HIGHLAND FUNDS II Fund Class A Class C Class Y Highland ... · The portfolio manager may also invest in exchange-traded funds (“ETFs”) and use various types of derivatives (such

HIGHLAND FUNDS II

Fund Class A Class C Class Y Highland Energy MLP Fund HEFAX HEFCX HEFYX Highland Premier Growth Equity Fund HPEAX HPECX HPEYX Highland Small-Cap Equity Fund HSZAX HSZCX HSZYX Highland Global Allocation Fund HCOAX HCOCX HCOYX

(each, a “Fund” and collectively, the “Funds”)

Supplement dated July 11, 2016 to the Prospectus for the Funds dated February 1, 2016, as supplemented and amended from time to time. This Supplement provides new and additional information beyond that contained in the Prospectus and should be read in conjunction with the Prospectus. Disclosure Relating to Highland Energy MLP Fund (for purposes of this section only, the “Fund”) The fourth paragraph of the section entitled “Principal Investment Strategies” that begins on page 2 of the Prospectus is deleted in its entirety and replaced with the following: Derivatives, which are instruments that have a value based on another instrument, exchange rate or index, may be used as substitutes for securities in which the Fund can invest. The Fund may invest without limitation in warrants, and may use derivatives, primarily swaps (including equity swaps), warrants, options and foreign currency transactions (e.g., foreign currency swaps, futures, and forwards), as tools in the management of portfolio assets. The Fund may also use such derivatives to hedge various investments for risk management and for speculative purposes. The following risk is added to the section entitled “Principal Risks” that begins on page 3 of the Prospectus: Swaps Risk involves both the risks associated with an investment in the underlying investments or instruments (including equity investments) and counterparty risk. In a standard over-the-counter (“OTC”) swap transaction, two parties agree to exchange the returns, differentials in rates of return or some other amount calculated based on the “notional amount” of predetermined investments or instruments, which may be adjusted for an interest factor. Swaps can involve greater risks than direct investments in securities, because swaps may be leveraged and OTC swaps are subject to counterparty risk (e.g., the risk of a counterparty’s defaulting on the obligation or bankruptcy), credit risk and pricing risk (i.e., swaps may be difficult to value). Swaps may also be considered illiquid. Certain swap transactions, including interest rate swaps and index credit default swaps, may be subject to mandatory clearing and exchange trading, although the swaps in which the Fund will invest are not currently subject to mandatory clearing and exchange trading. The use of swaps is a highly specialized activity which involves investment techniques, risk analyses and tax planning different from those associated with ordinary portfolio securities transactions. The value of swaps, like many other derivatives, may move in unexpected ways and may result in losses for the Fund. Disclosure Relating to Highland Premier Growth Equity Fund (for purposes of this section only, the “Fund”) The final paragraph of the section entitled “Principal Investment Strategies” that begins on page 10 of the Prospectus is deleted in its entirety and replaced with the following: The Fund also may invest to a lesser extent in securities of foreign (non-U.S.) issuers and debt securities. The portfolio manager may also invest in exchange-traded funds (“ETFs”) and use various types of derivatives (such as swaps (including equity swaps), options, futures and options on futures) to

gain or hedge exposure to certain types of securities as an alternative to investing directly in or selling such securities. The following risk is added to the section entitled “Principal Risks” that begins on page 11 of the Prospectus: Swaps Risk involves both the risks associated with an investment in the underlying investments or instruments (including equity investments) and counterparty risk. In a standard over-the-counter (“OTC”) swap transaction, two parties agree to exchange the returns, differentials in rates of return or some other amount calculated based on the “notional amount” of predetermined investments or instruments, which may be adjusted for an interest factor. Swaps can involve greater risks than direct investments in securities, because swaps may be leveraged and OTC swaps are subject to counterparty risk (e.g., the risk of a counterparty’s defaulting on the obligation or bankruptcy), credit risk and pricing risk (i.e., swaps may be difficult to value). Swaps may also be considered illiquid. Certain swap transactions, including interest rate swaps and index credit default swaps, may be subject to mandatory clearing and exchange trading, although the swaps in which the Fund will invest are not currently subject to mandatory clearing and exchange trading. The use of swaps is a highly specialized activity which involves investment techniques, risk analyses and tax planning different from those associated with ordinary portfolio securities transactions. The value of swaps, like many other derivatives, may move in unexpected ways and may result in losses for the Fund. Disclosure Relating to Highland Small-Cap Equity Fund (for purposes of this section only, the “Fund”) The final paragraph of the section entitled “Principal Investment Strategies” that begins on page 16 of the Prospectus is deleted in its entirety and replaced with the following: The Fund also may invest to a lesser extent in securities with capitalizations outside the Fund’s small-cap range, debt securities and foreign (non-U.S.) securities. The Fund may also invest in exchange-traded funds (“ETFs”) and it may invest in swaps (including equity swaps), index futures, options on index futures and index options to gain exposure to certain types of securities as a substitute to investing directly in such securities. The Fund is not intended to be a complete investment program. The following risk is added to the section entitled “Principal Risks” that begins on page 16 of the Prospectus: Swaps Risk involves both the risks associated with an investment in the underlying investments or instruments (including equity investments) and counterparty risk. In a standard over-the-counter (“OTC”) swap transaction, two parties agree to exchange the returns, differentials in rates of return or some other amount calculated based on the “notional amount” of predetermined investments or instruments, which may be adjusted for an interest factor. Swaps can involve greater risks than direct investments in securities, because swaps may be leveraged and OTC swaps are subject to counterparty risk (e.g., the risk of a counterparty’s defaulting on the obligation or bankruptcy), credit risk and pricing risk (i.e., swaps may be difficult to value). Swaps may also be considered illiquid. Certain swap transactions, including interest rate swaps and index credit default swaps, may be subject to mandatory clearing and exchange trading, although the swaps in which the Fund will invest are not currently subject to mandatory clearing and exchange trading. The use of swaps is a highly specialized activity which involves investment techniques, risk analyses and tax planning different from those associated with ordinary portfolio securities transactions. The value of swaps, like many other derivatives, may move in unexpected ways and may result in losses for the Fund. Disclosure Relating to Highland Global Allocation Fund (for purposes of this section only, the “Fund”) The eighth paragraph of the section entitled “Principal Investment Strategies” that begins on page 30 of the Prospectus is deleted in its entirety and replaced with the following:

In addition, the Fund may invest in pooled investment vehicles, including exchange-traded funds (“ETFs”). The Fund’s portfolio may include pooled investment vehicles that provide exposure to foreign equity securities and that invest in both developed and emerging markets, including ETFs that seek to track the performance of securities of a single country. The Fund may also use derivatives, primarily swaps (including equity swaps), options and futures contracts, as substitutes for securities in which the Fund can invest. The Fund may also use derivatives, such as swaps, options, futures and foreign currency transactions, to an unlimited extent to hedge various investments for risk management and speculative purposes. The Fund may invest in futures contracts to an unlimited extent. The following risk is added to the section entitled “Principal Risks” that begins on page 31 of the Prospectus: Swaps Risk involves both the risks associated with an investment in the underlying investments or instruments (including equity investments) and counterparty risk. In a standard over-the-counter (“OTC”) swap transaction, two parties agree to exchange the returns, differentials in rates of return or some other amount calculated based on the “notional amount” of predetermined investments or instruments, which may be adjusted for an interest factor. Swaps can involve greater risks than direct investments in securities, because swaps may be leveraged and OTC swaps are subject to counterparty risk (e.g., the risk of a counterparty’s defaulting on the obligation or bankruptcy), credit risk and pricing risk (i.e., swaps may be difficult to value). Swaps may also be considered illiquid. Certain swap transactions, including interest rate swaps and index credit default swaps, may be subject to mandatory clearing and exchange trading, although the swaps in which the Fund will invest are not currently subject to mandatory clearing and exchange trading. The use of swaps is a highly specialized activity which involves investment techniques, risk analyses and tax planning different from those associated with ordinary portfolio securities transactions. The value of swaps, like many other derivatives, may move in unexpected ways and may result in losses for the Fund.

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE PROSPECTUS FOR FUTURE REFERENCE.

HFII-SUP-7/11/16

State Street: Limited Access

HIGHLAND FUNDS II

Fund Class A Class C Class Y Highland Energy MLP Fund HEFAX HEFCX HEFYX Highland Premier Growth Equity Fund HPEAX HPECX HPEYX Highland Small-Cap Equity Fund HSZAX HSZCX HSZYX Highland Fixed Income Fund HFBAX HFBCX HFBYX Highland Tax-Exempt Fund HTXAX HTXCX HTXYX Highland Global Allocation Fund HCOAX HCOCX HCOYX Highland Total Return Fund HTAAX HTACX HTAYX

(each, a “Fund” and collectively, the “Funds”)

Supplement dated June 22, 2016 to the Prospectus for the Funds dated February 1, 2016, as supplemented and amended from time to time. This Supplement provides new and additional information beyond that contained in the Prospectus and should be read in conjunction with the Prospectus. Effective immediately, Highland Liquid Reserves Fund shares (the “Liquid Reserves Fund Shares”) of the investment class of State Street Institutional Liquid Reserves Fund, a money market mutual fund advised by SSGA Funds Management, Inc., will no longer be sold to new investors, and will not be available for purchase by exchange from any other Fund from new investors or existing shareholders. Effective September 20, 2016, the Liquid Reserves Fund Shares will not be sold to existing shareholders. Liquid Reserves Fund Shares will be liquidated (the “Liquidation”) on or about September 21, 2016 (the “Liquidation Date”). In connection with the Liquidation, any Liquid Reserves Fund Shares outstanding on the Liquidation Date will be automatically redeemed as of the close of business on the Liquidation Date. At any time prior to the Liquidation Date, shareholders of Liquid Reserves Fund Shares may redeem their Liquid Reserves Fund Shares. Shareholders of Liquid Reserves Fund Shares may also exchange their Liquid Reserves Fund Shares for shares of any other Fund at any time prior to the Liquidation Date, as described in and subject to any restrictions set forth under the section “Exchange of Shares” under the heading “Shareowner Guide – How to Invest in Highland Funds II” on page 74 of the Prospectus. Shareholders of the Liquid Reserves Fund Shares should consult their tax advisors regarding the tax treatment of the Liquidation. After the Liquidation Date, all references to the Liquid Reserves Fund Shares contained in the Prospectus are hereby deleted.

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE PROSPECTUS FOR FUTURE REFERENCE.

HFII-SUP-6/22/16

HIGHLAND FUNDS II

Highland Global Allocation Fund (the “Fund”)

Supplement dated February 24, 2016 to the Prospectus and Statement of Additional Information (“SAI”) for the Fund, each dated February 1, 2016, as supplemented and amended from time to time.

This Supplement provides new and additional information beyond that contained in the Prospectus and SAI and should be read in conjunction with the Prospectus and SAI.

Footnote 4 to the Annual Fund Operating Expenses table under “Fees and Expenses of the Fund” on page 29 in the Summary Section of the Prospectus is hereby deleted in its entirety and replaced with the following:

The last paragraph under “Management Fee” that begins on page 62 of the Prospectus is hereby deleted in its entirety and replaced with the following:

HCMFA has contractually agreed to limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the 1940 Act, taxes, such as deferred tax expenses, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses and extraordinary expenses (collectively, the “Excluded Expenses”)) of Highland Energy MLP Fund, Highland Small-Cap Equity Fund, Highland Fixed Income Fund, Highland Tax-Exempt Fund, Highland Global Allocation Fund and Highland Total Return Fund to 1.10%, 0.95%, 0.65%, 0.65%, 0.90% and 0.95% of average daily net assets attributable to any class of such Fund, respectively (each, an “Expense Cap” and collectively, the “Expense Caps”). The Expense Caps will continue through at least January 31, 2017, and may not be terminated prior to this date without the action or consent of the Board. The Trust, on behalf of each Fund, has contractually agreed to pay the Adviser all amounts previously paid, waived or reimbursed by the Adviser with respect to a Fund pursuant to its respective Expense Cap, provided that the

1

Class A Class C Class R Class Y HCOAX HCOCX HCORX HCOYX

4 Highland Capital Management Fund Advisors, L.P. (“HCMFA” or the “Adviser”) has contractually agreed to limit the total annual operating expenses (exclusive of fees paid by the Fund pursuant to its distribution plan under Rule 12b-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), taxes, such as deferred tax expenses, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses and extraordinary expenses (collectively, the “Excluded Expenses”)) of the Fund to 0.90% of average daily net assets attributable to any class of the Fund (the “Expense Cap”). The Expense Cap will continue through at least January 31, 2017, and may not be terminated prior to this date without the action or consent of the Fund’s Board of Trustees. Highland Funds II (the “Trust”), on behalf of the Fund, has contractually agreed to pay the Adviser all amounts previously paid, waived or reimbursed by the Adviser with respect to the Fund pursuant to the Expense Cap, provided that the amount of such additional payment in any year, together with all other expenses (excluding Excluded Expenses) of the Fund, in the aggregate, would not cause the Fund’s total annual operating expenses in any such year to exceed the amount of the Expense Cap, and provided further that no additional payments by the Trust will be made with respect to amounts paid, waived or reimbursed by the Adviser more than 36 months from the date such amounts were paid, waived or reimbursed. The Adviser may not recoup any amounts previously paid, waived or reimbursed under the Expense Cap before payment of the Fund’s operating expenses for the year in which the Adviser intends to recoup such amounts.

amount of such additional payment in any year, together with all other expenses (excluding Excluded Expenses) of such Fund, in the aggregate, would not cause a Fund’s total annual operating expenses in any such year to exceed the amount of its Expense Cap, and provided further that no additional payments by the Trust will be made with respect to amounts paid, waived or reimbursed by the Adviser more than 36 months after the date such amounts were paid, waived or reimbursed. The Adviser may not recoup any amounts previously paid, waived or reimbursed under an Expense Cap before payment of a Fund’s operating expenses for the year in which the Adviser intends to recoup such amounts.

In the section of the SAI entitled “Management of the Trust”, Footnote 1 to the table in the sub-section entitled “Investment Advisory Fees” that begins on page 51 is hereby deleted in its entirety and replaced with the following:

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE PROSPECTUS AND SAI FOR FUTURE REFERENCE.

HFII-SUP-2/24/16

2

1 HCMFA has contractually agreed to limit the total annual operating expenses (exclusive of fees paid by each Fund pursuant to its distribution plan under Rule 12b-1 under the 1940 Act, taxes, such as deferred tax expenses, dividend expenses on short sales, interest payments, brokerage commissions and other transaction costs, acquired fund fees and expenses and extraordinary expenses (collectively, the “Excluded Expenses”)) of the Energy MLP Fund, Small-Cap Equity Fund, Fixed Income Fund, Tax-Exempt Fund, Global Allocation Fund and Total Return Fund to 1.10%, 0.95%, 0.65%, 0.65%, 0.90% and 0.95% of average daily net assets attributable to any class of the Energy MLP Fund, Small-Cap Equity Fund, Fixed Income Fund, Tax-Exempt Fund, Global Allocation Fund and Total Return Fund, respectively (collectively, the “Expense Caps”). The Expense Caps will continue through at least January 31, 2017, and may not be terminated prior to this date without the action or consent of the Board.

HIGHLAND FUNDS II

Highland Small-Cap Equity Fund (the “Fund”)

Class A Class C Class R Class Y HSZAX HSZCX HSZRX HSZYX

Supplement dated February 12, 2016 to the Prospectus and Statement of Additional Information (“SAI”) for the Fund, each dated February 1, 2016, as supplemented and amended from time to time.

This Supplement provides new and additional information beyond that contained in the Prospectus and SAI and should be read in conjunction with the Prospectus and SAI.

The following paragraphs are added to the section entitled “Principal Investment Strategies” on page 16 in the Summary Section of the Prospectus:

The Fund may borrow for investment purposes. To the extent the Fund borrows and invests the proceeds, the Fund will create financial leverage. The use of borrowing for investment purposes increases both investment opportunity and investment risk.

The Fund may also sell securities short and use futures and options to gain short exposure. The Adviser will vary the Fund’s long and short exposures over time based on its assessment of market conditions and other factors.

The last paragraph under “Principal Investment Strategies” on page 16 in the Summary Section of the Prospectus is hereby deleted in its entirety and replaced with the following:

The Fund also may invest to a lesser extent in securities with capitalizations outside the Fund’s small-cap range, debt securities and foreign (non-U.S.) securities. The portfolio manager may also invest in exchange-traded funds (“ETFs”) and use various types of derivatives (such as options, futures, and options on futures) to gain or hedge exposure to securities in which the Fund is permitted to invest as an alternative to investing directly in or selling such securities. The Fund is not intended to be a complete investment program.

The following risks are added to the section entitled “Principal Risks” that begins on page 16 of the Prospectus:

Hedging Risk is the risk that, although intended to limit or reduce investment risk, hedging strategies may also limit or reduce the potential for profit. There is no assurance that hedging strategies will be successful.

Leverage Risk is the risk associated with the use of leverage for investment purposes to create opportunities for greater total returns. Any investment income or gains earned with respect to the amounts borrowed that are in excess of the interest that is due on the borrowing will augment the Fund’s income. Conversely, if the investment performance with respect to the amounts borrowed fails to cover the interest on such borrowings, the value of the Fund’s shares may decrease more quickly than would otherwise be the case. Interest payments and fees incurred in connection with such borrowings will reduce the amount of net income available for payment to Fund shareholders.

Short Sales Risk is the risk of loss associated with any appreciation in the price of a security borrowed in connection with a short sale. The Fund may engage in short sales that are not made “against-the-box,” which means that the Fund may sell short securities even when they are not actually owned during the period the short position is open. Short sales that are not made “against-the-box” theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase.

1

In the section of the Prospectus entitled “Additional Information About Principal and Other Investment Strategies”, the discussion of Leveraged Investment Techniques and Short Positions on page 43 is hereby deleted in its entirety and replaced with the following:

Leveraged Investment Techniques and Short Positions: Subject to applicable regulations, each Fund (other than Highland Global Allocation Fund, Highland Small-Cap Equity Fund and Highland Energy MLP Fund) may employ leverage for short-term purposes such as meeting redemption requests, but not for investment purposes. Highland Global Allocation Fund, Highland Small-Cap Equity Fund and Highland Energy MLP Fund may borrow for investment purposes, to meet redemption requests and for temporary, extraordinary or emergency purposes. To the extent a Fund borrows money from a bank, it may be required to post cash and/or securities as collateral to cover the loan until such time as it is repaid.

A Fund that employs leverage or utilizes shorting in its investment strategy may have a market exposure which can range from 150% net long to 50% net short. Such extremes however, will be uncommon. Examples of leveraged investment techniques include: (i) borrowing up to one third of a Fund’s total assets to purchase additional securities for the Fund; and (ii) buying ETFs, closed-end funds or mutual funds (“Underlying Funds”) that are designed to have market exposure that may be inverse to a particular index or that is several times the market exposure of a particular index. A Fund may take a “short position” where the portfolio manager believes that the price of a security or value of an index will decline. A Fund may “short” a particular security by selling the security without owning it at the time of the sale, with the intent of later purchasing the security at a lower price. If the price of the security goes down, the short position will be profitable to the Fund. Conversely, if the price rises the short position will be unprofitable to a Fund. A Fund may also gain short exposure to an index by buying an Underlying Fund that has an inverse exposure to the index.

In the section of the Prospectus entitled “Additional Information About Principal Risks”, Short Sales Risk on page 58 is hereby deleted in its entirety and replaced with the following:

Short Sales Risk: Short sales by Highland Premier Growth Equity Fund and Highland Small-Cap Equity Fund that are not made “against-the-box” (that is when the Funds have an offsetting long position in the asset that is selling short) theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. When the Funds engage in a short sale on a security, they must borrow the security sold short and deliver it to the counterparty. The Funds will ordinarily have to pay a fee or premium to borrow particular securities and be obligated to repay the lender of the security any dividends or interest that accrue on the security during the period of the loan. The amount of any gain from a short sale will be decreased, and the amount of any loss increased, by the amount of the premium, dividends, interest or expenses the Funds pay in connection with the short sale. Short selling allows the Funds to profit from declines in market prices to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. The Funds may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, the Funds might have difficulty purchasing securities to meet their short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet their short sale obligations at a time when fundamental investment considerations would not favor such sales. See “Taxation” below for special tax considerations associated with engaging in short sales.

2

In the section of the SAI entitled “Investment Restrictions”, the below Non-Fundamental Investment Restriction of the Small-Cap Equity Fund on page 33 is hereby deleted in its entirety:

9. The Fund may not purchase or sell put options, call options, spreads or combinations of put options, call options and spreads, except that the Fund may purchase and sell covered put and call options on securities and stock indexes and futures contracts and options on futures contracts.

In the section of the SAI entitled “Investment Strategies and Risks”, the second paragraph under “Covered Option Writing” on page 14 is hereby deleted in its entirety and replaced with the following:

In the case of a call option on a security, the option is “covered” if a Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or other assets determined to be liquid by the Adviser in such amount are segregated) upon conversion or exchange of other securities held by the Fund. For a call option on an index, the option is covered if a Fund segregates assets determined to be liquid by the Adviser in an amount equal to the contract value of the index. A call option is also covered if a Fund holds a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by the Adviser. A put option on a security or an index is “covered” if a Fund segregates assets determined to be liquid by the Adviser equal to the exercise price. A put option is also covered if a Fund holds a put on the same security or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the Fund segregates assets determined to be liquid by Adviser in an amount equal to the amount of the difference.

INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE PROSPECTUS AND SAI FOR FUTURE REFERENCE.

HFII-SUP-2/12/16

3

Highland Funds IIProspectusFebruary 1, 2016

Class A Class C Class Y

Equity Funds

Highland Energy MLP Fund HEFAX HEFCX HEFYX

Highland Premier Growth Equity Fund HPEAX HPECX HPEYX

Highland Small-Cap Equity Fund HSZAX HSZCX HSZYX

Income Funds

Highland Fixed Income Fund HFBAX HFBCX HFBYX

Highland Tax-Exempt Fund HTXAX HTXCX HTXYX

Asset Allocation Funds

Highland Global Allocation Fund HCOAX HCOCX HCOYX

Highland Total Return Fund HTAAX HTACX HTAYX

Although these securities have been registered with the Securities and Exchange Commission (“SEC”), the SEC has not approvedor disapproved any shares offered in this Prospectus or determined whether this Prospectus is truthful or complete. Anyrepresentation to the contrary is a criminal offense.

