non-criminal violations. Amended: June 1, 2009 EX-99.CERT 3 cert_302.txt SECTION 302 CERTIFICATION CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, Mark R. Bradley, certify that: 1. I have reviewed this report on Form N-CSR of First Trust Strategic High Income Fund II; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 23, 2014 /s/ Mark R. Bradley -------------------- ---------------------------------------- Mark R. Bradley, President and Chief Executive Officer (principal executive officer) CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, James M. Dykas, certify that: 1. I have reviewed this report on Form N-CSR of First Trust Strategic High Income Fund II; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 23, 2014 /s/ James M. Dykas -------------------- ---------------------------------------- James M. Dykas, Treasurer, Chief Financial Officer and Chief Accounting Officer (principal financial officer) EX-99.906 CERT 4 cert_906.txt SECTION 906 CERTIFICATION CERTIFICATION PURSUANT TO RULE 30A-2(B) UNDER THE 1940 ACT AND SECTION 906 OF THE SARBANES-OXLEY ACT I, Mark R. Bradley, President and Chief Executive Officer of First Trust Strategic High Income Fund II (the "Registrant"), certify that: 1. The Form N-CSR of the Registrant (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: December 23, 2014 /s/ Mark R. Bradley -------------------- ---------------------------------------- Mark R. Bradley, President and Chief Executive Officer (principal executive officer) I, James M. Dykas, Treasurer, Chief Financial Officer and Chief Accounting Officer of First Trust Strategic High Income Fund II (the "Registrant"), certify that: 1. The Form N-CSR of the Registrant (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: December 23, 2014 /s/ James M. Dykas -------------------- ---------------------------------------- James M. Dykas, Treasurer, Chief Financial Officer and Chief Accounting Officer (principal financial officer) EX-99 5 proxyinst.txt PROXY VOTING POLICIES BROOKFIELD INVESTMENT MANAGEMENT INC. PORTFOLIO PROXY VOTING POLICIES AND PROCEDURES MAY 2012 The Portfolio Proxy Voting Policies and Procedures (the "Policies and Procedures") set forth the proxy voting policies, procedures and guidelines to be followed by Brookfield Investment Management Inc. and its subsidiaries and affiliates (collectively, "BIM") in voting portfolio proxies relating to securities that are held in the portfolios of the investment companies or other clients ("Clients") for which BIM has been delegated such proxy voting authority. A. PROXY VOTING COMMITTEE BIM's internal proxy voting committee (the "Committee") is responsible for overseeing the proxy voting process and ensuring that BIM meets its regulatory and corporate governance obligations in voting of portfolio proxies. The Committee shall oversee the proxy voting agent's compliance with these Policies and Procedures, including any deviations by the proxy voting agent from the proxy voting guidelines ("Guidelines"). B. ADMINISTRATION AND VOTING OF PORTFOLIO PROXIES 1. FIDUCIARY DUTY AND OBJECTIVE As an investment adviser that has been granted the authority to vote on portfolio proxies, BIM owes a fiduciary duty to its Clients to monitor corporate events and to vote portfolio proxies consistent with the best interests of its Clients. In this regard, BIM seeks to ensure that all votes are free from unwarranted and inappropriate influences. Accordingly, BIM generally votes portfolio proxies in a uniform manner for its Clients and in accordance with these Policies and Procedures and the Guidelines. In meeting its fiduciary duty, BIM generally view proxy voting as a way to enhance the value of the company's stock held by the Clients. Similarly, when voting on matters for which the Guidelines dictate a vote be decided on a case-by-case basis, BIM's primary consideration is the economic interests its Clients. 2. PROXY VOTING AGENT BIM may retain an independent third party proxy voting agent to assist BIM in its proxy voting responsibilities in accordance with these Policies and Procedures and in particular, with the Guidelines. As discussed above, the Committee is responsible for monitoring the proxy voting agent. In general, BIM may consider the proxy voting agent's research and analysis as part of BIM's own review of a proxy proposal in which the Guidelines recommend that the vote be considered on a case-by-case basis. BIM bears ultimate responsibility for how portfolio proxies are voted. Unless instructed otherwise by BIM, the proxy voting agent, when retained, will vote each portfolio proxy in accordance with the Guidelines. The proxy voting agent also will assist BIM in maintaining records of BIM's portfolio proxy votes, including the appropriate records necessary for registered investment companies to meet their regulatory obligations regarding the annual filing of proxy voting records on Form N-PX with the Securities and Exchange Commission ("SEC"). 