INVESTMENT SUB-ADVISORY AGREEMENT
INVESTMENT SUB-ADVISORY AGREEMENT made as of this 12th day of February,
2013 by and among the First Trust Exchange-Traded Fund III, a Massachusetts
business trust (the "Trust"), First Trust Advisors L.P., an Illinois limited
partnership (the "Manager") and a registered investment adviser with the
Securities and Exchange Commission ("SEC"), and Stonebridge Advisors- LLC, a
Delaware limited liability company and a registered investment adviser with the
SEC (the "Sub-Adviser").
WHEREAS, the First Trust Preferred Securities and Income ETF (the "Fund")
is a series of the Trust, an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust has retained the Manager to serve as the investment
adviser for the Fund pursuant to an Investment Management Agreement between the
Manager and the Trust (as such agreement may be modified from time to time, the
"Management Agreement");
WHEREAS, the Management Agreement provides that the Manager may, subject
to the initial and periodic approvals required under Section 15 of the 1940 Act,
appoint a sub-adviser at its own cost and expense for the purpose of furnishing
certain services required under the Management Agreement; and
WHEREAS, the Trust and the Manager desire to retain the Sub-Adviser to
furnish investment advisory services for the Fund's investment portfolio, upon
the terms and conditions hereafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Appointment. The Trust and the Manager hereby appoint the Sub-Adviser
to provide certain sub-investment advisory services to the Fund for the period
and on the terms set forth in this Agreement. The Sub-Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided. The Sub-Adviser shall, for all purposes herein
provided, be deemed an independent contractor and, unless otherwise expressly
provided or authorized, shall have no authority to act for nor represent the
Trust, Fund or the Manager in any way, nor otherwise be deemed an agent of the
Trust, Fund or the Manager.
2. Services to Be Performed. Subject always to the supervision of the
Trust's Board of Trustees (the "Board of Trustees") and the Manager, the
Sub-Adviser will act as sub-adviser for, and manage on a discretionary basis the
investment and reinvestment of the assets of the Fund, furnish an investment
program in respect of, make investment decisions for, and place all orders
(either directly or through the Manager) for the purchase and sale of securities
and other instruments for the Fund's investment portfolio, all on behalf of the
Fund and as described in the Fund's most current effective registration
statement on Form N-1A and as the same may thereafter be amended from time to
time. In the performance of its duties, the Sub-Adviser will in all material
respects (a) satisfy any applicable fiduciary duties it may have to the Fund,
(b) monitor the Fund's investments, (c) comply with the provisions of the
Trust's Declaration of Trust and By-laws, as amended from time to time and
communicated by the Fund or the Manager to the Sub-Adviser in writing, and the
stated investment objectives, policies and restrictions of the Fund as such
objectives, policies and restrictions may subsequently be changed by the Board
of Trustees and communicated by the Fund or the Manager to the Sub-Adviser in
writing, and (d) assist in the valuation of portfolio securities held by the
Fund as requested by the Manager or the Fund. The Fund or the Manager -shall
provide the Sub-Adviser with current copies of the Trust's Declaration of Trust,
By-laws, prospectus, statement of additional information and any amendments
thereto, and any objectives, policies or limitations not appearing therein as
they may be relevant to the Sub-Adviser's performance under this Agreement.