Not FDIC InsuredMay Lose Value

No Bank Guarantee

Table of Contents

Summary Section 1

Highland Energy MLP Fund 1

Highland Premier Growth Equity Fund 10

Highland Small-Cap Equity Fund 15

Highland Fixed Income Fund 20

Highland Tax-Exempt Fund 25

Highland Global Allocation Fund 29

Highland Total Return Fund 37

More on Strategies, Risks and Disclosure of PortfolioHoldings 43

Additional Information About Principal and OtherInvestment Strategies 43

Additional Information About Principal Risks 44

Disclosure of Portfolio Holdings 61

Management of the Funds 61

Board of Trustees and Investment Adviser 61

Investment Sub-Adviser 63

Administrator/Sub-Administrator 63

Multi-Manager Structure 63

About the Funds’ Portfolio Managers 64

About the Funds’ Underwriter 66

Shareowner Guide — How to Invest in Highland Funds II 66

How to Buy Shares 66

Choosing a Share Class 68

Redemption of Shares 70

Exchange of Shares 74

Distribution and Shareholder Service Fees 75

Net Asset Value (NAV) 77

Dividends and Other Distributions 79

Taxation 79

Financial Highlights 85

Mailings to Shareholders 97

Highland Energy MLP Fund

Investment Objective

The investment objective of Highland Energy MLP Fund(“Highland Energy MLP Fund” or the “Fund”) is to provideinvestors with current income and capital appreciation.

Fees and Expenses of the Fund

The following tables describe the fees and expenses that youmay pay if you buy and hold shares of the Fund.

You may qualify for sales charge discounts on purchases ofClass A Shares if you and your family invest, or agree to investin the future, at least $50,000 in Highland Funds II equityfunds and/or asset allocation funds, or at least $100,000 inHighland Funds II fixed income funds. More informationabout these and other discounts is available from yourfinancial professional and in the “Reduced Sales Charges forClass A Shares” section on page 69 of the Fund’s Prospectusand the “Programs for Reducing or Eliminating Sales Charges”section on page 64 of the Fund’s Statement of AdditionalInformation.

Shareholder Fees (fees paid directly from your investment)


Maximum Sales Charge (Load) Imposed OnPurchases (as a % of offering price) 5.75% None None

Maximum Sales Charge (Load) Imposed onReinvested Dividends and other Distributions(as a % of offering price) None None None

Maximum Deferred Sales Charge (Load) (as a %of the net asset value at the time of purchaseor redemption, whichever is lower) None1 1.00%2 None

Exchange Fee None None None

Redemption Fee None None None

Annual Fund Operating Expenses (expenses that you pay each yearas a percentage of the value of your investment)


Management fee 1.00% 1.00% 1.00%

Distribution and/or Service (12b-1) Fees 0.25% 1.00% None

Other Expenses 0.80% 0.80% 0.80%

Total Annual Fund Operating Expenses 2.05% 2.80% 1.80%

Expense Reimbursement3 0.40% 0.40% 0.40%

Total Annual Fund Operating Expenses AfterExpense Reimbursement4 1.65% 2.40% 1.40%

1 Class A Shares bought without an initial sales charge in accountsaggregating $1 million or more at the time of purchase are subject to a0.50% contingent deferred sales charge (“CDSC”) if the shares are soldwithin one year of purchase.

2 Class C Shares are subject to a 1% CDSC for redemptions of shares withinone year of purchase. This CDSC does not apply to redemptions under asystematic withdrawal plan.

3 Highland Capital Management Fund Advisors, L.P. (“HCMFA” or the“Adviser”) has contractually agreed to limit the total annual operatingexpenses (exclusive of fees paid by the Fund pursuant to its distributionplan under Rule 12b-1 under the Investment Company Act of 1940, asamended (the “1940 Act”), taxes, such as deferred tax expenses, dividendexpenses on short sales, interest payments, brokerage commissions andother transaction costs, acquired fund fees and expenses andextraordinary expenses (collectively, the “Excluded Expenses”)) of theFund to 1.10% of average daily net assets attributable to any class of theFund (the “Expense Cap”). The Expense Cap will continue through at leastJanuary 31, 2017, and may not be terminated prior to this date withoutthe action or consent of the Fund’s Board of Trustees. Highland Funds II(the “Trust”), on behalf of the Fund, has contractually agreed to pay theAdviser all amounts previously paid, waived or reimbursed by the Adviserwith respect to the Fund pursuant to the Expense Cap, provided that theamount of such additional payment in any year, together with all otherexpenses (excluding Excluded Expenses) of the Fund, in the aggregate,would not cause the Fund’s total annual operating expenses in any suchyear to exceed the amount of the Expense Cap, and provided further thatno additional payments by the Trust will be made with respect to amountspaid, waived or reimbursed by the Adviser more than 36 months from thedate such amounts were paid, waived or reimbursed. The Adviser may notrecoup any amounts previously paid, waived or reimbursed under theExpense Cap before payment of the Fund’s operating expenses for theyear in which the Adviser intends to recoup such amounts.

4 The Fund accrues deferred income tax asset or liability for its future taxasset or liability associated with the capital appreciation or depreciation ofits investments, the distributions received by the Fund on equity securitiesof master limited partnerships (“MLPs”) considered to be return of capitaland for any net operating gains. The Fund’s accrued deferred tax asset orliability, if any, is reflected each day in the Fund’s net asset value per share.The Fund’s deferred tax asset or liability, if any, depends upon the Fund’snet investment gains and losses and realized and unrealized gains andlosses on investments and may vary greatly from year to year dependingon the nature of the Fund’s investments, the performance of thoseinvestments and general market conditions. Therefore, any estimate ofdeferred tax asset or liability cannot be reliably predicted from year toyear. See “Net Asset Value” in the Fund’s prospectus. Total annual Fundoperating expenses/(benefit) including deferred taxes (after expensereimbursement) were (8.23)%, (7.48)% and (8.48)% for Class A, Class C andClass Y shares, respectively.

Expense Example

This Example helps you compare the cost of investing in theFund to the cost of investing in other mutual funds. TheExample assumes that (i) you invest $10,000 in the Fund forthe time periods indicated and then sell or redeem all yourshares at the end of those periods, (ii) your investment has a5% return each year, and (iii) operating expenses remain thesame. Only the first year of each period in the Example takesinto account the expense reimbursement described in thefootnote above. Your actual costs may be higher or lower.

1 Year 3 Years 5 Years 10 Years

Class A $733 $1,144 $1,580 $2,787

Class C

if you do not sell your shares $243 $ 830 $1,444 $3,099

if you sold all your shares at the endof the period $343 $ 830 $1,444 $3,099

Class Y $143 $ 528 $ 938 $2,083

1

Portfolio Turnover

The Fund pays transaction costs, such as commissions, whenit buys and sells securities (or “turns over” its portfolio). Ahigher portfolio turnover rate may indicate higher transactioncosts and may result in higher taxes when Fund shares areheld in a taxable account. These costs, which are notreflected in Annual Fund Operating Expenses or in theExpense Example, affect the Fund’s performance. During themost recent fiscal year, the Fund’s portfolio turnover rate was33% of the average value of its portfolio.

Principal Investment Strategies

The Fund seeks to achieve its investment objective byinvesting primarily in master limited partnership (“MLP”)investments. Under normal market conditions, the Fundintends to invest at least 80% of its net assets (plus anyborrowings for investment purposes) in a portfolio of MLPsinvestments, as defined below. MLPs typically arecharacterized as “publicly traded partnerships” that qualify tobe treated as partnerships for U.S. federal income taxpurposes and are principally engaged in one or more aspectsof the exploration, production, processing, transmission,marketing, storage or delivery of energy-relatedcommodities, such as natural gas, natural gas liquids, coal,crude oil or refined petroleum products (collectively, theenergy industry). The Fund’s MLP investments includeinvestments that offer economic exposure to public MLPs inthe form of common or subordinated units issued by MLPs,securities of entities holding primarily general partner ormanaging member interests in MLPs, debt securities of MLPs,and securities that are derivatives of interests in MLPs,including I-Shares, warrants, and derivative instruments inwhich the Fund may invest that have economic characteristicsof MLP securities. Certain of the benefits Fund shareholdersare expected to derive from the Fund’s MLP investmentsdepend largely on the MLPs’ treatment as partnerships forU.S. federal income tax purposes. See “MLP Tax Risk” belowfor additional details.

In addition, the Fund may invest up to 20% of the value of itstotal assets in a wide variety of securities and financialinstruments, of all kinds and descriptions, that are not MLPinvestments, such as equity securities, equity-linkedsecurities, fixed income securities (including “junksecurities”), and money market securities. The Fund mayinvest without limitation in exchange-traded funds (“ETFs”)and may invest up to 20% of the value of its total assets inETFs that do not provide exposure to MLPs. The Fund mayinvest in securities of issuers of any market capitalization. TheFund may invest in securities of any credit quality.

The Fund may invest in securities of non-U.S. issuers, whichmay include, without limitation, emerging market issuers.Such securities may be denominated in U.S. dollars, non-U.S.currencies or multinational currency units (such as the Euro).At times, the Fund intends to hedge currency exposureresulting from investments denominated in non U.S.currencies.

Derivatives, which are instruments that have a value based onanother instrument, exchange rate or index, may be used assubstitutes for securities in which the Fund can invest. TheFund may invest without limitation in warrants, and may usederivatives, primarily warrants, options and foreign currencytransactions (e.g., foreign currency swaps, futures, andforwards), as tools in the management of portfolio assets.The Fund may also use such derivatives to hedge variousinvestments for risk management and for speculativepurposes.

The Fund may borrow an amount up to 33 1/3% (or suchother percentage permitted by law) of its total assets(including the amount borrowed) less all liabilities other thanborrowings. The Fund may borrow for investment purposes,to meet redemption requests and for temporary,extraordinary or emergency purposes. The use of borrowingfor investment purposes (i.e., leverage) increases bothinvestment opportunity and investment risk.

The Fund’s investment strategy utilizes the analytical modelsof Highland Capital Management Fund Advisors, L.P.(“HCMFA” or the “Adviser”) to evaluate potentialinvestments. In selecting investments for the Fund, theAdviser typically focuses on MLP issuers that it believes:(i) have stable cash flows and pay regular distributions;(ii) have potential for long-term distribution growth; (iii) maybe subject to a value catalyst, such as industry developments,regulatory changes, changes in management, acquisitions,sale or spin-off of a division; (iv) are well-managed;(v) willbenefit from favorable demand and supply dynamics for itsproducts and services; (vi) are best in class; and/or (vii) areunderappreciated by market analysts. The Adviser willtypically focus on companies that are exhibiting one or moreof these indicators. Technical analysis may also be used tohelp in the decision making process.

The Adviser may sell short securities of a company that itbelieves: (i) is overvalued relative to normalized business andindustry fundamentals or to the expected growth that theAdviser believes the company will achieve; (ii) has a weakcompetitive position relative to peers; (iii) engages inquestionable accounting practices; (iv) shows declining cashflow and/or liquidity; (v) has distribution estimates that theAdviser believes are too high; (vi) has weak competitivebarriers to entry; (vii) suffers from deteriorating industry and/or business fundamentals; (viii) has a weak management

2

team; (ix) will see multiple contraction; (x) is not adapting tochanges in technological, regulatory or competitiveenvironments; or (xi) provides a hedge against the Fund’slong exposure, such as a broad based market ETF. Technicalanalysis may be used to help in the decision making process.The Fund may engage in short sales that are not made“against-the-box,” which means that the Fund may sell shortsecurities even when they are not actually owned or offset atall times during the period the short position is open. Shortsales that are not made “against-the-box” could result inunlimited loss.

The Adviser generates investment ideas from a variety ofdifferent sources. These include, but are not limited to,screening software that analyzes both fundamental andtechnical factors, industry contacts, consultants, companypress releases, company conference calls, conversations withcompany management teams, buy-side contacts, sell-sidecontacts, brokers, third-party research, independent researchof financial and corporate information, third-party researchdatabases, and news services. The Adviser will makeinvestment decisions based on its analysis of the security’svalue, and will also take into account its view ofmacroeconomic conditions and industry trends. The Adviserwill make investments without regard to a company’s level ofcapitalization.

The Fund is non-diversified as defined in the InvestmentCompany Act of 1940, as amended, (the “1940 Act”). TheFund is not intended to be a complete investment program.

Principal Risks

When you sell Fund shares, they may be worth less than whatyou paid for them. Consequently, you can lose money byinvesting in the Fund. No assurance can be given that theFund will achieve its investment objective, and investmentresults may vary substantially over time and from period toperiod. An investment in the Fund is not appropriate for allinvestors.

An investment in the Fund is not a deposit of any bank and isnot insured or guaranteed by the Federal Deposit InsuranceCorporation (FDIC) or any other government agency.

Industry Concentration Risk is the risk that the Fund may beparticularly susceptible to economic, political or regulatoryevents affecting those industries in which the Fund focuses itsinvestments. Because the Fund normally invests at least 80%of the value of its assets in MLP investments, the Fund’sperformance largely depends on the overall condition ofthese industries and the Fund is susceptible to economic,political and regulatory risks or other occurrences associatedwith these industries.

MLP Risk is the risk of investing in MLP units, which involvessome risks that differ from an investment in the equitysecurities of a company. The Fund intends to investsubstantially in MLP units. Holders of MLP units have limitedcontrol and voting rights on matters affecting thepartnership. Holders of units issued by a MLP are exposed toa remote possibility of liability for all of the obligations of thatMLP in the event that a court determines that the rights ofthe holders of MLP units to vote to remove or replace thegeneral partner of that MLP, to approve amendments to thatMLP’s partnership agreement, or to take other action underthe partnership agreement of that MLP would constitute“control” of the business of that MLP, or a court orgovernmental agency determines that the MLP is conductingbusiness in a state without complying with the partnershipstatute of that state. Holders of MLP units are also exposed tothe risk that they will be required to repay amounts to theMLP that are wrongfully distributed to them. Investments inMLP units also present special tax risks. See “MLP Tax Risk”below.

MLP Tax Risk is the risk that the MLPs in which the Fundinvests will fail to be treated as partnerships for U.S. federalincome tax purposes. The Fund’s ability to meet itsinvestment objective will depend, in large measure, on thelevel of dividends, distributions or income it receives from theMLPs in which it invests and on the MLPs’ continuedtreatment as partnerships for U.S. federal income taxpurposes. If a MLP does not meet current legal requirementsto maintain its partnership status, or if it is unable to do sobecause of tax or other law changes, it would be treated as acorporation for U.S. federal income tax purposes. In that case,the MLP would be obligated to pay U.S. federal income tax (aswell as state and local taxes) at the entity level on its taxableincome and distributions received by the Fund would betaxable to the Fund as dividend income to the extent of theMLP’s current and accumulated earnings and profits forfederal tax purposes. The classification of a MLP as acorporation for U.S. federal income tax purposes could havethe effect of reducing the amount of cash available fordistribution by the MLP and the value of the Fund’sinvestment in any such MLP. As a result, the value of theFund’s shares and the cash available for distribution to Fundshareholders could be materially reduced.

Fund-Related Tax Risks are tax risks related to an investmentin the Fund, including, but not limited to:

• C Corporation Structure Tax Risks. The Fund was formedin 2011 as a regulated investment company under theInternal Revenue Code of 1986, as amended. It adoptedits current investing strategy during its taxable year thatbegan in October 2012. Because the Fund invests andintends to invest primarily in MLPs, it no longer qualifiesfor treatment as a regulated investment company, and

Highland Funds II ProspectusFebruary 1, 2016

3

has not so qualified since 2012. Instead, the Fund istreated as a C corporation. Accordingly, unlike mostmutual funds, the Fund is not entitled to pass-throughtax treatment. Instead, the Fund generally will besubject to U.S. federal income tax on its investmentincome and gains at the rates applicable to corporationsas well as state and local taxes. Based on a review of thehistoric results of the types of MLPs in which the Fundinvests, the Adviser currently expects that, from time totime, the cash distributions the Fund receives withrespect to its investments in equity securities of MLPswill exceed the taxable income allocated to the Fundfrom such MLPs, due to a variety of factors, includingsignificant non-cash deductions such as depreciationand depletion. Any such excess in a taxable year is nottreated as income to the Fund, but rather as atax-deferred return of capital to the Fund for U.S.federal income tax purposes, to the extent of the Fund’sbasis in the MLP securities. Distributions the Fundreceives from a MLP that exceed the Fund’s basis in thesecurities of that MLP are treated as taxable income orgains in the Fund’s hands.

The Fund’s receipt of return-of-capital distributionsfrom MLPs also causes the Fund’s taxable income orgains to be higher, or losses to be lower, upon theultimate sale of the MLP security by the Fund, and maycause taxable income or gains to be higher upon receiptof subsequent distributions from the MLP security bythe Fund in later periods. The Fund’s corporate incometax liability may be materially affected by, and mayfluctuate materially from year to year depending on, anumber of factors relating to the Fund and/or its MLP orother investments, including the extent to which theFund disposes of MLP equity securities during aparticular year, including, if necessary, to meet Fundshareholder redemption requests.

The Fund’s tax liability each year will not be finallyknown until the Fund completes its annual tax return.The Fund’s tax estimates could vary substantially fromthe actual liability and therefore the final determinationof the Fund’s actual tax liability may have a materialimpact on the Fund’s net asset value. See “Calculation ofNAV Risk” below. The payment of any corporate incometaxes imposed on the Fund decreases the value of theFund’s shares and the amount of cash available fordistribution to shareholders.

Due to the tax treatment of the Fund’s allocations anddistributions from MLPs, as described above, theAdviser currently expects that a significant portion ofthe Fund’s distributions to shareholders will typically betreated as a return of capital in the hands ofshareholders for U.S. federal income tax purposes (i.e.,

as distributions in excess of the Fund’s current andaccumulated earnings and profits) and thus will not besubject U.S. federal income tax to the extent of theshareholder’s basis in its Fund shares. However, noassurance can be given in this regard and the extent towhich the Fund is able to make return of capitaldistributions can vary materially from year to year.

• Calculation of Net Asset Value (“NAV”) Risk. Incalculating the daily NAV, the Fund accounts for itsdeferred tax liability and/or asset balances. The Fundmay accrue, in accordance with generally acceptedaccounting principles (“GAAP”), a deferred income taxliability balance, at the currently effective statutory U.S.federal income tax rate plus an estimated state andlocal income tax rate, for its future tax liabilityassociated with the capital appreciation of itsinvestments, the distributions received by the Fund onequity securities of MLPs considered to be return ofcapital and any net operating income or realized gains.Any deferred tax liability balance reduces the Fund’sNAV. Upon the Fund’s sale of a portfolio security, theFund may be liable for previously deferred taxes. If theFund is required to sell portfolio securities to meetredemption requests, the Fund may recognize incomeand gains for U.S. federal, state and local income taxpurposes, which would result in corporate income taxesimposed on the Fund.

• The Fund may accrue, in accordance with GAAP, adeferred tax asset balance, at the currently effectivestatutory U.S. federal income tax rate, which reflects anestimate of the Fund’s future tax benefit associated withnet operating losses, capital loss carryforwards andunrealized losses. To the extent the Fund has a netdeferred tax asset balance, the Fund may record avaluation allowance, which would offset the value ofsome or all of the Fund’s deferred tax asset balance. TheFund assesses whether a valuation allowance isrequired, considering all available positive and negativeevidence related to the realization of the Fund’sdeferred tax asset in connection with the calculation ofthe Fund’s daily NAV. However, to the extent the finalvaluation allowance for a financial statement perioddiffers from the estimates the Fund used in calculatingthe Fund’s daily NAV, the application of such finalvaluation allowance could have a material impact on theFund’s NAV. The assessment considers, among othermatters, the nature, frequency and severity of currentand cumulative losses, forecasts of future profitability(which are highly dependent on future cashdistributions from the Fund’s MLP holdings), theduration of statutory carryforward periods and theassociated risk that operating and capital loss

4

carryforwards may expire unused. From time to time,the Fund may modify its estimates or assumptionsregarding its deferred tax liability and/or asset balancesand the application of a valuation allowance withrespect to a deferred tax asset as new informationbecomes available. Such modifications, changes ingenerally accepted accounting principles or relatedguidance or interpretations thereof, limitations imposedon net operating and capital losses (if any) and changesin applicable tax law could result in increases ordecreases in the Fund’s NAV per share, which could bematerial.

• Tax Law Changes Risk. Changes in tax laws, regulationsor interpretations of those laws or regulations in thefuture could adversely affect the Fund or its MLPs orother investments, and could adversely affect the Fundand its shareholders. In some cases, such changes couldhave retroactive effect.

• A sustained reduced demand for crude oil, natural gasand refined petroleum products could adversely affectMLP revenues and cash flows.

• Changes in the regulatory environment could adverselyaffect the profitability of MLPs.

Counterparty Risk is the risk that a counterparty (the otherparty to a transaction or an agreement or the party withwhom the Fund executes transactions) to a transaction withthe Fund may be unable or unwilling to make timely principal,interest or settlement payments, or otherwise honor itsobligations.

Credit Risk is the risk that the issuers of certain securities orthe counterparties of a derivatives contract or repurchasecontract might be unable or unwilling (or perceived as beingunable or unwilling) to make interest and/or principalpayments when due, or to otherwise honor its obligations.Debt securities are subject to the risk of non-payment ofscheduled interest and/or principal. Non-payment wouldresult in a reduction of income to the Fund, a reduction in thevalue of the obligation experiencing non-payment and apotential decrease in the net asset value (“NAV”) of the Fund.

Currency Risk is the risk that fluctuations in exchange rateswill adversely affect the value of the Fund’s foreign currencyholdings and investments denominated in foreign currencies.

Debt Securities Risk is the risk associated with the fact thatthe value of debt securities typically changes in response tovarious factors, including, by way of example, market-relatedfactors (such as changes in interest rates or changes in therisk appetite of investors generally) and changes in the actualor perceived ability of the issuer (or of issuers generally) tomeet its (or their) obligations. During periods of rising interestrates, debt securities generally decline in value. Conversely,

during periods of falling interest rates, debt securitiesgenerally rise in value. This kind of market risk is generallygreater for funds investing in debt securities with longermaturities.

Derivatives Risk is a combination of several risks, includingthe risks that: (1) an investment in a derivative instrumentmay not correlate well with the performance of the securitiesor asset class to which the Fund seeks exposure, (2) derivativecontracts, including options, may expire worthless and theuse of derivatives may result in losses to the Fund, (3) aderivative instrument entailing leverage may result in a lossgreater than the principal amount invested, (4) derivativesnot traded on an exchange may be subject to credit risk, forexample, if the counterparty does not meet its obligations(see also “Counterparty Risk”), and (5) derivatives not tradedon an exchange may be subject to liquidity risk and therelated risk that the instrument is difficult or impossible tovalue accurately. As a general matter, when the Fundestablishes certain derivative instrument positions, such ascertain futures, warrants, options and forward contractpositions, it will segregate liquid assets (such as cash,U.S. Treasury bonds or commercial paper) equivalent to theFund’s outstanding obligations under the contract or inconnection with the position. In addition, changes in laws orregulations may make the use of derivatives more costly, maylimit the availability of derivatives, or may otherwiseadversely affect the use, value or performance of derivatives.

Emerging Markets Risk is the risk of investing in securities ofissuers tied economically to emerging markets, which entailsall of the risks of investing in securities of non-U.S. issuersdetailed below under “Non-U.S. Securities Risk” to aheightened degree. These heightened risks include: (i) greaterrisks of expropriation, confiscatory taxation, nationalization,and less social, political and economic stability; (ii) the smallersize of the markets for such securities and a lower volume oftrading, resulting in lack of liquidity and in price volatility;(iii) greater fluctuations in currency exchange rates; and(iv) certain national policies that may restrict the Fund’sinvestment opportunities, including restrictions on investingin issuers or industries deemed sensitive to relevant nationalinterests.