3. MATERIAL CONFLICTS OF INTEREST BIM votes portfolio proxies without regard to any other business relationship between BIM and the company to which the portfolio proxy relates. To this end, BIM must identify material conflicts of interest that may arise between a Client and BIM, such as the following relationships: o BIM provides significant investment advisory or other services to a portfolio company or its affiliates (the "Company") whose management is soliciting proxies or BIM is seeking to provide such services; o BIM serves as an investment adviser to the pension or other investment account of the Company or BIM is seeking to serve in that capacity; or o BIM and the Company have a lending or other financial-related relationship. In each of these situations, voting against the Company management's recommendation may cause BIM a loss of revenue or other benefit. BIM generally seeks to avoid such material conflicts of interest by maintaining separate investment decision-making and proxy voting decision-making processes. To further minimize possible conflicts of interest, BIM and the Committee employ the following procedures, as long as BIM determines that the course of action is consistent with the best interests of the Clients: o If the proposal that gives rise to a material conflict is specifically addressed in the Guidelines, BIM will vote the portfolio proxy in accordance with the Guidelines, provided that the Guidelines do not provide discretion to BIM on how to vote on the matter (i.e., case-by-case); or o If the previous procedure does not provide an appropriate voting recommendation, BIM may retain an independent fiduciary for advice on how to vote the proposal or the Committee may direct BIM to abstain from voting because voting on the particular proposal is impracticable and/or is outweighed by the cost of voting. 4. CERTAIN FOREIGN SECURITIES Portfolio proxies relating to foreign securities held by Clients are subject to these Policies and Procedures. In certain foreign jurisdictions, however, the voting of portfolio proxies can result in additional restrictions that have an economic impact to the security, such as "share-blocking." If BIM votes on the portfolio proxy, share-blocking may prevent BIM from selling the shares of the foreign security for a period of time. In determining whether to vote portfolio proxies subject to such restrictions, BIM, in consultation with the Committee, considers whether the vote, either in itself or together with the votes of other shareholders, is expected to affect the value of the security that outweighs the cost of voting. If BIM votes on a portfolio proxy and during the "share-blocking period," BIM would like to sell the affected foreign security, BIM, in consultation with the Committee, will attempt to recall the shares (as allowable within the market time-frame and practices). C. FUND BOARD REPORTING AND RECORDKEEPING BIM will prepare periodic reports for submission to the Boards of Directors of its affiliated funds (the "Funds") describing: o any issues arising under these Policies and Procedures since the last report to the Funds' Boards of Directors/Trustees and the resolution of such issues, including but not limited to, information about conflicts of interest not addressed in the Policies and Procedures; and o any proxy votes taken by BIM on behalf of the Funds since the last report to such Funds' Boards of Directors/Trustees that deviated from these Policies and Procedures, with reasons for any such deviations. In addition, no less frequently than annually, BIM will provide the Boards of Directors/Trustees of the Funds with a written report of any recommended changes based upon BIM's experience under these Policies and Procedures, evolving industry practices and developments in the applicable laws or regulations. BIM will maintain all records that are required under, and in accordance with, all applicable regulations, including the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, which include, but not limited to: o these Policies and Procedures, as amended from time to time; o records of votes cast with respect to portfolio proxies, reflecting the information required to be included in Form N-PX, as applicable; o records of written client requests for proxy voting information and any written responses of BIM to such requests; and o any written materials prepared by BIM that were material to making a decision in how to vote, or that memorialized the basis for the decision. D. AMENDMENTS TO THESE PROCEDURES The Committee shall periodically review and update these Policies and Procedures as necessary. Any amendments to these Procedures and Policies (including the Guidelines) shall be provided to the Board of Directors of BIM and to the Boards of Directors of the Funds for review and approval. E. PROXY VOTING GUIDELINES Guidelines are available upon request.