Unless otherwise provided by the Manager, the Sub-Adviser is authorized to
select the brokers or dealers that will execute the purchases and sales of
portfolio investments for the Fund, and is directed to use its commercially
reasonable efforts to obtain best execution, which includes most favorable net
results and execution of the Fund's orders, taking into account all appropriate
factors, including price, dealer spread or commission, size and difficulty of
the transaction and research or other services provided. Subject to approval by
the Board of Trustees and compliance with the policies and procedures adopted by
the Board of Trustees for the Fund and to the extent permitted by and in
conformance with applicable law (including Rule 17e-1 under the 1940 Act), the
Sub-Adviser may select brokers or dealers affiliated with the Sub-Adviser. It is
understood that the Sub-Adviser will not be deemed to have acted unlawfully, or
to have breached a fiduciary duty to the Trust or the Fund, or be in breach of
any obligation owing to the Trust or the Fund under this Agreement, or
otherwise, solely by reason of its having caused the Fund to pay a member of a
securities exchange, a broker or a dealer a commission for effecting a
securities transaction for the Fund in excess of the amount of commission
another member of an exchange, broker or dealer would have charged if the
Sub-Adviser determined in good faith that the commission paid was reasonable in
relation to the brokerage or research services provided by such member, broker
or dealer, viewed in terms of that particular transaction or the Sub-Adviser's
overall responsibilities with respect to its accounts, including the Fund, as to
which it exercises investment discretion.
In addition, the Sub-Adviser may, to the extent permitted by applicable
law, aggregate purchase and sale orders of securities placed with respect to the
assets of the Fund with similar orders being made simultaneously for other
accounts managed by the Sub-Adviser or its affiliates, if in the Sub-Adviser's
reasonable judgment such aggregation shall result in an overall economic benefit
to the Fund, taking into consideration the selling or purchase price, brokerage
commissions and other expenses. In the event that a purchase or sale of an asset
of the Fund occurs as part of any aggregate sale or purchase orders, the
objective of the Sub-Adviser and any of its affiliates involved in such
transaction shall be to allocate the securities so purchased or sold, as well as
expenses incurred in the transaction, among the Fund and other accounts in a
fair and equitable manner. Nevertheless, the Fund and the Manager acknowledge
that under some circumstances, such allocation may adversely affect the Fund
with respect to the price or size of the securities positions obtainable or
salable. Whenever the Fund and one or more other investment advisory clients of
the Sub-Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in a manner believed by the Sub-Adviser
to be equitable to each, although such allocation may result in a delay in one
or more client accounts being fully invested that would not occur if such an
allocation were not made. Moreover, it is possible that due to differing
investment objectives or for other reasons, the Sub-Adviser and its affiliates
may purchase securities of an issuer for one client and at approximately the
same time recommend selling or sell the same or similar types of securities for
another client.
The Sub-Adviser will not arrange purchases or sales of securities between
the Fund and other accounts advised by the Sub-Adviser or its affiliates unless
(a) such purchases or sales are in accordance with applicable law (including
Rule 17a-7 under the 0000 Xxx) and the Fund's policies and procedures, (b) the
Sub-Adviser determines the purchase or sale is in the best interests of the
Fund, and (c) the Board of Trustees has approved these types of transactions.
The Fund may adopt policies and procedures that modify or restrict the
Sub-Adviser's authority regarding the execution of the Fund's portfolio
transactions provided herein.
For purposes of complying with Rule 10f-3, Rule 12d3-1, Rule 17a-10 and
Rule 17e-1 under the 1940 Act, the Sub-Adviser hereby agrees that it will not
consult with any other sub-adviser of an investment company or a series of an
investment company that is advised by the Manager (the "First Trust Fund
complex") or an affiliated person of a sub-adviser (including any sub-adviser
that is a principal underwriter or an affiliated person of such principal
underwriter), concerning transactions for the Fund or any fund in the First
Trust Fund complex in securities or other fund assets. In addition, with respect
to a fund in the First Trust Fund complex with multiple sub-advisers, the
Sub-Adviser shall be limited to providing investment advice with respect to only
the discrete portion of the fund's portfolio as may be determined from
time-to-time by the Board of Trustees or the Manager, and shall not consult with
the sub-adviser (including any sub-adviser that is a principal underwriter or an
affiliated person of such principal underwriter) as to any other portion of the
fund's portfolio concerning transactions for the fund in securities or other
assets.