Equity Securities Risk is the risk that stock prices will fall overshort or long periods of time. In addition, common stocksrepresent a share of ownership in a company, and rank afterbonds and preferred stock in their claim on the company’sassets in the event of bankruptcy.

Exchange-Traded Funds (“ETF”) Risk is the risk that the pricemovement of an ETF may not exactly track the underlyingindex and may result in a loss. In addition, shareholders bear


5

both their proportionate share of the Fund’s expenses andsimilar expenses of the underlying investment company whenthe Fund invests in shares of another investment company.

Hedging Risk is the risk that, although intended to limit orreduce investment risk, hedging strategies may also limit orreduce the potential for profit. There is no assurance thathedging strategies will be successful.

Industry Specific Risk is the risk that the MLPs in which theFund invests will be impacted by risks specific to the industryMLPs serve, including the following:

• Fluctuations in commodity prices may impact thevolume of commodities transported, processed, storedor distributed.

• Reduced volumes of natural gas or other energycommodities available for transporting, processing,storing or distributing may affect the profitability of anMLP.

• Slowdowns in new construction and acquisitions canlimit growth potential.

• A sustained reduced demand for crude oil, natural gasand refined petroleum products could adversely affectMLP revenues and cash flows.

• Depletion of the natural gas reserves or othercommodities if not replaced, could impact an MLP’sability to make distributions.

• Changes in the regulatory environment could adverselyaffect the profitability of MLPs.

• Extreme weather and environmental hazards couldimpact the value of MLP securities.

• Rising interest rates could result in a higher cost ofcapital and drive investors into other investmentopportunities.

• Threats of attack by terrorists on energy assets couldimpact the market for MLPs.

Interest Rate Risk is the risk that fixed income securities willdecline in value because of changes in interest rates. Wheninterest rates decline, the value of fixed rate securitiesalready held by the Fund can be expected to rise. Conversely,when interest rates rise, the value of existing fixed rateportfolio securities can be expected to decline. A fund with alonger average portfolio duration will be more sensitive tochanges in interest rates than a fund with a shorter averageportfolio duration.

Legislation Risk is the risk that to the extent that state,federal or international regulators impose additionalrequirements or restrictions with respect to MLPs, theavailability of MLP investments may be adversely affected.

Leverage Risk is the risk associated with the use of leveragefor investment purposes to create opportunities for greatertotal returns. Any investment income or gains earned withrespect to the amounts borrowed that are in excess of theinterest that is due on the borrowing will augment the Fund’sincome. Conversely, if the investment performance withrespect to the amounts borrowed fails to cover the intereston such borrowings, the value of the Fund’s shares maydecrease more quickly than would otherwise be the case.Interest payments and fees incurred in connection with suchborrowings will reduce the amount of net income availablefor payment to Fund shareholders.

Management Risk is the risk associated with the fact that theFund relies on the Adviser’s ability to achieve its investmentobjective. The Adviser may be incorrect in its assessment ofthe intrinsic value of the companies whose securities theFund holds, which may result in a decline in the value of Fundshares and failure to achieve its investment objective.

Mid-Cap Company Risk is the risk that investing in securitiesof mid-cap companies may entail greater risks thaninvestments in larger, more established companies. Mid-capcompanies tend to have more narrow product lines, morelimited financial resources and a more limited trading marketfor their stocks, as compared with larger companies. As aresult, their stock prices may decline significantly as marketconditions change.

Non-Diversification Risk is the risk that an investment in theFund could fluctuate in value more than an investment in adiversified fund. As a non-diversified fund for purposes of the1940 Act, the Fund may invest a larger portion of its assets inthe securities of fewer issuers than a diversified fund. TheFund’s investment in fewer issuers may result in the Fund’sshares being more sensitive to the economic results of thoseissuers. An investment in the Fund could fluctuate in valuemore than an investment in a diversified fund.

Non-Payment Risk is the risk of non-payment of scheduledinterest and/or principal with respect to debt instruments.Non-payment would result in a reduction of income to theFund, a reduction in the value of the obligation experiencingnon-payment and a potential decrease in the NAV of theFund.

Non-U.S. Securities Risk is the risk associated with investingin non-U.S. issuers. Investments in securities of non-U.S.issuers involve certain risks not involved in domesticinvestments (for example, fluctuations in foreign exchangerates (for non-U.S. securities not denominated in U.S. dollars);future foreign economic, financial, political and socialdevelopments; nationalization; exploration or confiscatorytaxation; smaller markets; different trading and settlementpractices; less governmental supervision; and differentaccounting, auditing and financial recordkeeping standards

6

and requirements) that may result in the Fund experiencingmore rapid and extreme changes in value than a fund thatinvests exclusively in securities of U.S. companies. These risksare magnified for investments in issuers tied economically toemerging markets, the economies of which tend to be morevolatile than the economies of developed markets. Inaddition, certain investments in non-U.S. securities may besubject to foreign withholding and other taxes on interest,dividends, capital gains or other income or proceeds. Thosetaxes will reduce the Fund’s yield on any such securities. Seethe “Taxation” section below.

Operational and Technology Risk is the risk thatcyber-attacks, disruptions, or failures that affect the Fund’sservice providers, counterparties, market participants, orissuers of securities held by the Fund may adversely affect theFund and its shareholders, including by causing losses for theFund or impairing Fund operations.

Portfolio Turnover Risk is the risk that the Fund’s highportfolio turnover will increase the Fund’s transaction costsand may result in increased realization of net short-termcapital gains (which are taxable to shareholders as ordinaryincome when distributed to them), higher taxabledistributions and lower after-tax performance.

Prepayment Risk is the risk that during periods of fallinginterest rates, issuers of debt securities may repay higher ratesecurities before their maturity dates. This may cause theFund to lose potential price appreciation and to be forced toreinvest the unanticipated proceeds at lower interest rates.This may adversely affect the NAV of the Fund’s shares.

Restricted Securities Risk is the risk that the Adviser may notbe able to sell restricted securities, such as securities issuedpursuant to Rule 144A of the Securities Act of 1933, at theprice it would like or may have to sell them at a loss.

Securities Market Risk is the risk that the value of securitiesowned by the Fund may go up or down, sometimes rapidly orunpredictably, due to factors affecting particular companiesor the securities markets generally. A general downturn in thesecurities market may cause multiple asset classes to declinein value simultaneously. Many factors can affect this valueand you may lose money by investing in the Fund.

Small-Cap Company Risk is the risk that investing in thesecurities of small-cap companies either directly or indirectlythrough investments in ETFs, closed-end funds or mutualfunds (“Underlying Funds”) may pose greater market andliquidity risks than larger, more established companies,because of limited product lines and/or operating history,limited financial resources, limited trading markets, and thepotential lack of management depth. In addition, thesecurities of such companies are typically more volatile thansecurities of larger capitalization companies.

Performance

The bar chart and the Average Annual Total Returns tablebelow provide some indication of the risks of investing in theFund by showing changes in the performance of the Fund’sClass A Shares for each full calendar year and by showing howthe Fund’s average annual returns compare with the returnsof a broad-based securities market index or indices. As withall mutual funds, the Fund’s past performance (before andafter taxes) does not predict how the Fund will perform in thefuture. The Fund’s performance reflects applicable feewaivers and/or expense limitations in effect during theperiods presented, without which returns would have beenlower. Both the chart and the table assume the reinvestmentof dividends and distributions. The bar chart does not reflectthe deduction of applicable sales charges for Class A Shares. Ifsales charges had been reflected, the returns for Class AShares would be less than those shown below. The returns ofClass C and Class Y Shares would have substantially similarreturns as Class A because the classes are invested in thesame portfolio of securities and the annual returns woulddiffer only to the extent that the classes have differentexpenses. Updated information on the Fund’s performancecan be obtained by visiting http://highlandfunds.com/highland-funds-2/ or by calling 1-877-665-1287.

Effective February 1, 2013, the Fund revised its investmentstrategy to focus on MLP investments. Returns throughSeptember 30, 2012 reflect the Fund’s treatment as aregulated investment company under the Code. Returns afterSeptember 30, 2012 reflect the Fund’s treatment as a regularcorporation, or “C” corporation, for U.S. federal income taxpurposes. As a result, returns after September 30, 2012generally will be reduced by the amount of entity-levelincome taxes paid by the Fund as a regular corporation andthus will not necessarily be comparable to returns reportedwhile the Fund still qualified as a regulated investmentcompany.


7

Calendar Year Total Returns

The bar chart shows the performance of the Fund’s Class Ashares as of December 31.

−80

−60

−40

−20

0

20

40

60

80

%

8.40

2012

16.18

2013

8.68

2014

−54.65

2015

The highest calendar quarter total return for Class A Shares ofthe Fund was 11.83% for the quarter ended June 30, 2014and the lowest calendar quarter total return was -36.81% forthe quarter ended December 31, 2015.

Average Annual Total Returns(For the periods ended December 31, 2015)

1 YearSince

Inception

Class A (inception 12/01/11)

Return Before Taxes -57.27% -12.04%

Return After Taxes on Distributions -57.27% -13.03%

Return After Taxes on Distributions and Sale of FundShares -32.41% -8.42%

Return Before Taxes

Class C (inception 12/01/11) -55.35% -11.33%

Class Y (inception 12/01/11) -54.77% -10.56%

Alerian MLP Index (reflects no deduction for fees,expenses or taxes) (inception 12/01/11) -32.59% -0.02%

After-tax returns in the table above are shown for Class AShares only and after-tax returns for other share classes willvary. After-tax returns are calculated using the historicalhighest individual federal marginal income tax rates and donot reflect the impact of state and local taxes. Actual after-taxreturns depend on an investor’s tax situation and may differfrom those shown. For example, after-tax returns shown arenot relevant to investors who hold their Fund shares throughtax-advantaged arrangements, such as 401(k) plans orindividual retirement accounts.

In some cases, average annual return after taxes ondistributions and sale of fund shares is higher than theaverage annual return after taxes on distributions because ofrealized losses that would have been sustained upon the saleof fund shares immediately after the relevant periods. Thecalculations assume that an investor holds the shares in ataxable account, is in the actual historical highest individualfederal marginal income tax bracket for each year and wouldhave been able to immediately utilize the full realized loss toreduce his or her federal tax liability. However, actualindividual tax results may vary and investors should consulttheir tax advisers regarding their personal tax situations.

Portfolio Management

Highland Capital Management Fund Advisors, L.P. serves asthe investment adviser to the Fund. The primary individualportfolio managers for the Fund are:

Portfolio ManagerPortfolio ManagerExperience in this Fund Title with Adviser

James Dondero Less than 2 years Senior Portfolio Manager

Matthew Gray 4 years Director

Jon Poglitsch 4 years Managing Director

Purchase and Sale of Fund Shares

Purchase minimum (for Class A and Class C Shares) (reduced forcertain accounts)

By mail By wire Automatic

Initial Investment $500 $1,000 $25

Subsequent Investments $100 $1,000 $25

There is no program asset size or minimum investment requirements forinitial and subsequent purchases of shares by eligible omnibus accountinvestors.

Purchase minimum (for Class Y Shares) (eligible investors only)

Initial Investment None

Subsequent Investments None

Class Y Shares are available to investors who invest through programs orplatforms maintained by an authorized financial intermediary.

Individual investors that invest directly with the Fund are not eligible toinvest in Class Y Shares.

You may purchase shares of the Fund by mail, bank wire,electronic funds transfer or by telephone after you haveopened an account with the Fund. You may obtain an accountapplication from your financial intermediary, from the Fundby calling 1-877-665-1287 or from the Fund’s website athttp://highlandfunds.com/literature.

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In general, you may sell (redeem) all or part of your Fundshares on any business day through the following options:

• Through your Financial Intermediary

• By writing to Highland Funds II — Highland Energy MLPFund, PO Box 8656, Boston, Massachusetts 02266-8656,or

• By calling Boston Financial Data Services, Inc. at1-877-665-1287

Financial intermediaries may independently charge fees forshareholder transactions or for advisory services. Please seetheir materials for details.

Tax Information

The Fund intends to make distributions that (i), to the extentof the Fund’s earnings and profits, will generally be taxable toyou as ordinary income or qualified dividend income and (ii),to the extent in excess of the Fund’s earnings and profits, willgenerally be treated as a tax-free return of capital to you tothe extent of your basis in your Fund shares and thereafter betaxable to you as capital gain, in each case unless you are atax-exempt investor or otherwise investing in the Fundthrough a tax-advantaged arrangement, such as a 401(k) planor an individual retirement account. If you are investing in theFund through a tax-advantaged arrangement, you may betaxed later upon withdrawals from that account.

Payments to Broker-Dealers and Other FinancialIntermediaries

If you purchase shares of the Fund through a broker-dealer orother financial intermediary (such as a bank), the Fund and itsrelated companies may pay the intermediary for the sale ofFund shares and related services. These payments may createa conflict of interest by influencing the broker-dealer or otherintermediary and your salesperson to recommend the Fundover another investment. Ask your salesperson or visit yourfinancial intermediary’s website for more information.


9

Highland Premier Growth Equity Fund


The investment objective of Highland Premier Growth EquityFund (“Highland Premier Growth Equity Fund” or the “Fund”)is to seek long-term growth of capital and future incomerather than current income.
















Total Annual Fund Operating Expenses 1.13% 1.88% 0.88%1 Class A Shares bought without an initial sales charge in accountsaggregating $1 million or more at the time of purchase are subject to a0.50% contingent deferred sales charge (“CDSC”) if the shares are soldwithin one year of purchase.


Expense Example

This Example helps you compare the cost of investing in theFund to the cost of investing in other mutual funds. TheExample assumes that (i) you invest $10,000 in the Fund forthe time periods indicated and then sell or redeem all yourshares at the end of those periods, (ii) your investment has a5% return each year, and (iii) operating expenses remain thesame. Your actual costs may be higher or lower.


Class A $684 $913 $1,161 $1,871

Class C

if you do not sell your shares $191 $591 $1,016 $2,201

if you sold all your shares at the endof the period $291 $591 $1,016 $2,201

Class Y $ 90 $281 $ 488 $1,084

Portfolio Turnover



The Fund seeks to achieve its investment objectives byinvesting at least 80% of its net assets under normalcircumstances in equity securities, such as common andpreferred stocks.

The Fund invests primarily in a limited number of large- andmedium-sized companies (meaning companies with a marketcapitalization of $2 billion or more) that the portfoliomanager believes have above-average growth histories and/or growth potential. The portfolio manager selects equitysecurities from a number of industries based on the merits ofindividual companies. In seeking to satisfy the Fund’sinvestment objective with respect to future income, theportfolio manager will also consider companies that have thepotential to pay dividends in the future. Stock selection is keyto the performance of the Fund. The Fund may also sellsecurities short. Highland Capital Management Fund Advisors,L.P. (the “Adviser”) will vary the Fund’s long and shortexposures over time based on its assessment of marketconditions and other factors. The Adviser may also utilizeevent-driven strategies that are based on investmentopportunities created by significant transactional events, such

10

as spin-offs, mergers and acquisitions, industryconsolidations, liquidations, reorganizations, bankruptcies,recapitalizations, share buybacks and other extraordinarycorporate transactions.

The portfolio manager seeks to identify securities ofcompanies with characteristics such as:

• above-average annual growth rates

• financial strength (favorable debt ratios and otherfinancial characteristics)

• leadership in their respective industries

• high quality management focused on generatingshareholder value

The portfolio manager may consider selling a security whenone of these characteristics no longer applies, or whenvaluation becomes excessive and more attractive alternativesare identified.

The Fund also may invest to a lesser extent in securities offoreign (non-U.S.) issuers and debt securities. The portfoliomanager may also invest in exchange-traded funds (“ETFs”)and use various types of derivatives (such as options, futuresand options on futures) to gain or hedge exposure to certaintypes of securities as an alternative to investing directly in orselling such securities.

Principal Risks





Derivatives Risk is a combination of several risks, includingthe risks that: (1) an investment in a derivative instrumentmay not correlate well with the performance of the securitiesor asset class to which the Fund seeks exposure, (2) derivativecontracts, including options, may expire worthless and theuse of derivatives may result in losses to the Fund, (3) aderivative instrument entailing leverage may result in a lossgreater than the principal amount invested, (4) derivativesnot traded on an exchange may be subject to credit risk, forexample, if the counterparty does not meet its obligations(see also “Counterparty Risk”), and (5) derivatives not tradedon an exchange may be subject to liquidity risk and therelated risk that the instrument is difficult or impossible tovalue accurately. As a general matter, when the Fundestablishes certain derivative instrument positions, such ascertain futures, options and forward contract positions, it willsegregate liquid assets (such as cash, U.S. Treasury bonds orcommercial paper) equivalent to the Fund’s outstandingobligations under the contract or in connection with theposition. In addition, changes in laws or regulations maymake the use of derivatives more costly, may limit theavailability of derivatives, or may otherwise adversely affectthe use, value or performance of derivatives.

Event-Driven Investing Risk. Event-driven strategies analyzevarious transactions in order to predict a likely outcome andcommit capital in a way that benefits from that outcome.Event-driven strategies are broad in scope and employ adiverse set of securities, including common and preferredstock, debt securities, warrants, stubs and derivatives.Appreciation in the value of such securities may becontingent upon the occurrence of certain events, such as asuccessful reorganization or merger. If the expected eventdoes not occur, the Fund may incur a loss on the investments.There can be no assurance that any expected transaction willtake place. Certain transactions are dependent on one ormore factors to become effective, such as market conditionswhich may lead to unexpected positive or negative changes ina company profile, shareholder approval, regulatory andvarious other third party constraints, changes in earnings orbusiness lines or shareholder activism as well as many otherfactors.

Exchange-Traded Funds (“ETF”) Risk is the risk that the pricemovement of an ETF may not exactly track the underlyingindex and may result in a loss. In addition, shareholders bearboth their proportionate share of the Fund’s expenses andsimilar expenses of the underlying investment company whenthe Fund invests in shares of another investment company.

Focused Investment Risk is the risk that although the Fund isa diversified fund, it may invest in securities of a limitednumber of issuers in an effort to achieve a potentially greaterinvestment return than a fund that invests in a larger number


11

of issuers. As a result, price movements of a single issuer’ssecurities will have a greater impact on the Fund’s net assetvalue, causing it to fluctuate more than that of a more widelydiversified fund.

Growth Investing Risk is the risk of investing in growth stocksthat may be more volatile than other stocks because they aremore sensitive to investor perceptions of the issuingcompany’s growth potential. Growth-oriented funds willtypically underperform when value investing is in favor.




Non-U.S. Securities Risk is the risk associated with investingin non-U.S. issuers. Investments in securities of non-U.S.issuers involve certain risks not involved in domesticinvestments (for example, fluctuations in foreign exchangerates (for non-U.S. securities not denominated in U.S. dollars);future foreign economic, financial, political and socialdevelopments; nationalization; exploration or confiscatorytaxation; smaller markets; different trading and settlementpractices; less governmental supervision; and differentaccounting, auditing and financial recordkeeping standardsand requirements) that may result in the Fund experiencingmore rapid and extreme changes in value than a fund thatinvests exclusively in securities of U.S. companies. These risksare magnified for investments in issuers tied economically toemerging markets, the economies of which tend to be morevolatile than the economies of developed markets. Inaddition, certain investments in non-U.S. securities may besubject to foreign withholding and other taxes on interest,dividends, capital gains or other income or proceeds. Thosetaxes will reduce the Fund’s yield on any such securities. Seethe “Taxation” section below.



Short Sales Risk is the risk of loss associated with anyappreciation on the price of a security borrowed inconnection with a short sale. The Fund may engage in shortsales that are not made “against-the-box,” which means thatthe Fund may sell short securities even when they are notactually owned or otherwise covered at all times during theperiod the short position is open. Short sales that are notmade “against-the-box” theoretically involve unlimited losspotential since the market price of securities sold short maycontinuously increase.

Performance


12



−40

−20

0

20

40

%

8.66

2006

4.98

2007

−36.40

2008

38.53

2009

11.29

2010

0.05

2011

20.22

2012

34.61

2013

13.74

2014

3.02

2015



1 Year 5 Years 10 YearsSince

Inception


Return Before Taxes -2.90% 12.33% 7.18% 8.02%

Return After Taxes on Distributions -4.56% 11.23% 6.13% 7.24%

Return After Taxes on Distributionsand Sale of Fund Shares -0.21% 9.81% 5.73% 6.71%

Return Before Taxes

Class C (inception 9/30/99) 1.33% 12.82% 7.01% 4.73%

Class Y (inception 12/31/96) 3.28% 13.95% 8.08% 8.63%

S&P 500® Index (reflects nodeduction for fees, expenses ortaxes) (inception 12/31/96) 1.38% 12.57% 7.31% 7.46%

Russell 1000® Growth Index (reflectsno deduction for fees, expenses ortaxes) (inception 12/31/96) 5.67% 13.53% 8.53% 6.87%

After-tax returns in the table above are shown for Class AShares only and after-tax returns for other share classes willvary. After-tax returns are calculated using the historicalhighest individual federal marginal income tax rates and donot reflect the impact of state and local taxes. Actual after-taxreturns depend on an investor’s tax situation and may differfrom those shown. For example, after-tax returns shown are

not relevant to investors who hold their Fund shares throughtax-advantaged arrangements, such as 401(k) plans orindividual retirement accounts.





James Dondero Less than 1 year Portfolio Manager

Michael Gregory Less than 1 year Portfolio Manager














13



• By writing to Highland Funds II — Highland PremierGrowth Equity Fund, PO Box 8656, Boston,Massachusetts 02266-8656, or



Tax Information

The Fund intends to make distributions that generally will betaxable to you as ordinary income, qualified dividend incomeor capital gains, unless you are a tax-exempt investor orotherwise investing in the Fund through a tax-advantagedarrangement, such as a 401(k) plan or an individualretirement account. If you are investing in the Fund through atax-advantaged arrangement, you may be taxed later uponwithdrawals from that arrangement.



14

Highland Small-Cap Equity Fund


The investment objective of Highland Small-Cap Equity Fund(“Highland Small-Cap Equity Fund” or the “Fund”) is to seeklong-term growth of capital.


















Total Annual Fund Operating Expenses AfterExpense Reimbursement 1.21% 1.96% 0.96%




Expense Example



Class A $691 $1,029 $1,389 $2,401

Class C

if you do not sell your shares $199 $ 711 $1,249 $2,721

if you sold all your shares at the endof the period $299 $ 711 $1,249 $2,721

Class Y $ 98 $ 404 $ 733 $1,662

Portfolio Turnover


15


The Fund seeks to achieve its investment objective byinvesting at least 80% of its net assets under normalcircumstances in equity securities, such as common andpreferred stocks, of small-cap companies, plus borrowing forinvestment purposes.

