77Q - Advisory Agreement
The Board of Trustees of First Trust Strategic High Income Fund
("FHI"), First Trust Strategic High Income Fund II ("FHY") and
First Trust Strategic High Income Fund III ("FHO") (each, a
"Fund" and collectively, the "Funds"), including a majority of
the Independent Trustees, approved an Interim Sub-Advisory
Agreement and a New Sub-Advisory Agreement (collectively, the
"Agreements") among each Fund, First Trust Advisors L.P. (the
"Advisor") and Hyperion Brookfield Asset Management, Inc. (now
known as Brookfield Investment Management Inc.) ("Brookfield")
at a meeting held on June 29, 2009 (the "Meeting"). The Board
determined that the terms of the Agreements are fair and
reasonable and in the best interests of each Fund.
On May 1, 2009, Valhalla Capital Partners, LLC ("Valhalla")
notified the Funds and the Advisor of its resignation as sub-
advisor to each Fund, effective June 30, 2009 (the
"Resignation"). The Advisor immediately notified the Board and
thereafter conducted a review of potential sub-advisors to
replace Xxxxxxxx. The Board considered that pursuant to the
Investment Company Act of 1940, as amended ("1940 Act"), any
sub-advisory agreement with a replacement sub-advisor would
require shareholder approval prior to such sub-advisor assuming
its duties. In light of the short amount of time available to
the Funds and the Advisor to find a suitable replacement for
Valhalla and to obtain shareholder approval of a new sub-
advisory agreement, the Advisor proposed and the Board approved
the termination of the sub-advisory agreement with Valhalla for
each Fund (the "Valhalla Sub-Advisory Agreements") at the
Meeting. The termination of the Valhalla Sub-Advisory Agreements
allowed each Fund to rely on Rule 15a-4 under the 1940 Act to
enter into an interim sub-advisory agreement with a successor
sub-advisor without first obtaining shareholder approval during
the period while shareholder approval of a new sub-advisory
agreement was sought.
Between the time the Funds and the Advisor received notice of
the Resignation and the Meeting, the Advisor reviewed potential
subadvisors for consideration as the successor sub-advisor and
determined to recommend that Brookfield serve as the new sub-
advisor for the Funds. Prior to the Meeting, Xxxxxxxxxx provided
to the Board written responses to questions posed by independent
legal counsel on behalf of the Independent Trustees. At the
Meeting, representatives from Brookfield, including the
prospective portfolio managers for the Funds, made a
presentation to the Board and responded to questions. In their
presentation, the Brookfield representatives reviewed the
process they followed in transitioning as investment advisor to
another group of similar closed-end funds, and discussed the
changes they proposed for the Funds' investment policies and to
the Funds' portfolios. The Board then discussed the presentation
and the materials provided. The Independent Trustees then met
separately with their independent legal counsel to discuss the
information provided by Xxxxxxxxxx and the Advisor. Based on
their consideration of all the information received, the
Trustees appointed Xxxxxxxxxx as the interim sub-advisor to each
Fund, pursuant to the Interim Sub-Advisory Agreements, effective
June 29, 2009. Also at the Meeting, the Board approved the New
Sub-Advisory Agreements and determined to recommend them to
shareholders of each Fund for their approval.
To reach its determinations as to the Agreements, the Board
considered its duties under 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. In its evaluation of the Agreements,
the Board considered a report from Xxxxxxxxxx responding to a
request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services
to be provided by Brookfield, including the relevant personnel
responsible for these services and their experience; the
proposed sub-advisory fee for each Fund as compared to fees
charged to other clients of Brookfield; the potential for
economies of scale, if any; financial data on Brookfield; any
fall out benefits to Brookfield; and information on Brookfield's
compliance program. The Board applied its business judgment to
determine whether the proposed arrangements between the Funds,
the Advisor and Brookfield are reasonable business arrangements
from the Funds' perspective as well as from the perspective of
shareholders.
In reviewing the Agreements, the Board considered the nature,
quality and extent of services to be provided by Brookfield
under the Agreements. The Board considered Xxxxxxxxxx's
investment style and the backgrounds of the investment personnel
who would be responsible for the day-to-day management of each
Fund. The Board reviewed performance information provided by
Brookfield for a composite of high yield accounts managed by
Brookfield. The Board also discussed with the prospective
portfolio managers the approach they planned to take in
transitioning the Funds' portfolios. In light of the information
presented and the considerations made, the Board concluded that
the nature, quality and extent of services to be provided to the
Funds by Brookfield under the Agreements are expected to be
satisfactory.
The Board considered the sub-advisory fees to be paid under the
Agreements. The Board noted that, as required by Rule 15a-4, the
subadvisory fee under each Interim Sub-Advisory Agreement would
be the same as the fee paid under the Valhalla Sub-Advisory
Agreements. However, the Board considered that the sub-advisory
fee proposed under each New Sub-Advisory Agreement (the "New
Sub-Advisory Fee") would be five basis points higher than the
fee paid under the Valhalla Sub-Advisory Agreements. The Board
considered that the New Sub-Advisory Fee was negotiated at arm's
length between the Advisor and Brookfield, an unaffiliated third
party,
and noted that the fees to be paid to Brookfield would be paid
by the Advisor from its advisory fee. The Board also considered
the advisory fees charged by Xxxxxxxxxx to other exchange-traded
closed-end funds managed by Brookfield with similar investment
objectives as the Funds. The Board noted that the advisory fees
charged by Xxxxxxxxxx to these comparable funds were higher than
the New Sub-Advisory Fee. On the basis of all the information
provided, the Board concluded that the sub-advisory fees to be
paid under the Agreements were reasonable and appropriate in
light of the nature, quality and extent of services expected to
be provided by Brookfield under the Agreements.
The Board considered the information provided by Brookfield on
the estimated profitability of the New Sub-Advisory Agreements
to Brookfield, noting that the estimated profitability did not
seem unreasonable in light of the nature, quality and extent of
services expected to be provided by Brookfield under the New
Sub-Advisory Agreements. The Board noted that the overall
management fee structure reflects an appropriate level of
sharing of any economies of scale. The Board noted that
Xxxxxxxxxx currently does not intend to utilize soft dollars in
connection with its management of the Funds' portfolios, and did
not anticipate any fall-out benefits from its relationship with
the Funds. The Advisor stated that there may be additional
opportunities for the Advisor to work with Xxxxxxxxxx going
forward.
Based on all of the information considered and the conclusions
reached, the Board, including a majority of the Independent
Trustees, determined that the terms of the Agreements are fair
and reasonable and that the approval of the Agreements is in the
best interests of each Fund. No single factor was determinative
in the Board's analysis.