The Sub-Adviser will communicate to the officers and Trustees of the Trust
such information relating to transactions for the Fund as they may reasonably
request. In no instance will the Fund's portfolio securities be purchased from
or sold to the Manager, the Sub-Adviser or any affiliated person of either the
Trust, the Manager, or the Sub-Adviser, except as may be permitted under the
1940 Act and under no circumstances will the Sub-Adviser select brokers or
dealers for Fund transactions on the basis of Fund share sales by such brokers
or dealers.
The Sub-Adviser further agrees that it:
(a) will use the same degree of skill and care in providing such
services as it uses in providing services to other fiduciary accounts for
which it has investment responsibilities;
(b) will (i) conform in all material respects to all applicable
rules and regulations of the SEC, (ii) comply in all material respects
with all policies and procedures adopted by the Board of Trustees for the
Fund and communicated to the Sub-Adviser in writing and (iii) conduct its
activities under this Agreement in all material respects in accordance
with any applicable law and regulations of any governmental authority
pertaining to its investment advisory activities;
(c) will report to the Manager and to the Board of Trustees on a
quarterly basis and will make appropriate persons available for the
purpose of reviewing with representatives of the Manager and the Board of
Trustees on a regular basis at such times as the Manager or the Board of
Trustees may reasonably request in writing regarding the management of the
Fund, including, without limitation, review of the general investment
strategies of the Fund, the performance of the Fund's investment portfolio
in relation to relevant standard industry indices and general conditions
affecting the marketplace and will provide various other reports from time
to time as reasonably requested by the Manager or the Board of Trustees;
(d) will prepare and maintain such books and records with respect to
the Fund's securities and other transactions for the Fund's investment
portfolio as required for registered investment advisers under applicable
law, the Fund's compliance policies and procedures or as otherwise
requested by the Manager or the Board of Trustees and will prepare and
furnish the Manager and the Board of Trustees such periodic and special
reports as the Board or the Manager may request. The Sub-Adviser further
agrees that all records that it maintains for the Fund are the property of
the Fund and the Sub-Adviser will surrender promptly to the Fund any such
records upon the request of the Manager or the Fund (provided, however,
that the Sub-Adviser shall be permitted to retain copies thereof); and
shall be permitted to retain originals (with copies to the Fund) to the
extent required under Rule 204-2 of the Investment Advisers Act of 1940 or
other applicable law; and
(e) will monitor the pricing of portfolio securities, and events
relating to the issuers of those securities and the markets in which the
securities trade in the ordinary course of managing the portfolio
securities of the Fund, and will notify Manager promptly of any
issuer-specific or market events or other situations that occur
(particularly those that may occur after the close of a foreign market in
which the securities may primarily trade but before the time at which the
Fund's securities are priced on a given day) that may materially impact
the pricing of one or more securities in Sub-Adviser's portion of the
portfolio. In addition, Sub-Adviser will at the Manager's request assist
Manager in evaluating the impact that such an event may have on the net
asset value of the Fund and in determining a recommended fair value of the
affected security or securities.
3. Expenses. During the term of this Agreement, the Sub-Adviser will pay
one-half of all expenses of the Fund (including the cost of transfer agency,
custody, fund administration, legal, audit and other services and license fees)
but excluding the fee payment under this Agreement, interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution and service fees payable pursuant to a Rule 12b-1
plan, if any, and extraordinary expenses (collectively, the "Fund Expenses") in
the manner set forth in Section 5 below. In addition, during the term of this
Agreement, the Sub-Adviser will pay all expenses incurred by it in connection
with its activities under this Agreement, other than the cost of securities and
other assets (including brokerage commissions, if any) purchased for the Fund.
4. Additional Sub-Advisers. Subject to obtaining the initial and periodic
approvals required under Section 15 of the 1940 Act and the approval of the
Manager, the Sub-Adviser may retain one or more additional sub-advisers at the
Sub-Adviser's own cost and expense for the purpose of furnishing one or more of
the services described in Section 2 hereof with respect to the Fund. Retention
of a sub-adviser hereunder shall in no way reduce the responsibilities or
obligations of the Sub-Adviser under this Agreement and the Sub-Adviser shall be
responsible to the Fund for all acts or omissions of any sub-adviser in
connection with the performance of the Sub-Adviser's duties hereunder.
5. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Manager will pay the Sub-Adviser, and the
Sub-Adviser agrees to accept as full compensation therefore, a portfolio
management fee (the "Management Fee") equal to the annual rate of 0.425% of the
average daily net assets of the Fund less the amount of Fund Expenses owed by
the Sub-Adviser under Section 3 hereof. The Management Fee net of the Fund
Expenses shall be payable in arrears on or about the first day of each month
during the term of this Agreement. If the Fund Expenses owed by the Sub-Adviser
are greater than the Management Fee, the Sub-Adviser shall pay Fund/Manager the
difference by the date the Management Fee would have been due.
For the month and year in which this Agreement becomes effective or terminates,
there shall be an appropriate proration on the basis of the number of days that
the Agreement is in effect during the month and year, respectively.
6. Services to Others. The Trust and the Manager acknowledge that the
Sub-Adviser now acts, or may in the future act, as an investment adviser to
other managed accounts and as investment adviser or investment sub-adviser to
one or more other investment companies that are not series of the Trust. In
addition, the Trust and the Manager acknowledge that the persons employed by the
Sub-Adviser to assist in the Sub-Adviser's duties under this Agreement will not
devote their full time to such efforts. It is also agreed that the Sub-Adviser
may use any supplemental research obtained for the benefit of the Fund in
providing investment advice to its other investment advisory accounts and for
managing its own accounts.
7. Limitation of Liability. The Sub-Adviser shall not be liable for, and
the Trust and the Manager will not take any action against the Sub-Adviser to
hold the Sub-Adviser liable for, any error of judgment or mistake of law or for
any loss suffered by the Fund or the Manager (including, without limitation, by
reason of the purchase, sale or retention of any security) in connection with
the performance of the Sub-Adviser's duties under this Agreement, except for a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Sub-Adviser in the performance of its duties under this Agreement,
or by reason of its reckless disregard of its obligations and duties under this
Agreement.
8. Term; Termination; Amendment. This Agreement shall become effective on
the same date as the Management Agreement between the Trust and the Manager
becomes effective with respect to the Fund (it being understood that the Manager
shall notify the Sub-Adviser of the date of effectiveness of the Management
Agreement as soon as reasonably practical after effectiveness) provided that it
has been approved in the manner required by the 1940 Act, and shall remain in
full force until the two year anniversary of the date of its effectiveness
unless sooner terminated as hereinafter provided. This Agreement shall continue
in force from year to year thereafter, but only as long as such continuance is
specifically approved for the Fund at least annually in the manner required by
the 1940 Act and the rules and regulations thereunder; provided, however, that
if the continuation of this Agreement is not approved for the Fund, the
Sub-Adviser may continue to serve in such capacity for the Fund in the manner
and to the extent permitted by the 1940 Act and the rules and regulations
thereunder.
This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Manager or the Sub-Adviser upon sixty (60) days' written notice to the
other parties. This Agreement may also be terminated by the Fund by action of
the Board of Trustees or by a vote of a majority of the outstanding voting
securities of the Fund upon sixty (60) days' written notice to the Sub-Adviser
by the Fund without payment of any penalty.
This Agreement may be terminated at any time without the payment of any
penalty by the Manager, the Board of Trustees or by vote of a majority of the
outstanding voting securities of the Fund in the event that it shall have been
established by a court of competent jurisdiction that the Sub-Adviser or any
officer or director of the Sub-Adviser has taken any action that results in a
breach of the material covenants of the Sub-Adviser set forth herein.
The terms "assignment" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the 1940 Act and the rules and
regulations thereunder.
This Agreement shall automatically terminate in the event the Management
Agreement between the Manager and the Trust on behalf of the Fund is terminated,
assigned or not renewed.