The Fund uses an investment strategy that combines growth,value and core investment management styles. The Funddefines a small-cap company as one with a marketcapitalization that falls between (a) the bottom range of theRussell 2000® Index (“Russell 2000 Index”) and (b) the greaterof either the top range of the Russell 2000 Index or$3.0 billion. As of September 30, 2015, the marketcapitalization of companies in the Russell 2000 Index rangedfrom $38.0 million to $5.2 billion.1 The portfolio manager willnot sell a stock merely because the market capitalization of acompany in the portfolio moves outside its capitalizationrange or because the index capitalization range changes.Stock selection is key to the performance of the Fund.1 The Russell 2000 Index is constructed to provide an unbiased small-cap

barometer and is reconstituted annually. The capitalization range,however, may change significantly intra-year due to changes in themarket capitalization of securities in the Index.

The portfolio manager seeks to identify securities ofcompanies with characteristics such as:


• attractive products or services

• appropriate capital structure

• strong competitive positions in their industries

The portfolio managers may consider selling a security whenone of these characteristics no longer applies, or whenvaluation becomes excessive and more attractive alternativesare identified.

The Fund also may invest to a lesser extent in securities withcapitalizations outside the Fund’s small-cap range, debtsecurities and foreign (non-U.S.) securities. The portfoliomanager may also invest in exchange-traded funds (“ETFs”)and it may invest in index futures, options on index futuresand index options to gain exposure to certain types ofsecurities as a substitute to investing directly in suchsecurities. The Fund is not intended to be a completeinvestment program.

Principal Risks

When you sell Fund shares, they may be worth less than whatyou paid for them. Consequently, you can lose money byinvesting in the Fund. No assurance can be given that the

Fund will achieve its investment objective, and investmentresults may vary substantially over time and from period toperiod. An investment in the Fund is not appropriate for allinvestors.






16






Small-Cap Company Risk is the risk that investing in thesecurities of small-cap companies either directly or indirectlythrough investments in ETFs, closed-end funds or mutual

funds (“Underlying Funds”) may pose greater market andliquidity risks than larger, more established companies,because of limited product lines and/or operating history,limited financial resources, limited trading markets, and thepotential lack of management depth. In addition, thesecurities of such companies are typically more volatile thansecurities of larger capitalization companies.

Value Investing Risk is the risk of investing in undervaluedstocks that may not realize their perceived value for extendedperiods of time or may never realize their perceived value.Value stocks may respond differently to market and otherdevelopments than other types of stocks. Value-orientedfunds will typically underperform when growth investing is infavor.

Performance



17



−40

−20

0

20

40

%

12.98

2006

1.92

2007

−37.75

2008

30.25

2009

26.83

2010

2.93

2011

13.56

2012

32.53

2013

5.79

2014

−9.53

2015




Inception



Return After Taxes onDistributions -17.64% 5.05% 3.51% 6.66%

Return After Taxes onDistributions and Sale of FundShares -5.87% 5.56% 4.17% 6.76%

Return Before Taxes

Class C (inception 9/30/99) -10.92% 7.39% 5.00% 7.42%

Class Y (inception 9/30/98) -9.32% 8.45% 6.07% 9.28%

Russell 2000 Index (reflects nodeduction for fees, expenses ortaxes) (inception 9/30/98) -4.41% 9.19% 6.80% 8.25%






James Dondero Less than 1 year Portfolio Manager

Michael Gregory Less than 1 year Portfolio Manager














18


• By writing to Highland Funds II — Highland Small-CapEquity Fund, PO Box 8656, Boston, Massachusetts02266-8656, or



Tax Information





19

Highland Fixed Income Fund


The investment objective of Highland Fixed Income Fund(“Highland Fixed Income Fund” or the “Fund”) is to seekmaximum income consistent with prudent investmentmanagement and the preservation of capital.
















Acquired Fund Fees and Expenses 0.08% 0.08% 0.08%

Total Annual Fund Operating Expenses3,4 0.94% 1.69% 0.69%1 Class A Shares bought without an initial sales charge in accountsaggregating $1 million or more at the time of purchase are subject to a0.50% contingent deferred sales charge (“CDSC”) if the shares are soldwithin one year of purchase.


3 Total Annual Fund Operating Expenses differ from the ratio of expenses toaverage net assets shown in the Financial Highlights, which reflect theoperating expenses of the Fund and do not include acquired fund fees andexpenses.


Expense Example



Class A $517 $711 $922 $1,529

Class C

if you do not sell your shares $172 $532 $917 $1,996

if you sold all your shares at the endof the period $272 $532 $917 $1,996

Class Y $ 70 $220 $383 $ 857

20

Portfolio Turnover



The Fund seeks to achieve its investment objective byinvesting at least 80% of its net assets under normalcircumstances in debt securities.

Highland Capital Management Fund Advisors, L.P. (“HCMFA”or the “Adviser”), the Fund’s investment adviser, hasallocated all the assets of the Fund to be managed/advised byFirst Foundation Advisors (“FFA” or the “Sub-Adviser”), theFund’s sub-adviser. The Fund invests primarily in a variety ofinvestment-grade debt securities, such as mortgage-backedsecurities, corporate bonds, U.S. Government securities andmoney market instruments. The Fund normally has aweighted average maturity of approximately five to ten years,but is subject to no limitation with respect to the maturitiesof the instruments in which it may invest.

U.S. Government securities are securities that are issued orguaranteed as to principal and interest by theU.S. Government or one of its agencies or instrumentalities.Some U.S. Government securities are backed by the full faithand credit of the U.S. Government, such as U.S. Treasury billsand notes and obligations of the Government NationalMortgage Association (Ginnie Mae). Other U.S. Governmentsecurities are neither issued nor guaranteed by the full faithand credit of the U.S. Government, including those issued bythe Federal National Mortgage Association (Fannie Mae) andthe Federal Home Loan Mortgage Corporation (Freddie Mac).Fannie Mae and Freddie Mac have been operating under aconservatorship since 2008, with the Federal Housing FinanceAuthority acting as their conservator, and receive certainfinancing support from and have access to certain borrowingarrangements with the U.S. Treasury.

The portfolio managers seek to identify debt securities withcharacteristics such as:

• attractive yields and prices

• the potential for capital appreciation

• reasonable credit quality


The Fund also may invest to a lesser extent in non-mortgageasset-backed securities, high yield securities (also known as“junk securities”), foreign (non-U.S.) and emerging marketdebt securities and equity securities, such as exchange-tradedfunds (“ETFs”).

The portfolio managers may also use various types ofderivatives (such as options, futures and options on futures)to manage interest rate risk (also known as duration) and tomanage exposure to credit quality. The reference in theFund’s investment objective to capital preservation does notindicate that the Fund may not lose money. The investmentadviser seeks to employ strategies that are consistent withcapital preservation, but there can be no assurance that theinvestment adviser will be successful in doing so.

Principal Risks



Asset-Backed Securities Risk is the risk of investing inasset-backed securities, and includes interest rate risk,prepayment risk and the risk that the Fund could lose moneyif there are defaults on the loans underlying these securities.




21




High Yield Debt Securities Risk is the risk that belowinvestment grade securities or unrated securities of similarcredit quality (commonly known as “high yield securities” or“junk securities”) are more likely to default than higher ratedsecurities. The Fund’s ability to invest in high-yield debtsecurities generally subjects the Fund to greater risk thansecurities with higher ratings. Such securities are regarded bythe rating organizations as predominantly speculative withrespect to capacity to pay interest and repay principal in

accordance with the terms of the obligation. The marketvalue of these securities is generally more sensitive tocorporate developments and economic conditions and can bevolatile. Market conditions can diminish liquidity and makeaccurate valuations difficult to obtain.


Mortgage-Backed Securities Risk is the risk of investing inmortgage-backed securities, and includes interest rate risk,liquidity risk and credit risk, which may be heightened inconnection with investments in loans to “subprime”borrowers. Certain mortgage-backed securities are alsosubject to prepayment risk. Mortgage-backed securities,because they are backed by mortgage loans, are also subjectto risks related to real estate, and securities backed byprivate-issued mortgages may experience higher rates ofdefault on the underlying mortgages than securities backedby government-issued mortgages. The Fund could lose moneyif there are defaults on the mortgage loans underlying thesesecurities.


Operational and Technology Risk is the risk thatcyber-attacks, disruptions, or failures that affect the Fund’sservice providers, counterparties, market participants, or

22

issuers of securities held by the Fund may adversely affect theFund and its shareholders, including by causing losses for theFund or impairing Fund operations.



Restricted Securities Risk is the risk that the Sub-Adviser maynot be able to sell restricted securities, such as securitiesissued pursuant to Rule 144A of the Securities Act of 1933, atthe price it would like or may have to sell them at a loss.


Performance




−10

−5

0

5

10

%

4.09

2006

5.66

2007

−1.28

2008

7.37

2009

7.26

2010

7.59

2011

4.58

2012

−1.66

2013

4.29

2014

−0.40

2015

The highest calendar quarter total return for Class A Shares ofthe Fund was 4.37% for the quarter ended September 30,2009 and the lowest calendar quarter total return was -2.46%for the quarter ended June 30, 2013.



Inception





Return Before Taxes



Barclays Capital U.S. Aggregate BondIndex (reflects no deduction forfees, expenses or taxes) (inception12/28/93) 0.55% 3.25% 4.51% 5.56%



23



Highland Capital Management Fund Advisors, L.P. serves asthe investment adviser to the Fund and First FoundationAdvisors serves as sub-adviser to the Fund. The primaryindividual portfolio managers for the Fund are:

Portfolio ManagerPortfolio ManagerExperience in this Fund Title with Sub-Adviser

John Hakopian Less than 2 years President

Susan King Riechel Less than 2 years Managing Director of FixedIncome Investments















• By writing to Highland Funds II — Highland Fixed IncomeFund, PO Box 8656, Boston, Massachusetts 02266-8656,or



Tax Information




24

Highland Tax-Exempt Fund


The investment objective of Highland Tax-Exempt Fund(“Highland Tax-Exempt Fund” or the “Fund”) is to provide ashigh a level of income exempt from federal income taxationas is consistent with preservation of capital.


















Total Annual Fund Operating Expenses AfterExpense Reimbursement 0.92% 1.67% 0.67%




Expense Example



Class A $515 $735 $972 $1,652

Class C

if you do not sell your shares $170 $556 $967 $2,115

if you sold all your shares at the endof the period $270 $556 $967 $2,115

Class Y $ 68 $245 $436 $ 989

Portfolio Turnover


25


The Fund seeks to achieve its investment objective byinvesting primarily in investment-grade municipal obligations.Under normal circumstances, the portfolio manager managesthe Fund so that at least 80% of the Fund’s income is exemptfrom both regular federal income taxes and the federalalternative minimum tax.

Highland Capital Management Fund Advisors, L.P. (“HCMFA”or the “Adviser”), the Fund’s investment adviser, hasallocated all the assets of the Fund to be managed/advised byFirst Foundation Advisors (“FFA” or the “Sub-Adviser”), theFund’s sub-adviser. The Fund generally will have an effectiveduration of 75% to 125% of the duration of the BarclaysCapital 10-Year Municipal Bond Index. As of December 31,2015, the effective duration of the Barclays Capital 10-YearMunicipal Bond Index was 5.71 years. Portfolio duration isone measure of risk, as noted under “Interest Rate Risk”below.

The portfolio manager seeks to identify municipal obligationswith characteristics such as:


• the potential for income generation


• reasonable credit quality

The portfolio manager may consider selling a security whenone of these characteristics no longer applies, or whenvaluation becomes excessive and more attractive alternativesare identified.

The Fund also may invest to a lesser extent in tax-free ortaxable money market instruments and may hold cash. Theportfolio manager may also use various types of derivatives(such as options, futures and options on futures) to manageinterest rate exposure (also known as duration) and tomanage exposure to credit quality. The Fund may also investin exchange-traded funds (“ETFs”).

The Fund’s policy that at least 80% of its income be exemptfrom both regular federal income taxes and the federalalternative minimum tax may only be changed withshareholder approval. The reference in the Fund’s investmentobjective to capital preservation does not indicate that theFund may not lose money. The investment adviser seeks toemploy strategies that are consistent with capitalpreservation, but there can be no assurance that theinvestment adviser will be successful in doing so.

Principal Risks






26


Municipal Obligations Risk is the risk of investing in municipalsecurities, and includes interest rate risk and the credit risk ofthe issuers of municipal securities. The municipal securitiesmarket is volatile and may be significantly affected by adversetax, legislative or political changes. To the extent that theFund remains relatively small, it may have fewer favorableinvestment opportunities.




Performance

The bar chart and the Average Annual Total Returns tablebelow provide some indication of the risks of investing in theFund by showing changes in the performance of the Fund’sClass A Shares for each full calendar year and by showing howthe Fund’s average annual returns compare with the returnsof a broad-based securities market index or indices. As withall mutual funds, the Fund’s past performance (before andafter taxes) does not predict how the Fund will perform in thefuture. The Fund’s performance reflects applicable feewaivers and/or expense limitations in effect during theperiods presented, without which returns would have beenlower. Both the chart and the table assume the reinvestmentof dividends and distributions. The bar chart does not reflectthe deduction of applicable sales charges for Class A Shares. If

sales charges had been reflected, the returns for Class AShares would be less than those shown below. The returns ofClass C and Class Y Shares would have substantially similarreturns as Class A because the classes are invested in thesame portfolio of securities and the annual returns woulddiffer only to the extent that the classes have differentexpenses. Updated information on the Fund’s performancecan be obtained by visiting http://highlandfunds.com/highland-funds-2/ or by calling 1-877-665-1287.



−10

−5

0

5

10

%

3.01

2006

2.67

2007

0.06

2008

9.42

20091.14

2010

8.97

2011

4.85

2012

−3.58

2013

7.57

2014

2.21

2015

The highest calendar quarter total return for Class A Shares ofthe Fund was 5.16% for the quarter ended September 30,2009 and the lowest calendar quarter total return was -4.17%for the quarter ended December 31, 2010.



Inception




Return After Taxes on Distributionsand Sale of Fund Shares 0.23% 2.89% 3.09% 3.93%

Return Before Taxes

Class C (inception 9/30/99) 0.39% 3.12% 2.78% 3.33%

Class Y (inception 9/27/97) 2.38% 4.15% 3.80% 4.42%

Barclays Capital 10-Year MunicipalBond Index (reflects no deductionfor fees, expenses or taxes)(inception 8/31/93) 3.76% 5.55% 5.20% 5.47%


27







Susan King Riechel Less than 2 years Managing Director of FixedIncome Investments








Class Y








• By writing to Highland Funds II — Highland Tax-ExemptFund, PO Box 8656, Boston, Massachusetts 02266-8656,or



Tax Information

The Fund generally intends to distribute primarilyexempt-interest dividends that are exempt from federalincome tax and the federal alternative minimum tax. Aportion of the Fund’s distributions may not qualify asexempt-interest dividends, and generally will be taxable toyou as ordinary income, qualified dividend income or capitalgain, unless you are a tax-exempt investor or otherwiseinvesting in the Fund through a tax-advantaged arrangement,such as a 401(k) plan or an individual retirement account. Ifyou are investing in the Fund through a tax-advantagedarrangement, you may be taxed later upon withdrawals fromthat account.



28

Highland Global Allocation Fund


The investment objective of Highland Global Allocation Fund(“Highland Global Allocation Fund” or the “Fund”) is to seeklong-term growth of capital and future income (future incomemeans the ability to pay dividends in the future).
















Dividend Expense on Short Sales 0.03% 0.03% 0.03%






Expense Example



Class A $675 $887 $1,116 $1,773

Class C

if you do not sell your shares $182 $563 $ 970 $2,105

if you sold all your shares at the endof the period $282 $563 $ 970 $2,105

Class Y $ 81 $252 $ 439 $ 978

29

Portfolio Turnover

The Fund pays transaction costs, such as commissions, whenit buys and sells securities (or “turns over” its portfolio). Ahigher portfolio turnover rate may indicate higher transactioncosts and may result in higher taxes when Fund shares areheld in a taxable account. These costs, which are notreflected in Annual Fund Operating Expenses or in theExpense Example, affect the Fund’s performance. During themost recent fiscal year, the Fund’s portfolio turnover rate was108% of the average value of its portfolio. During the last twofiscal years, the Fund has experienced high portfolio turnoverrates.


The Fund seeks to achieve its investment objectives byinvesting in a portfolio of U.S. and foreign equity, debt andmoney market securities. Under normal market conditions,the Fund intends to invest at least 50% of its net assets inequity securities and at least 40% (plus any borrowings forinvestment purposes) of its net assets in securities of non-U.S.issuers. While the Fund’s investments in securities of non-U.S.issuers may from time to time represent less than 40% of itsnet assets, the Fund intends to invest approximately 30% ormore of its net assets in securities of non-U.S. issuers at alltimes. For purposes of determining whether securities heldby the Fund are securities of a non-U.S. issuer, a company isconsidered to be a non-U.S. issuer if the company’s securitiesprincipally trade on a market outside of the United States, thecompany derives a majority of its revenues or profits outsideof the United States, the company is not organized in theUnited States, or the company is significantly exposed to theeconomic fortunes and risks of regions outside theUnited States.

Equity securities in which the Fund may invest includecommon stock, preferred stock, securities convertible intocommon stock, rights and warrants or securities or otherinstruments whose price is linked to the value of commonstock. Although the equity securities in which the Fundinvests may be of any capitalization, may be denominated inany currency and may be located in emerging marketswithout limit, the Fund will primarily invest in equitysecurities of large capitalization companies (meaning amarket capitalization of $2 billion or more) that are located indeveloped markets.

The Fund may also invest in debt securities of any kind,including debt securities of varying maturities, debt securitiespaying a fixed or fluctuating rate of interest, inflation-indexedbonds, structured notes, loan assignments, loanparticipations, asset-backed securities, debt securitiesconvertible into equity securities, and securities issued or

guaranteed by the U.S. Government or its agencies orinstrumentalities, by foreign governments or internationalagencies or supranational entities or by domestic or foreignprivate issuers.

The Fund may also invest in senior loans to domestic orforeign corporations, partnerships and other entities thatoperate in a variety of industries and geographic regions(“Borrowers”) (“Senior Loans”). Senior Loans are businessloans that have a right to payment senior to most other debtsof the Borrower. Senior Loans generally are arranged throughprivate negotiations between a Borrower and severalfinancial institutions (the “Lenders”) represented in each caseby one or more such Lenders acting as agent (the “Agent”) ofthe several Lenders. On behalf of the Lenders, the Agent isprimarily responsible for negotiating the loan agreement(“Loan Agreement”) that establishes the relative terms andconditions of the Senior Loan and rights of the Borrower andthe Lenders.

With respect to the Fund’s equity investments, the Fundinvests primarily in companies that the portfolio managerbelieves have solid growth prospects and/or attractivevaluations. The portfolio manager’s growth managementstyle focuses on companies that are expected to grow fasterthan their relevant peers/markets and whose security pricesdo not fully reflect their potential for growth. The portfoliomanager’s value management style employs a relative valueapproach to identify companies across all economic sectorsand geographic regions that are undervalued relative to themarket, their peers, their historical valuation or their growthrate. This combination of investment styles is intended toresult in an approach that is broadly diversified acrosseconomic sectors and countries.

When choosing investment markets, Fund managementconsiders various factors, including economic and politicalconditions, potential for economic growth and possiblechanges in currency exchange rates. In addition to investing insecurities of non-U.S. issuers, the Fund actively manages itsexposure to foreign currencies through the use of forwardcurrency contracts and other currency derivatives. The Fundmay own foreign cash equivalents or foreign bank deposits aspart of the Fund’s investment strategy. The Fund may alsoinvest in non-U.S. currencies for hedging and speculativepurposes. The Fund may underweight or overweight acurrency based on the Fund management team’s outlook.

The Fund may invest in debt securities of any credit quality,including below investment grade securities (also known as“high yield securities” or “junk securities”). Such securities arerated below investment grade by a nationally recognizedstatistical rating organization (“NRSRO”) or are unrated butdeemed by Highland Capital Management Fund Advisors, L.P.

30

(the “Adviser”) to be of comparable quality. The Fund mayinvest without limitation in below investment grade orunrated securities, including in insolvent borrowers orborrowers in default.

In addition, the Fund may invest in pooled investmentvehicles, including exchange-traded funds (“ETFs”). TheFund’s portfolio may include pooled investment vehicles thatprovide exposure to foreign equity securities and that investin both developed and emerging markets, including ETFs thatseek to track the performance of securities of a singlecountry. The Fund may also use derivatives, primarily swaps,options and futures contracts, as substitutes for securities inwhich the Fund can invest. The Fund may also use derivatives,such as options, futures and foreign currency transactions, toan unlimited extent to hedge various investments for riskmanagement and speculative purposes. The Fund may investin futures contracts to an unlimited extent.

The Fund may seek to provide exposure to the investmentreturns of real assets that trade in the commodity markets,including through investment in certain commodity-linkedinstruments and pooled investment vehicles, such asexchange-traded notes (“ETNs”) and ETFs that generatereturns tied to a particular commodity or commodity marketindex. These investments are generally designed to providethe Fund with commodity market exposure without directinvestment in physical commodities.

The Fund may borrow an amount up to 33 1/3% of its totalassets (including the amount borrowed). The Fund mayborrow for investment purposes, to meet redemptionrequests and for temporary, extraordinary or emergencypurposes. To the extent the Fund borrows more money thanit has cash or short-term cash equivalents and invests theproceeds, the Fund will create financial leverage. The use ofborrowing for investment purposes increases bothinvestment opportunity and investment risk.

The Fund’s portfolio manager may sell a security for a varietyof reasons, such as to invest in a company offering superiorinvestment opportunities.

Principal Risks



Allocation Risk is the risk that the Adviser may not allocateassets of the Fund among strategies or asset classes in anoptimal manner, if, among other reasons, it does notcorrectly assess the attractiveness of a strategy or asset class.

Asset-Backed Securities Risk is the risk of investing inasset-backed securities, and includes interest rate risk,prepayment risk and the risk that the Fund could lose moneyif there are defaults on the loans underlying these securities.

Commodity Exposure Risk is the risk that exposure to thecommodities markets may subject the Fund to greatervolatility than investments in traditional securities.Commodities prices can be extremely volatile and exposureto commodities can cause the price of the Fund’s shares todecline and fluctuate more than the price of shares of a fundwith a broader range of investments. Certain of the Fund’scommodities-linked investments may be limited by taxconsiderations, including the Fund’s intention to qualifyannually as a regulated investment company (“RIC”) underthe Internal Revenue Code of 1986, as amended (the “Code”).See “Taxation” below.

Counterparty Risk is the risk that a counterparty (the otherparty to a transaction or an agreement or the party withwhom the Fund executes transactions) to a transaction withthe Fund may be unable or unwilling to make timely principal,interest or settlement payments, or otherwise honor itsobligations.



Debt Securities Risk is the risk associated with the fact thatthe value of debt securities typically changes in response tovarious factors, including, by way of example, market-relatedfactors (such as changes in interest rates or changes in therisk appetite of investors generally) and changes in the actualor perceived ability of the issuer (or of issuers generally) tomeet its (or their) obligations. During periods of rising interestrates, debt securities generally decline in value. Conversely,


31

during periods of falling interest rates, debt securitiesgenerally rise in value. This kind of market risk is generallygreater for funds investing in debt securities with longermaturities.

In addition, because loans are not ordinarily registered withthe U.S. Securities and Exchange Commission (the “SEC”) orany state securities commission or listed on any securitiesexchange, there is usually less publicly available informationabout such instruments. In addition, loans may not beconsidered “securities” for purposes of the anti-fraudprovisions under the federal securities laws and, as a result,as a purchaser of these instruments, the Fund may not beentitled to the anti-fraud protections of the federal securitieslaws. In the course of investing in such instruments, the Fundmay come into possession of material nonpublic informationand, because of prohibitions on trading in securities of issuerswhile in possession of such information, the Fund may beunable to enter into a transaction in a publicly-traded securityof that issuer when it would otherwise be advantageous forthe Fund to do so. Alternatively, the Fund may choose not toreceive material nonpublic information about an issuer ofsuch loans, with the result that the Fund may have lessinformation about such issuers than other investors whotransact in such assets.


Emerging Markets Risk is the risk of investing in securities ofissuers tied economically to emerging markets, which entailsall of the risks of investing in securities of non-U.S. issuersdetailed below under “Non-U.S. Securities Risk” to aheightened degree. These heightened risks include: (i) greater

risks of expropriation, confiscatory taxation, nationalization,and less social, political and economic stability; (ii) the smallersize of the markets for such securities and a lower volume oftrading, resulting in lack of liquidity and in price volatility;(iii) greater fluctuations in currency exchange rates; and(iv) certain national policies that may restrict the Fund’sinvestment opportunities, including restrictions on investingin issuers or industries deemed sensitive to relevant nationalinterests.



Fixed Income Market Risk is the risk that fixed incomemarkets may, in response to governmental intervention,economic or market developments (including potentially areduction in the number of broker-dealers willing to engagein market-making activity), or other factors, experienceperiods of increased volatility and reduced liquidity. Duringthose periods, the Fund may experience increased levels ofshareholder redemptions, and may have to sell securities attimes when it would otherwise not do so, and at unfavorableprices. Fixed income securities may be difficult to valueduring such periods.

Foreign Financial Institutions Risk is the risk associated withobligations of foreign banks, such as the possibility that theirliquidity could be impaired, that their obligations may be lessmarketable than comparable obligations of United Statesbanks, that foreign deposits may be seized or nationalized,and that foreign governmental restrictions may be adoptedwhich might adversely affect the payment of principal andinterest on those obligations. These risks are in addition toother risks of foreign investments as described under“Non-U.S. Securities Risk” below. Foreign banks are notgenerally subject to examination by any United StatesGovernment agency or instrumentality.


32


High Yield Debt Securities Risk is the risk that belowinvestment grade securities or unrated securities of similarcredit quality (commonly known as “high yield securities” or“junk securities”) are more likely to default than higher ratedsecurities. The Fund’s ability to invest in high-yield debtsecurities generally subjects the Fund to greater risk thansecurities with higher ratings. Such securities are regarded bythe rating organizations as predominantly speculative withrespect to capacity to pay interest and repay principal inaccordance with the terms of the obligation. The marketvalue of these securities is generally more sensitive tocorporate developments and economic conditions and can bevolatile. Market conditions can diminish liquidity and makeaccurate valuations difficult to obtain.

Illiquid and Restricted Securities Risk is the risk that theAdviser may not be able to sell illiquid or restricted securities,such as securities issued pursuant to Rule 144A of theSecurities Act of 1933, at the price it would like or may haveto sell them at a loss. Securities of non-U.S. issuers, andemerging or developing markets securities in particular, aresubject to greater liquidity risk.


Leverage Risk is the risk associated with the use of leveragefor investment purposes to create opportunities for greatertotal returns. Any investment income or gains earned withrespect to the amounts borrowed that are in excess of theinterest that is due on the borrowing will augment the Fund’sincome. Conversely, if the investment performance withrespect to the amounts borrowed fails to cover the intereston such borrowings, the value of the Fund’s shares maydecrease more quickly than would otherwise be the case.Interest payments and fees incurred in connection with suchborrowings will reduce the amount of net income availablefor payment to Fund shareholders.

Limited Information Risk is the risk associated with the factthat the types of Senior Loans in which the Fund will investhistorically may not have been rated by a NRSRO, have notbeen registered with the SEC or any state securitiescommission, and have not been listed on any national

securities exchange. Although the Fund will generally haveaccess to financial and other information made available tothe lenders in connection with Senior Loans, the amount ofpublic information available with respect to Senior Loans willgenerally be less extensive than that available for rated,registered or exchange-listed securities. As a result, theperformance of the Fund and its ability to meet itsinvestment objective is more dependent on the analyticalability of the Adviser than would be the case for aninvestment company that invests primarily in rated,registered or exchange-listed securities.




Portfolio Turnover Risk is the risk that the Fund’s highportfolio turnover will increase the Fund’s transaction costsand may result in increased realization of net short-term


33

capital gains (which are taxable to shareholders as ordinaryincome when distributed to them), higher taxabledistributions and lower after-tax performance.



Senior Loans Risk is the risk associated with Senior Loans,which are typically below investment grade and areconsidered speculative because of the credit risk of theirissuers. As with any debt instrument, Senior Loans aregenerally subject to the risk of price declines and to increasesin interest rates, particularly long-term rates. Senior loans arealso subject to the risk that, as interest rates rise, the cost ofborrowing increases, which may increase the risk of default.In addition, the interest rates of floating rate loans typicallyonly adjust to changes in short-term interest rates; long-terminterest rates can vary dramatically from short-term interestrates. Therefore, Senior Loans may not mitigate price declinesin a rising long-term interest rate environment. Thesecondary market for loans is generally less liquid than themarket for higher grade debt. Less liquidity in the secondarytrading market could adversely affect the price at which theFund could sell a loan, and could adversely affect the NAV ofthe Fund’s shares. The volume and frequency of secondarymarket trading in such loans varies significantly over time andamong loans. Although Senior Loans in which the Fund willinvest will often be secured by collateral, there can be noassurance that liquidation of such collateral would satisfy theborrower’s obligation in the event of a default or that suchcollateral could be readily liquidated.


Sovereign Debt Risk is the risk that a governmental entitymay delay or refuse to pay interest or repay principal on itssovereign debt. For example, this may occur due to cash flowproblems, insufficient foreign currency reserves, politicalconsiderations, the relative size of the governmental entity’sdebt position in relation to an economy or failure to instituterequired economic reforms.

Tax Status Risk is the risk that the Fund’s ability to invest incertain commodity-related instruments, including in certaincommodity-linked ETFs and ETNs, is or may be limited by theFund’s intention to qualify as a RIC under the Code, and, if theFund does not appropriately limit such investments or if suchinvestments (or the income earned on such investments)were to be recharacterized for U.S. tax purposes, the Fundcould fail to qualify as a RIC under one or more of thequalification tests applicable to RICs under the Code. If theFund were to fail to qualify as a RIC in any taxable year, andwere ineligible to or otherwise did not cure such failure, theFund would be subject to tax on its taxable income atcorporate rates, and all distributions from earnings andprofits, including any distributions of net long-term capitalgains, would be taxable to shareholders as dividend income.See “Taxation” below.

Underlying Funds Risk is the risk associated with investing inUnderlying Funds. The Fund may invest in Underlying Fundssubject to the limitations set forth in the 1940 Act. UnderlyingFunds typically incur fees that are separate from those feesincurred directly by the Fund; therefore, the Fund’s purchaseof Underlying Funds’ securities results in the layering ofexpenses. The Fund’s shareholders indirectly bear aproportionate share of the operating expenses of UnderlyingFunds (including advisory fees) in addition to bearing theFund’s expenses.

Valuation Risk is the risk that the portfolio securities thathave been valued using techniques other than marketquotations, may have valuations that are different from thoseproduced using other methodologies, and that the securitymay be sold at a discount to the value established by theFund.


Performance

The bar chart and the Average Annual Total Returns tablebelow provide some indication of the risks of investing in theFund by showing changes in the performance of the Fund’s

34

Class A Shares for each full calendar year and by showing howthe Fund’s average annual returns compare with the returnsof a broad-based securities market index or indices. As withall mutual funds, the Fund’s past performance (before andafter taxes) does not predict how the Fund will perform in thefuture. The Fund’s performance reflects applicable feewaivers and/or expense limitations in effect during theperiods presented, without which returns would have beenlower. Both the chart and the table assume the reinvestmentof dividends and distributions. The bar chart does not reflectthe deduction of applicable sales charges for Class A Shares. Ifsales charges had been reflected, the returns for Class AShares would be less than those shown below. The returns ofClass C and Class Y Shares would have substantially similarreturns as Class A because the classes are invested in thesame portfolio of securities and the annual returns woulddiffer only to the extent that the classes have differentexpenses. Updated information on the Fund’s performancecan be obtained by visiting http://highlandfunds.com/highland-funds-2/ or by calling 1-877-665-1287.

The performance information shown for the Fund’s Class Ashares includes historical performance of the Fund for theperiods prior to April 9, 2013. As of April 9, 2013, the Fundchanged its name from “Highland Core America Equity Fund”to “Highland Global Allocation Fund,” adopted a revisedinvestment strategy, and began comparing its performance tothe FTSE All-World Index, in addition to the S&P 500® Index.Prior to April 9, 2013 (and for the periods show below otherthan periods beginning after April 9, 2013), the Fund focusedon a U.S. equity strategy. The performance information forthe Fund’s Class A shares in the bar chart for periods prior toApril 9, 2013 does not reflect the impact of the sales charges(loads) that were previously in effect.



−40

−20

0

20

40

%

17.31

2006

9.65

2007

−33.22

2008

25.48

2009

11.17

2010

−1.45

2011

13.21

2012

29.64

2013

15.25

2014

−26.51

2015




Inception



Return After Taxes onDistributions -32.24% 0.06% 1.22% 5.02%

Return After Taxes onDistributions and Sale of FundShares -17.16% 1.54% 2.28% 5.32%

Return Before Taxes




FTSE All-World Index (reflects nodeduction for fees, expenses ortaxes) (inception 12/31/93) -1.65% 6.66% 5.50% 7.17%




35


Highland Capital Management Fund Advisors, L.P. serves asthe investment adviser to the Fund. The primary individualportfolio manager for the Fund is:


James Dondero 3 years Portfolio Manager















• By writing to Highland Funds II — Highland GlobalAllocation Fund, PO Box 8656, Boston, Massachusetts02266-8656, or



Tax Information




36

Highland Total Return Fund


The investment objective of Highland Total Return Fund(“Highland Total Return Fund” or the “Fund”) is to seekmaximum total return (total return includes both income andcapital appreciation).





















Expense Example



Class A $710 $996 $1,302 $2,169

Class C

if you do not sell your shares $219 $676 $1,159 $2,493

if you sold all your shares at the endof the period $319 $676 $1,159 $2,493

Class Y $118 $368 $ 638 $1,409

37

Portfolio Turnover

The Fund pays transaction costs, such as commissions, whenit buys and sells securities (or “turns over” its portfolio). Ahigher portfolio turnover rate may indicate higher transactioncosts and may result in higher taxes when Fund shares areheld in a taxable account. These costs, which are notreflected in Annual Fund Operating Expenses or in theExpense Example, affect the Fund’s performance. During themost recent fiscal year, the Fund’s portfolio turnover rate was175% of the average value of its portfolio. During the last twofiscal years, the Fund has experienced high portfolio turnoverrates.


The Fund seeks to achieve its investment objective byinvesting primarily in a combination of U.S. and foreign(non-U.S.) equity and debt securities and cash. The Fund’sasset allocation process utilizes information from the Fund’ssub-adviser, First Foundation Advisors (“FFA” or the“Sub-Adviser”), to diversify holdings across these asset classesand to adjust the asset class weightings based on market andeconomic conditions. The Fund may also use various types ofderivatives (such as options, futures and options on futures)to gain exposure to certain types of securities as analternative to investing directly in such securities, to managecurrency exposure and interest rate exposure (also known asduration), and to manage exposure to credit quality. TheFund may hedge a portion of its foreign currency risk but isnot required to do so.

Highland Capital Management Fund Advisors, L.P. (“HCMFA”or the “Adviser”), the Fund’s investment adviser, hasallocated all the assets of the Fund to be managed/advised byFFA. The Fund invests in equity securities, such as commonand preferred stocks, principally for their capital appreciationpotential and investment-grade debt securities principally fortheir income potential. The Fund invests in cash principally forthe preservation of capital, income potential or maintenanceof liquidity. Within each asset class, the portfolio managersprimarily use active security selection to choose securitiesbased on the perceived merits of individual issuers, althoughportfolio managers of different asset classes or strategiesmay place different emphasis on the various characteristics ofa company (as identified below) during the selection process.

The portfolio managers seek to identify equity securities ofcompanies with characteristics such as:

• strong earnings growth

• favorable valuation

• a presence in successful industries


• large or medium capitalization (meaning a marketcapitalization of $2 billion or more)

The portfolio managers seek to identify debt securities withcharacteristics such as:



• reasonable credit quality (typically investment gradedebt securities, such as mortgage-backed securities,corporate bonds, U.S. Government securities andmoney market instruments)


The portion of the Fund invested in debt securities normallyhas a weighted average maturity of approximately five to tenyears, but is subject to no limitation with respect to thematurities of the instruments in which it may invest.

The Fund may also invest to a lesser extent in high yieldsecurities (also known as “junk securities”), equity and debtsecurities of companies that are located in emerging marketcountries, and exchange-traded funds (“ETFs”) to gainexposure to securities including those of U.S. issuers that areprincipally engaged in or related to the real estate industryand to securities in emerging markets.

Principal Risks



Allocation Risk is the risk that the Sub-Adviser may notallocate assets of the Fund among strategies or asset classesin an optimal manner, if, among other reasons, it does notcorrectly assess the attractiveness of a strategy or asset class.

Credit Risk is the risk that the issuers of certain securities orthe counterparties of a derivatives contract or repurchasecontract might be unable or unwilling (or perceived as beingunable or unwilling) to make interest and/or principal

38

payments when due, or to otherwise honor its obligations.Debt securities are subject to the risk of non-payment ofscheduled interest and/or principal. Non-payment wouldresult in a reduction of income to the Fund, a reduction in thevalue of the obligation experiencing non-payment and apotential decrease in the net asset value (“NAV”) of the Fund.








High Yield Debt Securities Risk is the risk that belowinvestment grade securities or unrated securities of similarcredit quality (commonly known as “high yield securities” or“junk securities”) are more likely to default than higher ratedsecurities. The Fund’s ability to invest in high-yield debtsecurities generally subjects the Fund to greater risk thansecurities with higher ratings. Such securities are regarded bythe rating organizations as predominantly speculative withrespect to capacity to pay interest and repay principal inaccordance with the terms of the obligation. The marketvalue of these securities is generally more sensitive tocorporate developments and economic conditions and can bevolatile. Market conditions can diminish liquidity and makeaccurate valuations difficult to obtain.

Illiquid and Restricted Securities Risk is the risk that theAdviser may not be able to sell illiquid or restricted securities,such as securities issued pursuant to Rule 144A of theSecurities Act of 1933, at the price it would like or may haveto sell them at a loss. Securities of non-U.S. issuers, andemerging or developing markets securities in particular, aresubject to greater liquidity risk.


Mid-Cap Company Risk is the risk that investing in securitiesof mid-cap companies may entail greater risks thaninvestments in larger, more established companies. Mid-capcompanies tend to have more narrow product lines, more


39

limited financial resources and a more limited trading marketfor their stocks, as compared with larger companies. As aresult, their stock prices may decline significantly as marketconditions change.

Mortgage-Backed Securities Risk is the risk of investing inmortgage-backed securities, and includes interest rate risk,liquidity risk and credit risk, which may be heightened inconnection with investments in loans to “subprime”borrowers. Certain mortgage-backed securities are alsosubject to prepayment risk. Mortgage-backed securities,because they are backed by mortgage loans, are also subjectto risks related to real estate, and securities backed byprivate-issued mortgages may experience higher rates ofdefault on the underlying mortgages than securities backedby government-issued mortgages. The Fund could lose moneyif there are defaults on the mortgage loans underlying thesesecurities.





Real Estate Securities Risk is the risk that an investment inreal estate securities will be closely linked to the performanceof the real estate markets. Property values or income may falldue to increasing vacancies or declining rents resulting fromeconomic, legal, cultural or technological developments.

REIT-Specific Risk includes the risk that an investment in thestocks of real estate investment trusts (“REITs”) will declinebecause of adverse developments affecting the real estateindustry and real property values. An investment in a REITalso may be adversely affected or lost if the REIT fails toqualify as a REIT for tax purposes.




Performance

The bar chart and the Average Annual Total Returns tablebelow provide some indication of the risks of investing in theFund by showing changes in the performance of the Fund’sClass A Shares for each full calendar year and by showing howthe Fund’s average annual returns compare with the returnsof a broad-based securities market index or indices. As withall mutual funds, the Fund’s past performance (before and

40

after taxes) does not predict how the Fund will perform in thefuture. The Fund’s performance reflects applicable feewaivers and/or expense limitations in effect during theperiods presented, without which returns would have beenlower. Both the chart and the table assume the reinvestmentof dividends and distributions. The bar chart does not reflectthe deduction of applicable sales charges for Class A Shares. Ifsales charges had been reflected, the returns for Class AShares would be less than those shown below. The returns ofClass C and Class Y Shares would have substantially similarreturns as Class A because the classes are invested in thesame portfolio of securities and the annual returns woulddiffer only to the extent that the classes have differentexpenses. Updated information on the Fund’s performancecan be obtained by visiting http://highlandfunds.com/highland-funds-2/ or by calling 1-877-665-1287.



−40

−20

0

20

40

%

13.89

2006

11.56

2007

−30.64

2008

21.14

2009

9.60

2010

−3.45

2011

11.04

2012

15.69

2013

3.84

2014

−0.75

2015




Inception





Return Before Taxes




Barclays Capital U.S. Aggregate BondIndex (reflects no deduction forfees, expenses or taxes) (inception2/28/93) 0.55% 3.25% 4.51% 5.56%




41





Jim Garrison Less than 2 years Portfolio Manager

Eric Speron Less than 2 years Portfolio Manager















• By writing to Highland Funds II — Highland Total ReturnFund, PO Box 8656, Boston, Massachusetts 02266-8656,or



Tax Information




42

Additional Information About Principal and OtherInvestment Strategies

The principal investment objective of the Highland EnergyMLP Fund is not fundamental and can be changed withoutshareholder approval.

Any Fund (except Highland Tax-Exempt Fund) with an 80%investment policy, as stated in the Summary Section above,may change that policy upon 60 days’ notice to shareholders.Highland Tax-Exempt Fund’s policy that at least 80% of itsincome be exempt from both regular federal income taxesand the federal alternative minimum tax may only bechanged with shareholder approval.

In addition to each Fund’s principal investment strategiesdescribed earlier in this Prospectus, a Fund is permitted touse other securities, non-principal investment strategies andtechniques in pursuit of its investment objective, as describedbelow and in the Funds’ Statement of Additional Information(“SAI”). No Fund is under any obligation to use any of thesetechniques or strategies at any given time or under anyparticular economic condition. Certain instruments andinvestment strategies may expose the Funds to other risksand considerations, which, with respect to principal risks, arediscussed in this Prospectus and, with respect to non-principal risks, are discussed in the Funds’ SAI. Any referenceto investments made by a Fund includes those that may bemade both directly by a Fund and indirectly by a Fund (e.g.,through derivatives and other pooled investment vehicles(including ETFs)).

Cash and Temporary Defensive Positions: Under normalcircumstances, each Fund may hold cash: (i) pendinginvestment, (ii) for investment purposes, (iii) for cashmanagement purposes, such as to meet redemptions or payoperating expenses, and (iv) during a Fund restructuring. AFund that invests in equity securities may equitize cash inorder to gain general equity market exposure with respect tosuch holdings of cash.

A Fund may from time to time take temporary defensivepositions when the portfolio manager believes that adversemarket, economic, political or other conditions exist. In thesecircumstances, the portfolio manager may (x) without limithold cash, or (y) restrict the securities markets in which aFund’s assets are invested by investing those assets insecurities markets deemed to be conservative in light of theFund’s investment objective and strategies.

Some Funds utilize cash as an asset class to hedge theportfolio and reduce volatility.

In addition, a Fund may hold cash under circumstances wherethe liquidation of the Fund has been approved by theTrustees, and, therefore, investments in accordance with theFund’s investment objective and policies would no longer beappropriate.

To the extent that a Fund holds cash, it may not achieve itsinvestment objective.

Exchange-Traded Funds: ETFs are listed on various exchangesand seek to provide investment results that correspondgenerally to the performance of specified market indices byholding a basket of the securities in the relevant index. TheFunds may invest in ETFs, including ETFs that are part of theHighland fund complex and advised by the Adviser or itsaffiliates (the “Underlying Highland ETFs”). The UnderlyingHighland ETFs include the Highland/iBoxx Senior Loan ETF,Highland HFR Event-Driven ETF, Highland HFR Global ETF andHighland HFR Equity Hedge ETF and may include additionalETFs advised by the Adviser or its affiliates in the future. Feesand expenses of investments in Underlying Highland ETFs willbe borne by shareholders of the investing funds, and theAdviser intends to voluntarily waive the portion of themanagement fee of the investing funds that is attributable toinvestments in Underlying Highland ETFs.

Leveraged Investment Techniques and Short Positions:Subject to applicable regulations, each Fund (other thanHighland Global Allocation Fund and Highland Energy MLPFund) may employ leverage for short-term purposes such asmeeting redemption requests, but not for investmentpurposes. Highland Global Allocation Fund and HighlandEnergy MLP Fund may borrow for investment purposes, tomeet redemption requests and for temporary, extraordinaryor emergency purposes. To the extent a Fund borrows moneyfrom a bank, it may be required to post cash and/or securitiesas collateral to cover the loan until such time as it is repaid.

A Fund that employs leverage or utilizes shorting in itsinvestment strategy may have a market exposure which canrange from 150% net long to 50% net short. Such extremeshowever, will be uncommon. Examples of leveragedinvestment techniques include: (i) borrowing up to one thirdof a Fund’s total assets to purchase additional securities forthe Fund; and (ii) buying ETFs, closed-end funds or mutualfunds (“Underlying Funds”) that are designed to have marketexposure that may be inverse to a particular index or that isseveral times the market exposure of a particular index. AFund may take a “short position” where the portfoliomanager believes that the price of a security or value of anindex will decline. A Fund may “short” a particular security byselling the security without owning it at the time of the sale,

More on Strategies, Risks and Disclosure of Portfolio Holdings


43

with the intent of later purchasing the security at a lowerprice. If the price of the security goes down, the shortposition will be profitable to the Fund. Conversely, if the pricerises the short position will be unprofitable to a Fund. A Fundmay also gain short exposure to an index by buying anUnderlying Fund that has an inverse exposure to the index.