Termination of this Agreement shall not affect the right of the
Sub-Adviser to receive payments on any unpaid balance of the compensation
described in Section 5, or the obligation of the Sub-Adviser to pay its share of
Fund Expenses as described in Sections 3 and 5, earned or accrued prior to such
termination and for any additional period during which the Sub-Adviser serves as
such for the Fund, subject to applicable law.
9. Compliance Certification. From time to time the Sub-Adviser shall
provide such certifications with respect to Rule 38a-1 under the 1940 Act, as
are reasonably requested by the Fund or the Manager. In addition, the
Sub-Adviser will, from time to time, provide a written assessment of its
compliance program in conformity with current industry standards that is
reasonably acceptable to the Fund to enable the Fund to fulfill its obligations
under Rule 38a-1 under the 1940 Act.
10. Notice. Any notice under this Agreement shall be sufficient in all
respects if given in writing and delivered by commercial courier providing proof
of delivery and addressed as follows or addressed to such other person or
address as such party may designate for receipt of such notice.
If to the Manager or the Fund: If to the Sub-Adviser:
First Trust Preferred Securities and Income ETF Stonebridge Advisors LLC
First Trust Advisors L.P. 000 Xxxxxxx Xxxx
000 X. Xxxxxxx Xxxxx Xxxxxx, XX 00000
Xxxxxxx, Xxxxxxxx 00000 Attention: Xxxxx X. Xxxxxxx
Attention: Secretary
11. Limitations on Liability. All parties hereto are expressly put on
notice of the Trust's Declaration of Trust and all amendments thereto, a copy of
which is on file with the Secretary of the Commonwealth of Massachusetts, and
the limitation of shareholder and Trustee liability contained therein and a copy
of which has been provided to the Sub-Adviser prior to the date hereof. This
Agreement is executed by the Trust on behalf of the Fund by the Trust's officers
in their capacity as officers and not individually and is not binding upon any
of the Trustees, officers or shareholders of the Trust individually but the
obligations imposed upon the Trust or Fund by this Agreement are binding only
upon the assets and property of the Fund, and persons dealing with the Trust or
Fund must look solely to the assets of the Fund for the enforcement of any
claims.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement will be binding upon and shall inure to the benefit of the parties
hereto and their respective successors.
13. Applicable Law. This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 11 hereof, which shall be
construed in accordance with the laws of Massachusetts) the laws of the State of
Illinois.
14. Amendment, Etc. This Agreement may only be amended, or its provisions
modified or waived, in a writing signed by the party against which such
amendment, modification or waiver is sought to be enforced.
15. Authority. Each party represents to the others that it is duly
authorized and fully empowered to execute, deliver and perform this Agreement.
The Trust represents that engagement of the Sub-Adviser has been duly authorized
by the Trust and is in accordance with the Trust's Declaration of Trust and
other governing documents of the Fund.
16. Severability. Each provision of this Agreement is intended to be
severable from the others so that if any provision or term hereof is illegal or
invalid for any reason whatsoever, such illegality or invalidity shall not
affect the validity of the remaining provisions and terms hereof; provided,
however, that the provisions governing payment of the Management Fee described
in Section 5 and the obligation to pay Fund Expenses described in Sections 3 and
5 are not severable.
17. Entire Agreement. This Agreement constitutes the sole and entire
agreement of the parties hereto with respect to the subject matter expressly set
forth herein.
IN WITNESS WHEREOF, the Trust on behalf of the Fund, the Manager and the
Sub-Adviser have caused this Agreement to be executed as of the day and year
first above written.
FIRST TRUST ADVISORS L.P. STONEBRIDGE ADVISORS LLC
By /s/ Xxxxx X. Xxxxx By /s/ Xxxxx X. Xxxxxxx
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Title: Controller Title: President
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FIRST TRUST EXCHANGE-TRADED FUND III on behalf of
First Trust Preferred Securities and Income ETF
By /s/ Xxxx X. Xxxxxxx
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Title: President & CEO
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