Securities Lending: Each Fund may make secured loans of itsportfolio securities amounting to not more than 30% (5% inthe case of Highland Tax-Exempt Fund) of its total assets,thereby realizing additional income. As a matter of policy,securities loans are made to borrowers pursuant toagreements requiring that the loans be continuously securedby collateral in cash or securities of the U.S. government or itsagencies or instrumentalities, irrevocable letters of creditissued by a bank, or forms of collateral acceptable under theTrust’s securities lending agreement, which, at the time ofeach securities loan, must be an amount at least equal to102% or 105% of the current market value of the loanedsecurities, depending on the nature of the loaned securitiesand the collateral received, as set forth in the Trust’ssecurities lending agreement. Collateral must be marked tomarket daily by State Street Bank and Trust Company or otherparty as designated in the securities lending agreement andthe borrower will be required to provide additional collateralshould the market value of the loaned securities increase.

Additional Information About Principal Risks

Like all mutual funds, investing in the Funds involves riskfactors and special considerations. A Fund’s risk is definedprimarily by its principal investment strategies, which aredescribed earlier in the summary section of this Prospectus,along with descriptions of each Fund’s related risks.Investments in a Fund are not insured against loss ofprincipal. As with any mutual fund, there can be no assurancethat a Fund will achieve its investment objectives. Investing inshares of a Fund should not be considered a completeinvestment program. There is a risk that the share value ofthe Funds will fluctuate.

One of your most important investment considerationsshould be balancing risk and return. Different types ofinvestments tend to respond differently to shifts in theeconomic and financial environment. Diversifying yourinvestments among different asset classes — such as stocks,bonds and cash — and within an asset class — such as small-cap and large-cap stocks — may help you to manage risk andachieve the results you need to reach your financial goals.

Factors that may affect a Fund’s portfolio as a whole arecalled “principal risks” and are summarized in this section.This summary describes the nature of these principal risksand certain related risks, but is not intended to include everypotential risk. Unless otherwise specified, each principal risk

summarized below applies to each Fund. The Funds could besubject to additional risks because the types of investmentsthey make may change over time. The SAI, which isincorporated by reference into this Prospectus, includes moreinformation about the Funds and their investments. EachFund is not intended to be a complete investment program.

Allocation Risk: The Adviser or Sub-Adviser may not allocateassets of a Fund among strategies, asset classes orinvestment management styles in an optimal manner, if,among other reasons, it does not correctly assess theattractiveness of a strategy, asset class or investment style.

Asset-Backed Securities Risk: Because asset-backed securitiesoften are secured by the loans underlying the securities, aFund may lose money if there are defaults on the loansunderlying the securities. Such defaults have increased therisk for asset-backed securities that are secured by home-equity loans related to sub-prime mortgage loans, especiallyin a declining residential real estate market. Asset-backedsecurities also may be subject to more rapid repayment thantheir stated maturity dates indicate, due to changingeconomic conditions. To maintain its position in suchsecurities, a Fund may reinvest the reductions in principalamounts resulting from the prepayments. Yields on thosereinvested amounts are subject to prevailing market rates.Because prepayments of principal generally increase whenrates are falling, a Fund generally has to reinvest proceedsfrom prepayments at lower rates. Investments in asset-backed securities may also be subject to valuation risk.

Commodity Exposure Risk: Commodity prices can beextremely volatile and are affected by many factors, includingchanges in overall market movements, real or perceivedinflationary trends, commodity index volatility, changes ininterest rates or currency exchange rates, population growthand changing demographics, nationalization, expropriation,or other confiscation, international regulatory, political andeconomic developments (e.g., regime changes and changes ineconomic activity levels), and developments affecting aparticular industry or commodity, such as drought, floods orother weather conditions, livestock disease, tradeembargoes, competition from substitute products,transportation bottlenecks or shortages, fluctuations insupply and demand and tariffs. Certain of Highland GlobalAllocation Fund’s commodities-linked investments may belimited by tax considerations, including the Fund’s intentionto qualify annually as a RIC under the Code. See “Taxation”below.

Counterparty Risk: A Fund may engage in transactions insecurities and financial instruments that involvecounterparties. Counterparty risk is the risk that acounterparty (the other party to a transaction or anagreement or the party with whom a Fund executes


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transactions) to a transaction with a Fund may be unable orunwilling to make timely principal, interest or settlementpayments, or otherwise honor its obligations. In an attemptto limit the counterparty risk associated with suchtransactions, a Fund conducts business only with financialinstitutions judged by the Adviser or Sub-Adviser, asapplicable, to present acceptable credit risk. For example,repurchase agreements are loans of money or arrangementsunder which a Fund purchases securities and the seller agreesto repurchase the securities within a specific time and at aspecific price. The repurchase price is generally higher than aFund’s purchase price, with the difference being income to aFund. The counterparty’s obligations under the repurchaseagreement are collateralized with U.S. Treasury and/oragency obligations with a market value of not less than 100%of the obligations, valued daily. Collateral is held by a Fund’scustodian in a segregated, safekeeping account for thebenefit of a Fund. Repurchase agreements afford a Fund anopportunity to earn income at low risk on temporarilyavailable cash. If bankruptcy or insolvency proceedingscommence with respect to the seller of the securities beforerepurchase of the securities under a repurchase agreement, aFund may encounter delays and incur costs before being ableto sell the securities. Such a delay may involve loss of interestor a decline in price of the securities. If a court characterizesthe transaction as a loan and a Fund has not perfected asecurity interest in the securities, a Fund may be required toreturn the securities to the seller’s estate and be treated asan unsecured creditor of the seller. As an unsecured creditor,a Fund would be at risk of losing some or all of the principaland interest involved in the transaction.

Credit Risk: The value of debt securities owned by a Fundmay be affected by the ability of issuers to make principal andinterest payments and by the issuer’s or counterparty’s creditquality. If an issuer cannot meet its payment obligations or ifits credit rating is lowered, the value of its debt securities maydecline. Lower quality bonds are generally more sensitive tothese changes than higher quality bonds. Even withinsecurities considered investment grade, differences exist incredit quality and some investment-grade debt securities mayhave speculative characteristics. A security’s price may beadversely affected by the market’s perception of thesecurity’s credit quality level even if the issuer orcounterparty has suffered no degradation in its ability tohonor the obligation.

Credit risk varies depending upon whether the issuers of thesecurities are corporations or domestic or foreigngovernments or their sub-divisions or instrumentalities andwhether the particular note or other instrument held by aFund has a priority in payment of principal and interest. U.S.government securities are subject to varying degrees of creditrisk depending upon whether the securities are supported by

the full faith and credit of the United States, supported by theability to borrow from the U.S. Treasury, supported only bythe credit of the issuing U.S. government agency,instrumentality, or corporation, or otherwise supported bythe United States. Obligations issued by U.S. governmentagencies, authorities, instrumentalities or sponsoredenterprises, such as Government National MortgageAssociation, are backed by the full faith and credit of theU.S. Treasury, while obligations issued by others, such asFederal National Mortgage Association (“FNMA”), FederalHome Loan Mortgage Corporation (“Freddie Mac”) andFederal Home Loan Banks (“FHLBs”), are backed solely by theability of the entity to borrow from the U.S. Treasury or bythe entity’s own resources. No assurance can be given thatthe U.S. government would provide financial support to U.S.government agencies, authorities, instrumentalities orsponsored enterprises if it is not obligated to do so by law.

Currency Risk: A portion of each Fund’s assets may be quotedor denominated in non-U.S. currencies. These securities maybe adversely affected by fluctuations in the relative currencyexchange rates and by exchange control regulations. A Fund’sinvestment performance may be negatively affected by adevaluation of a currency in which the Fund’s investments arequoted or denominated. Further, a Fund’s investmentperformance may be significantly affected, either positively ornegatively, by currency exchange rates because the U.S.dollar value of securities quoted or denominated in anothercurrency will increase or decrease in response to changes inthe value of such currency in relation to the U.S. dollar.

Debt Securities Risk: The value of a debt security (and otherincome-producing securities, such as preferred stocks,convertible preferred stocks, equity-linked notes, andinterests in income-producing trusts) changes in response tointerest rate changes. In general, the value of a debt securityis likely to fall as interest rates rise. This risk is generallygreater for obligations with longer maturities or for debtsecurities that do not pay current interest (such as zero-coupon securities). Debt securities with floating interest ratescan be less sensitive to interest rate changes, although, to theextent a Fund’s income is based on short-term interest ratesthat fluctuate over short periods of time, income received bya Fund may decrease as a result of a decline in interest rates.In addition, the interest rates of floating rate loans typicallyonly adjust to changes in short-term interest rates; long-terminterest rates can vary dramatically from short-term interestrates. In response to an interest rate decline, debt securitiesthat provide the issuer with the right to call or redeem thesecurity prior to maturity may be called or redeemed. If adebt security is repaid more quickly than expected, a Fundmay not be able to reinvest the proceeds at the same interestrate, reducing the potential for gain. When interest rates


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increase or for other reasons, debt securities may be repaidmore slowly than expected. As a result, the maturity of thedebt instrument is extended, increasing the potential for loss.

The value of a debt security also depends on the issuer’scredit quality or ability to pay principal and interest whendue. The value of a debt security is likely to fall if an issuer orthe guarantor of a security is unable or unwilling (orperceived to be unable or unwilling) to make timely principaland/or interest payments or otherwise to honor itsobligations, or if the debt security’s rating is downgraded by acredit rating agency. The obligations of issuers (and obligorsof asset-backed securities) are subject to bankruptcy,insolvency, and other laws affecting the rights and remediesof creditors. The value of a debt security can also decline inresponse to other changes in market, economic, industry,political, and regulatory conditions that affect a particulartype of debt security or issuer or debt securities generally.The values of many debt securities may fall in response to ageneral increase in investor risk aversion or a decline in theconfidence of investors generally in the ability of issuers tomeet their obligations.

Leveraged loans are subject to the same risks typicallyassociated with debt securities. In addition, leveraged loans,which typically hold a senior position in the capital structureof a borrower, are subject to the risk that a court couldsubordinate such loans to presently existing or futureindebtedness or take other action detrimental to the holdersof leveraged loans. Leveraged loans are also especially subjectto the risk that the value of the collateral, if any, securing aloan may decline, be insufficient to meet the obligations ofthe borrower, or be difficult to liquidate.

Derivatives Risk: All of the Funds may invest in derivatives,which are financial contracts whose value depends on, or isderived from, the value of underlying assets, reference rates,or indices. Derivatives involve the risk that changes in theirvalue may not move as expected relative to the value of theassets, rates, or indices they are designed to track.Derivatives include futures, non-U.S. currency contracts, swapcontracts, warrants, and opinions contracts. Derivatives mayrelate to securities, interest rates, currencies or currencyexchange rates, inflation rates, commodities, and indices.

There are several risks associated with derivativestransactions. The use of derivatives involves risks that are inaddition to, and potentially greater than, the risks of investingdirectly in securities and other more traditional assets. Adecision as to whether, when and how to use derivativesinvolves the exercise of skill and judgment, and even a wellconceived transaction may be unsuccessful to some degreebecause of market behavior or unexpected events. The use ofderivative transactions may result in losses greater than ifthey had not been used, may require a Fund to sell or

purchase portfolio securities at inopportune times or forprices other than current market values, may limit theamount of appreciation a Fund can realize on an investmentor may cause a Fund to hold a security that it might otherwisesell. A Fund may enter into credit derivatives, such as creditdefault swaps and credit default index investments, includingloan credit default swaps and loan credit default index swaps.The use by a Fund of credit default swaps may have the effectof creating a short position in a security. These investmentscan create investment leverage and may create additionalinvestment risks that may subject a Fund to greater volatilitythan investments in more traditional securities. Derivativecontracts may expire worthless.

A Fund may invest in derivatives with a limited number ofcounterparties, and events affecting the creditworthiness ofany of those counterparties may have a pronounced effect onthe Fund. Derivatives risk is particularly acute inenvironments (like those of 2008) in which financial servicesfirms are exposed to systemic risks of the type evidenced bythe insolvency of Lehman Brothers and subsequent marketdisruptions. In addition, during those periods, a Fund mayhave a greater need for cash to provide collateral for largeswings in its mark-to-market obligations under the derivativesin which it has invested.

A Fund’s use of derivatives may not be effective or have thedesired results. Moreover, suitable derivatives will not beavailable in all circumstances. For example, the economiccosts of taking some derivative positions may be prohibitive,and if a counterparty or its affiliate is deemed to be anaffiliate of a Fund, the Funds will not be permitted to tradewith that counterparty. In addition, the Adviser may decidenot to use derivatives to hedge or otherwise reduce a Fund’srisk exposures, potentially resulting in losses for the Fund.

Swap contracts and other OTC derivatives are highlysusceptible to liquidity risk (see “Illiquid Securities Risk andRestricted Securities Risk”) and counterparty risk (see“Counterparty Risk”), and are subject to documentation risks.Because many derivatives have a leverage component (i.e., anotional value in excess of the assets needed to establishand/or maintain the derivative position), adverse changes inthe value or level of the underlying asset, rate or index mayresult in a loss substantially greater than the amount investedin the derivative itself. See “Leverage Risk” below.

Derivatives also present other risks described in this section,including securities market risk, illiquid and restrictedsecurities risk, currency risk, credit risk, and counterparty risk.Special tax considerations apply to the Funds’ use ofderivatives. See the “Taxation” section below.

As a general matter, when a Fund establishes certainderivative instrument positions, such as certain futures,options and forward contract positions, it will segregate liquid


46

assets (such as cash, U.S. Treasury bonds or commercialpaper) equivalent to the Fund’s outstanding obligations underthe contract or in connection with the position.

Under recently adopted rules and regulations, transactions insome types of swaps (including interest rate swaps and creditdefault swaps on North American and European indices) arerequired to be centrally cleared. In a transaction involvingthose swaps (“cleared derivatives”), a Fund’s counterparty isa clearing house, rather than a bank or broker. Since theFunds are not members of clearing houses and only membersof a clearing house (“clearing members”) can participatedirectly in the clearing house, the Funds will hold clearedderivatives through accounts at clearing members. In clearedderivatives transactions, the Funds will make payments(including margin payments) to and receive payments from aclearing house through their accounts at clearing members.Clearing members guarantee performance of their clients’obligations to the clearing house.

In many ways, cleared derivative arrangements are lessfavorable to mutual funds than bilateral arrangements. Forexample, the Funds may be required to provide more marginfor cleared derivatives transactions than for bilateralderivatives transactions. Also, in contrast to a bilateralderivatives transaction, following a period of notice to a Fund,a clearing member generally can require termination of anexisting cleared derivatives transaction at any time or anincrease in margin requirements above the margin that theclearing member required at the beginning of a transaction.Clearing houses also have broad rights to increase marginrequirements for existing transactions or to terminate thosetransactions at any time. Any increase in marginrequirements or termination of existing cleared derivativestransactions by the clearing member or the clearing housecould interfere with the ability of a Fund to pursue itsinvestment strategy. Further, any increase in marginrequirements by a clearing member could expose a Fund togreater credit risk to its clearing member, because margin forcleared derivatives transactions in excess of a clearinghouse’s margin requirements typically is held by the clearingmember. Also, a Fund is subject to risk if it enters into aderivatives transaction that is required to be cleared (or thatthe Adviser expects to be cleared), and no clearing member iswilling or able to clear the transaction on the Fund’s behalf. Inthose cases, the transaction might have to be terminated,and the Fund could lose some or all of the benefit of thetransaction, including loss of an increase in the value of thetransaction and/or loss of hedging protection. In addition, thedocumentation governing the relationship between the Fundsand clearing members is drafted by the clearing members andgenerally is less favorable to the Funds than typical bilateralderivatives documentation. For example, documentationrelating to cleared derivatives generally includes a one-way

indemnity by the Funds in favor of the clearing member forlosses the clearing member incurs as the Funds’ clearingmember and typically does not provide the Funds anyremedies if the clearing member defaults or becomesinsolvent. While futures contracts entail similar risks, the riskslikely are more pronounced for cleared swaps due to theirmore limited liquidity and market history.

Some types of cleared derivatives are required to be executedon an exchange or on a swap execution facility. A swapexecution facility is a trading platform where multiple marketparticipants can execute derivatives by accepting bids andoffers made by multiple other participants in the platform.While this execution requirement is designed to increasetransparency and liquidity in the cleared derivatives market,trading on a swap execution facility can create additionalcosts and risks for a Fund. For example, swap executionfacilities typically charge fees, and if a Fund executesderivatives on a swap execution facility through a brokerintermediary, the intermediary may impose fees as well. Also,a Fund may indemnify a swap execution facility, or a brokerintermediary who executes cleared derivatives on a swapexecution facility on the Fund’s behalf, against any losses orcosts that may be incurred as a result of the Fund’stransactions on the swap execution facility.

These and other new rules and regulations could, amongother things, further restrict a Fund’s ability to engage in, orincrease the cost to a Fund of, derivatives transactions, forexample, by making some types of derivatives no longeravailable to the Fund, increasing margin or capitalrequirements, or otherwise limiting liquidity or increasingtransaction costs. These regulations are new and evolving, sotheir potential impact on the Funds and the financial systemare not yet known. While the new regulations and centralclearing of some derivatives transactions are designed toreduce systemic risk (i.e., the risk that the interdependence oflarge derivatives dealers could cause them to suffer liquidity,solvency or other challenges simultaneously), there is noassurance that the new clearing mechanisms will achieve thatresult, and in the meantime, as noted above, central clearingand related requirements expose the Funds to new kinds ofrisks and costs.

Equity Securities Risk: The market prices of equity securitiesowned by a Fund may go up or down, sometimes rapidly orunpredictably. The value of a security may decline for anumber of reasons that may directly relate to the issuer, suchas management performance, fundamental changes to thebusiness, financial leverage, non-compliance with regulatoryrequirements and reduced demand for the issuer’s goods orservices. The values of equity securities also may decline dueto general market conditions that are not specifically relatedto a particular company, such as real or perceived adverseeconomic conditions, changes in the general outlook for


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corporate earnings, changes in interest or currency rates oradverse investor sentiment generally. Certain equitysecurities may decline in value even during periods when theprices of equity securities in general are rising, or may notperform as well as the market in general. In addition to theserisks, preferred stock and convertible securities are alsosubject to the risk that issuers will not make payments onsecurities held by a Fund, which could result in losses to theFund. The credit quality of preferred stock and convertiblesecurities held by a Fund may be lowered if an issuer’sfinancial condition changes, leading to greater volatility in theprice of the security. In addition, a company’s preferred stockgenerally pays dividends only after the company makesrequired payments to holders of its bonds and other debt. Forthis reason, the value of preferred stock will usually reactmore strongly than bonds and other debt to actual orperceived changes in the company’s financial condition orprospects. The market value of convertible securities alsotends to fall when prevailing interest rates rise.

Event-Driven Investing Risk: Event-driven strategies analyzevarious transactions in order to predict a likely outcome andcommit capital in a way that benefits from that outcome.Event-driven strategies are broad in scope and employ adiverse set of securities including common and preferredstock, debt securities, warrants, stubs and derivatives.Appreciation in the value of such securities may becontingent upon the occurrence of certain events, such as asuccessful reorganization or merger. If the expected eventdoes not occur, the Fund may incur a loss on the investments.There can be no assurance that any expected transaction willtake place. Certain transactions are dependent on one ormore factors to become effective, such as market conditions,which may lead to unexpected positive or negative changes ina company profile, shareholder approval, regulatory andvarious other third party constraints, changes in earnings orbusiness lines or shareholder activism as well as many otherfactors. No assurance can be given that the transactionsentered into will result in a profitable investment for the Fundand will not incur substantial losses.

Exchange-Traded Funds (“ETF”) Risk: The value of ETFs canbe expected to increase and decrease in value in proportionto increases and decreases in the indices that they aredesigned to track. The volatility of different index trackingstocks can be expected to vary in proportion to the volatilityof the particular index they track. ETFs are traded similarly tostocks of individual companies. Although an ETF is designedto provide investment performance corresponding to itsindex, it may not be able to exactly replicate the performanceof its index because of its operating expenses and otherfactors.

Exchange-Traded Notes Risk: A Fund may invest in exchangetraded notes (“ETNs”), which are debt securities with returnslinked to a particular index. ETNs are typically linked to theperformance of a commodities index that reflects thepotential return on unleveraged investments in futurescontracts of physical commodities, plus a specified rate ofinterest that could be earned on cash collateral. ETNs aresubject to credit risk. The value of an ETN may vary and maybe influenced by time to maturity, level of supply anddemand for the ETN, volatility and lack of liquidity inunderlying commodities markets or other relevant markets,changes in the applicable interest rates, changes in theissuer’s credit rating, and economic, legal, political, orgeographic events that affect the referenced commodity orother reference asset. ETNs are also subject to the risk ofbeing illiquid. When a Fund invests in ETNs it will bear itsproportionate share of any fees and expenses borne by theETN. There may be restrictions on a Fund’s right to redeem itsinvestment in an ETN, which is meant to be held untilmaturity. A Fund’s decision to sell its ETN holdings may belimited by the unavailability of a secondary market. The taxrules are uncertain with respect to the treatment of incomeor gains arising in respect of ETNs. A Fund’s investments incommodities-linked ETNs may be limited by these and othertax considerations, including, where applicable, the Fund’sintention to qualify annually as a RIC under the Code. See“Taxation” below.

Fixed Income Market Risk: Fixed income securities marketsmay, in response to governmental intervention, economic ormarket developments (including potentially a reduction in thenumber of broker-dealers willing to engage in market-makingactivity), or other factors, experience periods of increasedvolatility and reduced liquidity. During those periods, a Fundmay experience increased levels of shareholder redemptions,and may have to sell securities at times when it wouldotherwise not do so, and at unfavorable prices. Fixed incomesecurities may be difficult to value during such periods. Inrecent periods, governmental financial regulators, includingthe U.S. Federal Reserve, have taken steps to maintainhistorically low interest rates by purchasing bonds. Steps bythose regulators to curtail or “taper” such activities couldresult in the effects described above, and could have amaterial adverse effect on prices for fixed income securitiesand on the management of a Fund.

Focused Investment Risk: Funds whose investments arefocused in particular countries, regions, sectors, companies,or industries with high positive correlations to one another(e.g., different industries within broad sectors, such astechnology or financial services), or in securities from issuerswith high positive correlations to one another, are subject togreater overall risk than funds whose investments are more


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diversified. A Fund that focuses its investments in a particulartype of security or sector, or in securities of companies in aparticular industry, is vulnerable to events affecting thosesecurities, sectors, or companies. Securities, sectors, orcompanies that share common characteristics are oftensubject to similar business risks and regulatory burdens, andoften react similarly to specific economic, market, political orother developments.

Although Highland Premier Growth Equity Fund is adiversified Fund, it may invest in securities of a limitednumber of issuers in an effort to achieve a potentially greaterinvestment return than a fund that invests in a larger numberof issuers. A fund that invests a significant portion of its assetsin a relatively small number of securities may have more riskbecause changes in the value of a single security or theimpact of a single economic, political or regulatoryoccurrence may have a great adverse impact on the fund’snet asset value.

Foreign Financial Institutions Risk: Obligations of foreignbanks involve somewhat different investment risks thanthose affecting obligations of United States banks, includingthe possibilities that their liquidity could be impaired becauseof future political and economic developments, that theirobligations may be less marketable than comparableobligations of United States banks, that foreign deposits maybe seized or nationalized, and that foreign governmentalrestrictions such as exchange controls may be adopted whichmight adversely affect the payment of principal and intereston those obligations. These risks are in addition to other risksof foreign investments as described under “Non-U.S. Securities and Emerging and Developing Markets Risk”below. Foreign banks are not generally subject toexamination by any United States Government agency orinstrumentality; therefore, these institutions may pose ahigher money laundering risk than U.S. financial institutions.

Hedging Risk: There are several risks in connection with theuse by a Fund of futures contracts and related options as ahedging device. One risk arises because of the imperfectcorrelation between movements in the prices of the futurescontracts and options and movements in the underlyingsecurities or index or movements in the prices of a Fund’ssecurities which are the subject of a hedge. The Adviser orSub-Adviser, as applicable, will, however, attempt to reducethis risk by purchasing and selling, to the extent possible,futures contracts and related options on securities andindices the movements of which will, in its judgment,correlate closely with movements in the prices of theunderlying securities or index and a Fund’s portfolio securitiessought to be hedged. Successful use of futures contracts andoptions by a Fund for hedging purposes is also subject to theAdviser’s or Sub-Adviser’s, as applicable, ability to predictcorrectly movements in the direction of the market. It is

possible that, where a Fund has purchased puts on futurescontracts to hedge its portfolio against a decline in themarket, the securities or index on which the puts arepurchased may increase in value and the value of securitiesheld in the portfolio may decline. If this occurred, the Fundwould lose money on the puts and also experience a declinein the value of its portfolio securities. In addition, the pricesof futures, for a number of reasons, may not correlateperfectly with movements in the underlying securities orindex due to certain market distortions. First, all participantsin the futures market are subject to margin depositrequirements. Such requirements may cause investors toclose futures contracts through offsetting transactions whichcould distort the normal relationship between the underlyingsecurity or index and futures markets. Second, the marginrequirements in the futures markets are less onerous thanmargin requirements in the securities markets in general, andas a result the futures markets may attract more speculatorsthan the securities markets do. Increased participation byspeculators in the futures markets may also cause temporaryprice distortions. Due to the possibility of price distortion,even a correct forecast of general market trends by theAdviser or Sub-Adviser, as applicable, still may not result in asuccessful hedging transaction over a very short time period.In addition, to maintain margin requirements, a Fund mayhave to sell portfolio securities at disadvantageous prices ortimes because it may not be possible to liquidate a position ata reasonable price. The earmarking of such assets also willhave the effect of limiting a Fund’s ability otherwise to investthose assets. Special tax considerations apply to a Fund’shedging transactions. See the “Taxation” section below.

High Yield Debt Securities Risk: Below investment gradesecurities (also known as “high-yield securities” or “junksecurities”) may be fixed or variable rate obligations and arerated below investment grade (Ba/BB or lower) by anationally recognized statistical rating organization or areunrated but deemed by the Adviser or Sub-Adviser, asapplicable, to be of comparable quality. Such securitiesshould be considered speculative with respect to capacity topay interest and repay principal in accordance with the termsof the obligation. High-yield debt securities are frequentlyissued by corporations in the growth stage of theirdevelopment, but also may be issued by establishedcompanies. High-yield securities held by a Fund may includesecurities received as a result of a corporate reorganization orissued as part of a corporate takeover.

Below investment grade securities have greater credit andliquidity risk than more highly rated obligations and aregenerally unsecured and may be subordinate to otherobligations of the obligor. The lower rating of high-yieldsecurities reflects a greater possibility that adverse changes inthe financial condition of the issuer or in general economic


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conditions (including, for example, a substantial period ofrising interest rates or declining earnings) or both may impairthe ability of the issuer to make payment of principal andinterest. Many issuers of high-yield securities are highlyleveraged and their relatively high debt to equity ratios createincreased risks that their operations might not generatesufficient cash flow to service their obligations. Overalldeclines in the below investment grade bond market andother markets may adversely affect such issuers by inhibitingtheir ability to refinance their obligations at maturity.Investments in obligations of issuers that are generallytrading at significantly higher yields than had been historicallytypical of the applicable issuer’s obligations may include debtobligations that have a heightened probability of being incovenant or payment default in the future. Such investmentsgenerally are considered speculative. The repayment ofdefaulted obligations is subject to significant uncertainties.Defaulted obligations might be repaid only after lengthyworkout or bankruptcy proceedings, during which the issuermight not make any interest or other payments. Typicallysuch workout or bankruptcy proceedings result in only partialrecovery of cash payments or an exchange of the defaultedsecurity for other debt or equity securities of the issuer or itsaffiliates, which may in turn be illiquid or speculative. High-yield securities will be subject to certain additional risks tothe extent that such obligations may be unsecured andsubordinated to substantial amounts of senior indebtedness,all or a significant portion of which may be secured.Moreover, such obligations may not be protected by financialcovenants or limitations upon additional indebtedness andare unlikely to be secured by collateral. See “Taxation” belowand “Income Tax Considerations” in the SAI for a discussion ofspecial tax consequences associated with certain belowinvestment grade securities.

Illiquid and Restricted Securities Risk: Illiquid investmentsmay be difficult to resell at approximately the price they arevalued in the ordinary course of business within seven days.When investments cannot be sold readily at the desired timeor price, a Fund may have to accept a much lower price, maynot be able to sell the investment at all or may be forced toforego other investment opportunities, all of which mayadversely impact a Fund’s returns. Illiquid investments alsomay be subject to valuation risk. Restricted securities(including Rule 144A securities) may be subject to legalrestraints on resale and, therefore, are typically less liquidthan other securities. The prices received from sellingrestricted securities in privately negotiated transactions maybe less than those originally paid by a Fund. Investors inrestricted securities may not benefit from the same investorprotections as publicly traded securities.

Industry Concentration Risk: The performance of a Fund thatmay invest a significant portion of its assets in a particularsector or industry may be closely tied to the performance ofcompanies in a limited number of sectors or industries.Companies in a single sector often share commoncharacteristics, are faced with the same obstacles, issues andregulatory burdens and their securities may react similarly toadverse market conditions. To the extent that a Fundconcentrates its investment in particular issuers, countries,geographic regions, industries or sectors, the Fund may besubject to greater risks of adverse developments in suchareas of focus than a fund that invests in a wider variety ofissuers, countries, geographic regions, industries, sectors orinvestments. The price movements of investments in aparticular sector or industry may be more volatile than theprice movements of more broadly diversified investments.

Because Highland Energy MLP Fund normally invests at least80% of the value of its assets in MLP investments, the Fund’sperformance largely depends on the overall condition ofthese industries and the Fund is susceptible to economic,political and regulatory risks or other occurrences associatedwith these industries. MLP investments may be adverselyaffected by foreign government, federal or state regulationson energy production, distribution and sale. Stock prices ofcompanies in energy-related industries are also affected bysupply and demand both for their specific product or serviceand for energy products in general.

Industry-Specific Risk (Highland Energy MLP Fund only):Energy companies are subject to risks specific to the industrythey serve. Risks inherent in the energy business of thesetypes of MLPs include the following:

• MLPs may be directly affected by energy commodityprices. The volatility of commodity prices can indirectlyaffect certain other MLPs due to the impact of prices onthe volume of commodities transported, processed,stored or distributed. The Fund seeks largely to invest inhigh quality MLPs that are able to mitigate or managedirect margin exposure to commodity price levels. TheMLP sector can be hurt by market perception that MLPs’performance and distributions are directly tied tocommodity prices.

• The profitability of MLPs may be materially impacted bythe volume of natural gas, oil or other energycommodities available for transporting, processing,storing or distributing. A significant decrease in theproduction of natural gas, oil, coal or other energycommodities, due to a decline in production fromexisting facilities, import supply disruption, depressed


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commodity prices or otherwise, would reduce revenueand operating income of MLPs and, therefore, theability of MLPs to make distributions to partners.

• A sustained decline in demand for crude oil, natural gasand refined petroleum products could adversely affectMLP revenues and cash flows. Factors that could lead toa decrease in market demand include a recession orother adverse economic conditions, an increase in themarket price of the underlying commodity, higher taxesor other regulatory actions that increase costs, or a shiftin consumer demand for such products. Demand mayalso be adversely impacted by consumer sentiment withrespect to global warming and by legislation intended topromote the use of alternative energy sources.

• A portion of any one MLP’s assets may be dedicated tonatural gas or oil reserves and other commodities thatnaturally deplete over time, which could have amaterially adverse impact on an MLP’s ability to makedistributions if the reserves are not replaced.

• Some MLPs are dependent on third parties to conducttheir exploration and production activities and thereforeshortages in crews or drilling rigs can adversely impactthese MLPs.

• MLPs employ a variety of means of increasing cash flow,including increasing utilization of existing facilities,expanding operations through new construction,expanding operations through acquisitions, or securingadditional long-term contracts. Thus, some MLPs maybe subject to new construction risk, acquisition risk orother risk factors arising from their specific businessstrategies. A significant slowdown in large energycompanies’ disposition of energy infrastructure assetsand other merger and acquisition activity in the energyMLP industry could reduce the growth rate of cash flowsreceived by the Fund.

• The profitability of MLPs could be adversely affected bychanges in the regulatory environment. Most MLPs’assets are heavily regulated by federal and stategovernments in diverse matters, such as the way inwhich certain MLP assets are constructed, maintainedand operated and the prices MLPs may charge for theirservices. Such regulation can change over time in scopeand intensity. Moreover, many state and federalenvironmental laws provide for civil as well asregulatory remediation, thus adding to the potentialexposure an MLP may face.

• Extreme weather patterns and environmental hazards,such as the BP oil spill in 2010, could result in significantvolatility in the supply and price of energy and powerand could adversely impact the value of the securities in

which a Fund invests. This volatility may createfluctuations in commodity prices and earnings ofcompanies in the energy infrastructure industry.

• A rising interest rate environment could adverselyimpact the performance of MLPs. Rising interest ratescould limit the capital appreciation of equity units ofMLPs as a result of the increased availability ofalternative investments at competitive yields with MLPs.Rising interest rates also may increase an MLP’s cost ofcapital. A higher cost of capital could limit growth fromacquisition/expansion projects and limit MLPdistribution growth rates.

• Since the September 11, 2001 attacks, theU.S. Government has issued public warnings indicatingthat energy assets, specifically those related to pipelineinfrastructure, production facilities and transmissionand distribution facilities, might be specific targets ofterrorist activity. The continued threat of terrorism andrelated military activity likely will increase volatility forprices in natural gas and oil and could affect the marketfor products of MLPs.

Interest Rate Risk:When interest rates decline, the value offixed rate securities already held by a Fund can be expectedto rise. Conversely, when interest rates rise, the value ofexisting fixed-rate portfolio securities can be expected todecline. To the extent a Fund invests in fixed-rate debtsecurities with longer maturities, the Fund is subject togreater interest rate risk than funds investing solely inshorter-term fixed-rate debt securities. In addition, theinterest rates of floating rate loans typically only adjust tochanges in short-term interest rates; long-term interest ratescan vary dramatically from short-term interest rates. In aperiod of rising interest rates, the higher cost of any leverageemployed by a Fund and/or increasing defaults by issuers ofhigh-yield securities would likely exacerbate any decline inthe Fund’s NAV. If an issuer of a debt security containing aredemption or call provision exercises either provision in adeclining interest rate market, the Fund would likely replacethe security with a security having a lower interest rate,which could result in a decreased return for shareholders.

Legislation Risk: To the extent that state, federal orinternational regulators impose additional requirements orrestrictions with respect to the MLPs, the availability of MLPinvestment for Highland Energy MLP Fund may be adverselyaffected.

In addition, to the extent that legislation or state or federalregulators impose additional requirements or restrictionswith respect to the ability of financial institutions to makeloans in connection with highly leveraged transactions, theavailability of Senior Loan interests for investment by a Fundmay be adversely affected. Such requirements or restrictions


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may reduce or eliminate sources of financing for affectedborrowers. Further, to the extent that legislation or federal orstate regulators require such institutions to dispose of debtsecurities relating to highly leveraged transactions or subjectsuch securities to increased regulatory scrutiny, such financialinstitutions may determine to sell debt securities in a mannerthat results in a price that, in the opinion of the Adviser orSub-Adviser, as applicable, is not indicative of fair value. Werea Fund to attempt to sell a securities at a time when afinancial institution was engaging in such a sale with respectto the securities, the price at which the Fund couldconsummate such a sale might be adversely affected.

Leverage Risk:When deemed appropriate by the Adviser,and subject to applicable regulations, each Fund may useleverage in its investment program, including the use ofborrowed funds and investments in certain types of options,such as puts, calls and warrants, which may be purchased fora fraction of the price of the underlying securities while givingthe purchaser full exposure to movement in the price ofthose underlying securities. While such strategies andtechniques increase the opportunity to achieve higher returnson the amounts invested, they also increase the risk of loss.To the extent a Fund purchases securities with borrowedfunds, its net assets will tend to increase or decrease at agreater rate than if borrowed funds are not used. The level ofinterest rates generally, and the rates at which such fundsmay be borrowed in particular, could affect the operatingresults of a Fund. If the interest expense on borrowings wereto exceed the net return on the portfolio securities purchasedwith borrowed funds, a Fund’s use of leverage would result ina lower rate of return than if the Fund were not leveraged.

If the amount of borrowings that a Fund may haveoutstanding at any one time is large in relation to its capital,fluctuations in the market value of a Fund’s portfolio will havedisproportionately large effects in relation to the Fund’scapital and the possibilities for profit and the risk of loss willtherefore be increased. Any investment gains made with theadditional monies borrowed will generally cause the NAV of aFund to rise more rapidly than would otherwise be the case.Conversely, if the investment performance of the investmentsacquired with borrowed money fails to cover their cost to theFund, the NAV of a Fund will generally decline faster thanwould otherwise be the case. If a Fund employs leverage, theAdviser will benefit because a Fund’s Average Daily ManagedAssets, as defined below, will increase with leverage and theAdviser is compensated based on a percentage of AverageDaily Managed Assets.

Under the terms of any credit facility, a Fund may be requiredto, among other things, pledge some or all of its assets, limitits ability to pay distributions in certain circumstances, incuradditional debts and engage in certain transactions. Such

agreements could limit a Fund’s ability to pursue itsinvestment strategies. The terms of any credit facility may bemore restrictive than those described.

Limited Information Risk: The types of Senior Loans in whichHighland Global Allocation Fund invests historically may nothave been rated by a nationally recognized statistical ratingorganization (“NRSRO”), have not been registered with theSEC or any state securities commission, and have not beenlisted on any national securities exchange. Although the Fundwill generally have access to financial and other informationmade available to the lenders in connection with SeniorLoans, the amount of public information available withrespect to Senior Loans will generally be less extensive thanthat available for rated, registered or exchange-listedsecurities. As a result, the performance of the Fund and itsability to meet its investment objective is more dependent onthe analytical ability of the Adviser than would be the case foran investment company that invests primarily in rated,registered or exchange-listed securities.

Management Risk: Each Fund is subject to management riskbecause it relies on the Adviser’s or Sub-Adviser’s, asapplicable, ability to achieve its investment objective. EachFund runs the risk that the Adviser’s or Sub-Adviser’s, asapplicable, investment techniques will fail to produce desiredresults and cause the Fund to incur significant losses. TheAdviser or Sub-Adviser, as applicable, also may fail to usederivatives effectively, choosing to hedge or not to hedgepositions at disadvantageous times. In addition, if one ormore key individuals leave, the Adviser or Sub-Adviser, asapplicable, may not be able to hire qualified replacements ormay require an extended time to do so. This situation couldprevent a Fund from achieving its investment objectives. TheFunds’ portfolio managers use quantitative analyses and/ormodels. Any imperfections or limitations in such analyses andmodels could affect the ability of the portfolio managers toimplement strategies. By necessity, these analyses andmodels make simplifying assumptions that limit their efficacy.Models that appear to explain prior market data can fail topredict future market events. Further, the data used inmodels may be inaccurate and/or it may not include the mostrecent information about a company or a security.

MLP Risk: Highland Energy MLP Fund may invest in MLPunits. An investment in MLP units involves some risks whichdiffer from Equity Securities Risk. Holders of MLP units havelimited control and voting rights on matters affecting thepartnership. Holders of units issued by a MLP are exposed toa remote possibility of liability for all of the obligations of thatMLP in the event that a court determines that the rights ofthe holders of MLP units to vote to remove or replace thegeneral partner of that MLP, to approve amendments to thatMLP’s partnership agreement, or to take other action underthe partnership agreement of that MLP would constitute


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“control” of the business of that MLP, or a court orgovernmental agency determines that the MLP is conductingbusiness in a state without complying with the partnershipstatute of that state. Holders of MLP units are also exposed tothe risk that they will be required to repay amounts to theMLP that are wrongfully distributed to them.

• MLP Common Units. MLP common units can be affectedby macro-economic and other factors affecting the stockmarket in general, expectations of interest rates,investor sentiment toward MLPs or the energy sector,changes in a particular issuer’s financial condition, orunfavorable or unanticipated poor performance of aparticular issuer (generally measured in terms ofdistributable cash flow). Prices of common units ofindividual MLPs also can be affected by fundamentalsunique to the partnership, including earnings power andcoverage ratios.

• MLP I-Shares. MLP I-Shares represent an ownershipinterest issued by an MLP affiliate, typically an LLC,which owns an interest in and manages the MLP. MLPI-Shares may be subject to illiquid securities risk becauseof their potentially relatively smaller size. I-Shares maytrade at a discount to their related MLP units, despitehaving an economic value equivalent to an MLP unit andan equal claim on the cash flows underlying theinvestment.

• General partner interests in MLPs are typically retainedby the original sponsors of an MLP, such as its founders,corporate partners and entities that sell assets to theMLP. The holders of a general partner interest can beliable in certain circumstances for amounts greater thanthe amount of the holder’s investment. General partnerinterests often confer direct board participation rightsin, and in many cases control over the operations of, theMLP. Conflicts of interest may arise between the generalpartners or managing member on the one hand, and thelimited partners or members on the other hand,including those arising from incentive distributionpayments or corporate opportunities.

MLP Tax Risk: Highland Energy MLP Fund’s ability to meet itsinvestment objective depends, in large measure, on the levelof dividends, distributions or income it receives from theMLPs in which it invests and on the MLPs’ continuedtreatment as partnerships for U.S. federal income taxpurposes. If a MLP does not meet current legal requirementsto maintain its partnership status, or if it is unable to do sobecause of tax or other law changes, it would be treated as acorporation for U.S. federal income tax purposes. In that case,the MLP would be obligated to pay U.S. federal income tax (aswell as state and local taxes) at the entity level on its taxableincome and distributions received by the Fund would be

taxable to the Fund as dividend income to the extent of theMLP’s current and accumulated earnings and profits forfederal tax purposes. In addition, any distributions that theFund receives from a MLP that were treated as dividends inthe hands of the Fund could materially affect the taxcharacter of the Fund’s distributions to shareholders. See“Distributions” and “Taxation” below. Moreover, in the caseof an MLP treated as a corporation for U.S. federal income taxpurposes, any items of loss or deduction in excess of suchMLP’s items of income or gain would not be treated asincurred directly by the Fund and would be permitted to beused only by such MLP. Therefore, in general, theclassification of a MLP as a corporation for U.S. federalincome tax purposes could adversely affect the Fund and itsshareholders, including by (i) reducing the amount of cashavailable for distribution by the MLP to the Fund and, in turn,for distribution by the Fund to the Fund’s shareholders and(ii) reducing the value of the Fund’s investment in any suchMLP and, in turn, the value of the Fund’s shares.

Mortgage-Backed Securities Risk:Mortgage-backedsecurities that are collateralized by a portfolio of mortgagesor mortgage-related securities depend on the payments ofprincipal and interest made by or through the underlyingassets, which may not be sufficient to meet the paymentobligations of the mortgage-backed securities. Prepaymentsof principal, which occur more frequently in falling interestrate conditions, may shorten the term and reduce the valueof these securities. The quality and value of the underlyingcollateral may decline, or default, which has become asignificant risk for collateral related to sub-prime mortgageloans, especially in a declining residential real estate market.Further, these securities generally are privately sold and maynot be readily marketable, particularly after a rapid decreasein value. Investments in mortgage-backed securities may alsobe subject to valuation risk.

Municipal Obligations Risk:Municipal obligations are backedby the entities that issue them and/or other revenue streams.Like other debt securities, prices of municipal debt securitiesare affected inversely by changes in interest rates and bychanges in the credit rating or financial condition of theissuer. Interest income derived from investments in municipalobligations typically is exempt from regular federal incometax but may be subject to state and local taxes. Capital gainsrecognized on the disposition of municipal obligations aregenerally subject to federal income tax. In addition, interestincome on certain municipal obligations may be subject tofederal corporate and individual alternative minimum taxes.See “Taxation” below. The municipal obligations market isvolatile and may be significantly affected by tax, legislative orpolitical changes. Some municipal obligations are insured,which is intended to guarantee the timely payment ofinterest and repayment of principal.


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Non-Diversification Risk: Due to the nature of the HighlandEnergy MLP Fund’s investment strategy and its non-diversified status (for purposes of the 1940 Act), the Fundmay invest a greater percentage of its assets in the securitiesof fewer issuers than a “diversified” fund, and accordinglymay be more vulnerable to changes in the value of thoseissuers’ securities. A Fund that invests in the securities of alimited number of issuers is particularly exposed to adversedevelopments affecting those issuers, and a decline in themarket value of a particular security held by the Fund is likelyto affect the Fund’s performance more than if the Fundinvested in the securities of a larger number of issuers.

Non-Payment Risk: Debt instruments are subject to the riskof non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to a Fund, areduction in the value of the security experiencing non-payment and a potential decrease in the NAV of a Fund.There can be no assurance that the liquidation of anycollateral would satisfy the borrower’s obligation in the eventof non-payment of scheduled interest or principal payments,or that such collateral could be readily liquidated. Moreover,as a practical matter, most borrowers cannot satisfy theirdebts by selling their assets. Borrowers pay their debts fromthe cash flow they generate. This is particularly the case forborrowers that are highly leveraged. If the borrower’s cashflow is insufficient to pay its debts as they come due, theborrower is far more likely to seek to restructure its debtsthan it is to sell off assets to pay its debts. Borrowers may tryto restructure their debts either by seeking protection fromcreditors under Chapter 11 of the U.S. Bankruptcy Code (the“Bankruptcy Code”) or negotiating a work out. In the event ofbankruptcy of a borrower, a Fund could experience delays orlimitations with respect to its ability to realize the benefits ofthe collateral securing a debt security. The agent generally isresponsible for determining that the lenders have obtained aperfected security interest in the collateral securing the debtsecurity. If a borrower files for protection from creditorsunder Chapter 11 of the Bankruptcy Code, the BankruptcyCode will impose an automatic stay that prohibits the agentfrom liquidating collateral. The agent may ask the bankruptcycourt to lift the stay. As a practical matter, the court isunlikely to lift the stay if it concludes that the borrower has achance to emerge from the reorganization proceedings andthe collateral is likely to hold most of its value. If the lendershave a perfected security interest, the debt security will betreated as a separate class in the reorganization proceedingsand will retain a priority interest in the collateral. Chapter 11reorganization plans typically are the product of negotiationamong the borrower and the various creditor classes.Successful negotiations may require the lenders to extend thetime for repayment, change the interest rate or accept some

consideration in the form of junior debt or equity securities. Awork out outside of bankruptcy may produce similarconcessions by senior lenders.

Non-U.S. Securities and Emerging and Developing MarketsRisk: Investing in non-U.S. securities involves additional andmore varied risks than investing in U.S. investments,including, but not limited to: fluctuations in foreign exchangerates (for non-U.S. securities not denominated in U.S. dollars);future foreign economic, financial, political and socialdevelopments; different legal systems; the possibleimposition of exchange controls or other foreigngovernmental laws or restrictions; lower trading volume;much greater price volatility and illiquidity of certain non-U.S.securities markets; different trading and settlement practices;less governmental supervision; changes in currency exchangerates; high and volatile rates of inflation; fluctuating interestrates; less publicly available information; and differentaccounting, auditing and financial recordkeeping standardsand requirements.

Because non-U.S. issuers are not generally subject to uniformaccounting, auditing and financial reporting standards andpractices comparable to those applicable to U.S. issuers,there may be less publicly available information about certainnon-U.S. issuers than about U.S. issuers. Evidence ofsecurities ownership may be uncertain in many foreigncountries. Securities of non-U.S. issuers are generally lessliquid than securities of comparable U.S. issuers. In certaincountries, there is less government supervision andregulation of stock exchanges, brokers and listed companiesthan in the U.S. In addition, with respect to certain foreigncountries, especially emerging market countries, there is thepossibility of expropriation or confiscatory taxation, politicalor social instability, war, terrorism, nationalization, limitationson the removal of funds or other assets or diplomaticdevelopments which could affect U.S. investments in thosecountries. Commissions (and other transaction costs) for non-U.S. securities are generally higher than those on U.S.securities. In addition, it is expected that the expenses forcustodian arrangements of a Fund’s non-U.S. securities willbe somewhat greater than the expenses for a fund thatinvests primarily in domestic securities. Certain investmentsin non-U.S. securities may also be subject to foreignwithholding and other taxes on interest, dividends, capitalgains or other income or proceeds. Those taxes will reduce aFund’s yield on any such securities.

The value of the non-U.S. securities held by a Fund that arenot U.S. dollar-denominated may be significantly affected bychanges in currency exchange rates. The U.S. dollar value of aforeign denominated non-U.S. security generally decreaseswhen the value of the U.S. dollar rises against the foreign


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currency in which the security is denominated and tends toincrease when the value of the U.S. dollar falls against suchcurrency. Currencies of certain countries may be volatile andtherefore may affect the value of securities denominated insuch currencies, which means that the Fund’s NAV or currentincome could decline as a result of changes in the exchangerates between foreign currencies and the U.S. dollar. Inaddition, the value of a Fund’s assets may be affected bylosses and other expenses incurred in converting betweenvarious currencies in order to purchase and sell foreigndenominated non-U.S. securities, and by currencyrestrictions, exchange control regulation, currencydevaluations and political and economic developments. Theforegoing risks often are heightened for investments insmaller, emerging capital markets. In addition, individualforeign economies may differ favorably or unfavorably fromthe U.S. economy in such respects as growth of grossdomestic product, rates of inflation, capital reinvestment,resources, self-sufficiency and balance of payments position.

As a result of these potential risks, the Adviser or Sub-Adviser,as applicable, may determine that, notwithstandingotherwise favorable investment criteria, it may not bepracticable or appropriate to invest in a particular country. AFund may invest in countries in which foreign investors,including the Adviser or Sub-Adviser, as applicable, have hadno or limited prior experience.

Investing in securities of issuers tied economically toemerging markets entails all of the risks of investing insecurities of non-U.S. issuers detailed above to a heighteneddegree. These heightened risks include: (i) greater risks ofexpropriation, confiscatory taxation, nationalization, and lesssocial, political and economic stability; (ii) the smaller size ofthe markets for such securities and a lower volume of trading,resulting in lack of liquidity and in price volatility; (iii) greaterfluctuations in currency exchange rates; and (iv) certainnational policies that may restrict a Fund’s investmentopportunities, including restrictions on investing in issuers orindustries deemed sensitive to relevant national interests.

In addition, the risks associated with investing in a narrowly-defined geographic area are generally more pronounced withrespect to investments in emerging market countries. Forexample, to the extent a Fund invests in companiesincorporated or doing significant business in China, whichmay be considered an emerging market, the risks associatedwith China-related investments may be more pronounced forsuch Fund. Funds may also be subject to Emerging MarketsRisk if they invest in derivatives or other securities orinstruments whose value or returns are related to the valueor returns of emerging market securities.

The Funds may invest in some emerging markets throughtrading structures or protocols that subject them to risks suchas those associated with illiquidity, custodying assets,different settlement and clearance procedures and assertinglegal title under a developing legal and regulatory regime to agreater degree than in developed markets or even in otheremerging markets. For example, the Funds may invest incertain eligible Chinese securities (“China A-shares”) listedand traded on the Shanghai Stock Exchange (“SSE”) throughthe Hong Kong—Shanghai Stock Connect (“Stock Connect”)program. Stock Connect is a securities trading and clearingprogram developed by the Hong Kong Stock Exchange(“SEHK”), SSE, Hong Kong Securities Clearing CompanyLimited and China Securities Depository and ClearingCorporation Limited for the establishment of mutual marketaccess between SEHK and SSE that commenced operations inNovember 2014. Stock Connect is subject to regulationspromulgated by regulatory authorities for both SSE and SEHKand further regulations or restrictions, such as tradingsuspensions, may adversely affect Stock Connect and thevalue of the China A-shares held by the Funds. There is noguarantee that the systems required to operate StockConnect will function properly or will continue to be adaptedto changes and developments in both markets or that bothexchanges will continue to support Stock Connect in thefuture. In the event that the relevant systems do not functionproperly, trading through the Stock Connect program couldbe disrupted. While Stock Connect is not subject to individualinvestment quotas, daily and aggregate investment quotasapply to the aggregate volume on Stock Connect, which mayrestrict or preclude a Fund’s ability to invest in Stock Connectsecurities or to enter into or exit trades on a timely basis. Inaddition, Stock Connect securities generally may not be sold,purchased or otherwise transferred other than through StockConnect in accordance with the program’s rules, which mayfurther subject the Funds to liquidity risk with respect toChina A-shares. A Fund may be restricted in its ability todispose of its China A-shares purchased through StockConnect in a timely manner. As an example, Stock Connect isgenerally available only on business days when both the SEHKand SSE are open. When either the SEHK or SSE is closed, aFund will not be able to trade Stock Connect securities at atime that may otherwise be beneficial to trade. Additionally,the SSE may be open at a time when the Stock Connectprogram is not trading, with the result that prices of ChinaA-shares may fluctuate at times when a Fund is unable to addto or exit its position. Because of the way in which China A-shares are held in Stock Connect, a Fund may not be able toexercise the rights of a shareholder and may be limited in itsability to pursue claims against the issuer of a security, andmay suffer losses in the event the depository of the SSE


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becomes insolvent. Only certain China A-shares are eligible tobe accessed through the Stock Connect program. Suchsecurities may lose their eligibility at any time, in which casethey presumably could be sold but could no longer bepurchased through the Stock Connect program. Because theStock Connect program is new, the actual effect on themarket for trading China A-shares with the introduction oflarge numbers of foreign investors is unknown. Investmentsin China A-shares may not be covered by the securitiesinvestor protection programs of either exchange and, withoutthe protection of such programs, will be subject to the risk ofdefault by the broker. The limitations and risks describedabove with respect to Stock Connect are specific to thatprogram; however, these and other risks may exist to varyingdegrees in connection with the Funds’ investments throughother trading structures, protocols and platforms in otheremerging markets.

Operational and Technology Risk: The Funds, their serviceproviders, and other market participants increasingly dependon complex information technology and communicationssystems to conduct business functions. These systems aresubject to a number of different threats or risks that couldadversely affect a Fund and its shareholders, despite theefforts of the Fund and its service providers to adopttechnologies, processes, and practices intended to mitigatethese risks.

For example, unauthorized third parties may attempt toimproperly access, modify, disrupt the operations of, orprevent access to these systems of a Fund, the Fund’s serviceproviders, counterparties, or other market participants ordata within them (a “cyber-attack”). Power orcommunications outages, acts of god, information technologyequipment malfunctions, operational errors, and inaccuracieswithin software or data processing systems may also disruptbusiness operations or impact critical data. Market eventsalso may trigger a volume of transactions that overloadscurrent information technology and communication systemsand processes, impacting the ability to conduct the Funds’operations.

Cyber-attacks, disruptions, or failures that affect the Funds’service providers or counterparties may adversely affect theFunds and their shareholders, including by causing losses forthe Funds or impairing Fund operations. For example, theFunds’ or their service providers’ assets or sensitive orconfidential information may be misappropriated, data maybe corrupted, and operations may be disrupted (e.g., cyber-attacks or operational failures may cause the release ofprivate shareholder information or confidential Fundinformation, interfere with the processing of shareholdertransactions, impact the ability to calculate a Fund’s NAV, andimpede trading). In addition, cyber-attacks, disruptions, orfailures may cause reputational damage and subject the

Funds or their service providers to regulatory fines, litigationcosts, penalties or financial losses, reimbursement or othercompensation costs, and/or additional compliance costs.While the Funds and their service providers may establishbusiness continuity and other plans and processes to addressthe possibility of cyber-attacks, disruptions, or failures, thereare inherent limitations in such plans and systems, includingthat they do not apply to third parties, such as other marketparticipants, as well as the possibility that certain risks havenot been identified or that unknown threats may emerge inthe future.

Similar types of operational and technology risks are alsopresent for issuers of the Funds’ investments, which couldhave material adverse consequences for such issuers, andmay cause the Funds’ investments to lose value. In addition,cyber-attacks involving a Fund counterparty could affect suchcounterparty’s ability to meet its obligations to the Fund,which may result in losses to the Fund and its shareholders.Furthermore, as a result of cyber-attacks, disruptions, orfailures, an exchange or market may close or issue tradinghalts on specific securities or the entire market, which mayresult in the Funds being, among other things, unable to buyor sell certain securities or financial instruments or unable toaccurately price its investments. The Funds cannot directlycontrol any cybersecurity plans and systems put in place byits service providers, Fund counterparties, issuers in whichthe Funds invest, or securities markets and exchanges.

Portfolio Turnover Risk: A high rate of portfolio turnover (i.e.,100% or more) will result in increased transaction costs for aFund in the form of increased dealer spreads and brokeragecommissions. Greater transaction costs may reduce Fundperformance. High portfolio turnover also may result inincreased realization of net short-term capital gains (whichare taxable to shareholders as ordinary income whendistributed to them), higher taxable distributions and lower aFund’s after-tax performance. A Fund’s annual portfolioturnover rate may vary greatly from year to year.

Prepayment Risk: Borrowers may pay back principal beforethe scheduled due date. Such prepayments may require aFund to replace a debt security with a lower-yielding security.During periods of falling interest rates, issuers of debtsecurities may repay higher rate securities before theirmaturity dates. This may cause a Fund to lose potential priceappreciation and to be forced to reinvest the unanticipatedproceeds at lower interest rates. This may adversely affectthe NAV of a Fund’s shares.

Real Estate Securities Risk: The securities of issuers that own,construct, manage or sell residential, commercial or industrialreal estate are subject to risks in addition to those of otherissuers. Such risks include: changes in real estate values andproperty taxes, overbuilding, variations in rental income,


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interest rates and changes in tax and regulatoryrequirements, such as those relating to the environment.Performance of a particular real estate security depends onthe structure, cash flow and management skill of theparticular company.

REIT-Specific Risk: Equity REITs may be affected by changes inthe value of the underlying property owned by the trusts,while mortgage REITs may be affected by the quality of anycredit extended. Further, equity and mortgage REITs aredependent upon management skill and are not diversified.Such trusts are also subject to heavy cash flow dependency,defaults by borrowers, self-liquidation, and the possibility offailing to qualify for special tax treatment under SubchapterM of the Code and to maintain an exemption under the 1940Act. For example, because Highland Total Return Fund mayacquire debt securities of issuers primarily engaged in orrelated to the real estate industry, it also could conceivablyown real estate directly as a result of a default on suchsecurities. Any rental income or income from the dispositionof such real estate could adversely affect its ability to retainits tax status, which would have adverse tax consequences onits shareholders. Finally, certain REITs may be self-liquidatingat the end of a specified term, and run the risk of liquidatingat an economically inopportune time.

Restrictions on Resale Risk: Senior Loans may not be readilymarketable and may be subject to restrictions on resale.Interests in Senior Loans generally are not listed on anynational securities exchange or automated quotation systemand no active market may exist for many of the Senior Loansin which a Fund may invest. To the extent that a secondarymarket may exist for certain of the Senior Loans in which aFund invests, such market may be subject to irregular tradingactivity, wide bid/ask spreads and extended trade settlementperiods.

Securities Market Risk: The value of securities owned by aFund may go up or down, sometimes rapidly orunpredictably, due to factors affecting particular companiesor the securities markets generally. The profitability of a Fundsubstantially depends upon the Adviser’s or Sub-Adviser’s, asapplicable, ability to correctly assess the future pricemovements of stocks, bonds, loans, options on stocks, andother securities and the movements of interest rates. TheAdviser or Sub-Adviser, as applicable, cannot guarantee thatit will be successful in accurately predicting price movements.

The market prices of equities may decline for reasons thatdirectly relate to the issuing company (such as poormanagement performance or reduced demand for its goodsor services), factors that affect a particular industry (such as adecline in demand, labor or raw material shortages, orincreased production costs) or general market conditions notspecifically related to a company or industry (such as real or

perceived adverse economic conditions, changes in thegeneral outlook for corporate earnings, changes in interest orcurrency rates, or adverse investor sentiment generally). Seealso “Debt Securities Risk” and “Fixed Income Market Risk”above.

As a result of the nature of a Fund’s investment activities, it ispossible that the Fund’s financial performance may fluctuatesubstantially from period to period. Additionally, at any pointin time an investment in a Fund may be worth less than theoriginal investment, even after taking into account thereinvestment of dividends and distributions.

Senior Loans Risk: Senior Loans may not be rated by a ratingagency, registered with the Securities and ExchangeCommission or any state securities commission or listed onany national securities exchange. Therefore, there may beless publicly available information about them than forregistered or exchange-listed securities. The risks associatedwith Senior Loans are similar to the risks of below investmentgrade securities. Moreover, any specific collateral used tosecure a loan may decline in value or lose all its value orbecome illiquid, which would adversely affect the loan’svalue. Economic and other events, whether real or perceived,can reduce the demand for certain Senior Loans or SeniorLoans generally, which may reduce market prices and causethe Fund’s NAV per share to fall. The frequency andmagnitude of such changes cannot be predicted.

The secondary market in which these investments are tradedis generally less liquid than the market for higher-grade debt.Less liquidity in the secondary trading market could adverselyaffect the price at which a Fund could sell a high yield SeniorLoan, and could adversely affect the NAV of the Fund’sshares. At times of less liquidity, it may be more difficult tovalue high yield Senior Loans because this valuation mayrequire more research, and elements of judgment may play agreater role in the valuation since there is less reliable,objective data available. Investments in Senior Loans andother securities may result in greater NAV fluctuation than ifa Fund did not make such investments. See “Taxation” belowfor a discussion of special tax consequences associated withany investment by a Fund in below investment gradesecurities.

As with any debt security, Senior Loans are generally subjectto the risk of price declines due to increases in interest rates,particularly long-term rates. Senior loans are also subject tothe risk that, as interest rates rise, the cost of borrowingincreases, which may increase the risk of default. In addition,the interest rates of floating rate loans typically only adjust tochanges in short-term interest rates; long-term interest ratescan vary dramatically from shot-term interest rates.Therefore, Senior Loans may not mitigate price declines in arising long-term interest rate environment. Declines in


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interest rates may increase prepayments of debt obligationsand require the Fund to invest assets at lower yields. Noactive trading market may exist for certain Senior Loans,which may impair the ability of a Fund to realize full value inthe event of the need to liquidate such assets. Adversemarket conditions may impair the liquidity of some activelytraded Senior Loans.

Although Senior Loans in which a Fund will invest will oftenbe secured by collateral, there can be no assurance thatliquidation of such collateral would satisfy the borrower’sobligation in the event of a default or that such collateralcould be readily liquidated. In the event of bankruptcy of aborrower, a Fund could experience delays or limitations in itsability to realize the benefits of any collateral securing aSenior Loan. A Fund may also invest in Senior Loans that arenot secured.

In addition to the risks typically associated with debtsecurities and loans generally, Senior Loans are also subjectto the risk that a court could subordinate a Senior Loan,which typically holds a senior position in the capital structureof a borrower, to presently existing or future indebtedness ortake other action detrimental to the holders of Senior Loans.

Short Sales Risk: Short sales by Highland Premier GrowthEquity Fund that are not made “against-the-box” (that iswhen the Fund has an offsetting long position in the assetthat is selling short) theoretically involve unlimited losspotential since the market price of securities sold short maycontinuously increase. When the Fund engages in a short saleon a security, it must borrow the security sold short anddeliver it to the counterparty. The Fund will ordinarily have topay a fee or premium to borrow particular securities and beobligated to repay the lender of the security any dividends orinterest that accrue on the security during the period of theloan. The amount of any gain from a short sale will bedecreased, and the amount of any loss increased, by theamount of the premium, dividends, interest or expenses theFund pays in connection with the short sale. Short sellingallows the Fund to profit from declines in market prices to theextent such decline exceeds the transaction costs and thecosts of borrowing the securities. However, since theborrowed securities must be replaced by purchases at marketprices in order to close out the short position, anyappreciation in the price of the borrowed securities wouldresult in a loss. Purchasing securities to close out the shortposition can itself cause the price of the securities to risefurther, thereby exacerbating the loss. The Fund may mitigatesuch losses by replacing the securities sold short before themarket price has increased significantly. Under adversemarket conditions, the Fund might have difficulty purchasingsecurities to meet its short sale delivery obligations, andmight have to sell portfolio securities to raise the capitalnecessary to meet its short sale obligations at a time when

fundamental investment considerations would not favor suchsales. See “Taxation” below for special tax considerationsassociated with engaging in short sales.

Sovereign Debt Risk: Sovereign debt instruments are subjectto the risk that a governmental entity may delay or refuse topay interest or repay principal on its sovereign debt, due, forexample, to cash flow problems, insufficient foreign currencyreserves, political considerations, the relative size of thegovernmental entity’s debt position in relation to theeconomy or the failure to put in place economic reformsrequired by the International Monetary Fund or othermultilateral agencies. If a governmental entity defaults, it mayask for more time in which to pay or for further loans. Thereis no legal process for collecting sovereign debt that agovernment does not pay nor are there bankruptcyproceedings through which all or part of the sovereign debtthat a governmental entity has not repaid may be collected.

Style Risk: Securities with different characteristics tend toshift in and out of favor depending upon market andeconomic conditions as well as investor sentiment. A Fundmay underperform other funds that employ a different style.A Fund also may employ a combination of styles that impactits risk characteristics. Examples of different styles includegrowth and value investing, as well as those focusing on large,medium, or small company securities.

• Growth Investing Risk: Growth stocks may be morevolatile than other stocks because they are moresensitive to investor perceptions of the issuingcompany’s growth potential. Growth-oriented funds willtypically underperform when value investing is in favor.

• Value Investing Risk: Undervalued stocks may notrealize their perceived value for extended periods oftime or may never realize their perceived value. Valuestocks may respond differently to market and otherdevelopments than other types of stocks. Value-oriented funds will typically underperform when growthinvesting is in favor.

• Mid-Cap Company Risk: Investments in securities ofmid-cap companies entail greater risks than investmentsin larger, more established companies. Mid-capcompanies tend to have more narrow product lines,more limited financial resources and a more limitedtrading market for their stocks, as compared with largercompanies. As a result, their stock prices may declinesignificantly as market conditions change.

• Small-Cap Company Risk: Investing in securities ofsmall-cap companies may involve greater risks thaninvesting in larger, more established companies. Smallercompanies may have limited product lines, markets andfinancial resources. Their securities may trade less


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frequently and in more limited volume than securities oflarger, more established companies. In addition, smallercompanies are typically subject to greater changes inearnings and business prospects than are largercompanies. Consequently, the prices of small companystocks tend to rise and fall in value more than otherstocks. Although investing in small-cap companies mayoffer potential for above-average returns, thecompanies may not succeed and their stock prices coulddecline significantly. Investments in small-capcompanies may also be subject to valuation risk.

Tax Status Risk: The Highland Global Allocation Fund’s abilityto invest in certain commodity-related instruments, includingcertain commodity-linked ETFs and ETNs, is or may be limitedby the Fund’s intention to qualify as a RIC under the Codeand, if the Fund does not appropriately limit suchinvestments or if such investments (or the income earned onsuch investments) were to be recharacterized for U.S. taxpurposes, the Fund could fail to qualify as a RIC. For instance,in order to qualify as a RIC, the Fund must meet annually asource of income requirement, generally requiring at least90% of its gross income to be derived from certain specifiedsources. Under current guidance, direct investments incommodities and certain commodity-related instrumentsgenerally would not produce qualifying income for a RIC,while the qualifying income status of other commodity-related instruments is uncertain under current law. The Fundintends to appropriately limit its investments in commodity-related instruments in order to meet such qualifying incomerequirements. If, however, the Fund were to fail to qualify asa RIC in any taxable year, and were ineligible to or otherwisedid not cure such failure, the Fund would be subject to tax onits taxable income at corporate rates, and all distributionsfrom earnings and profits, including any distributions of netlong-term capital gains, would be taxable to shareholders asdividend income. See “Taxation” below.

Fund-Related Tax Risks (Highland Energy MLP Fund only): Inaddition to other risk considerations, an investment inHighland Energy MLP Fund’s shares will involve certain taxrisks, including, but not limited to, the risks summarizedbelow. There may be other tax considerations applicable toparticular shareholders and the foreign and U.S. federal, stateand local tax consequences of the purchase and ownership ofthe Fund’s shares will depend on the facts of each investor’ssituation. Prospective investors are encouraged to consulttheir own tax advisors regarding the specific taxconsequences that may affect such investors.

• C Corporation Structure Tax Risks: Unlike most mutualfunds, the Fund is not entitled to pass-through taxtreatment as a regulated investment company. Instead,the Fund is treated as a regular corporation, or “C”corporation, for U.S. federal income tax purposes.

Because of the Fund’s concentration in MLPs, the Fundis not eligible to elect to be treated as a regulatedinvestment company under the Code. Accordingly, theFund generally is subject to U.S. federal income tax onits investment income and gains at the rates applicableto corporations (generally at a rate of 35%) as well asstate and local income taxes. As a limited partner ormember in the MLPs in which the Fund invests, theFund is required to include in its taxable income itsallocable share of income, gains, losses, deductions, andcredits from those MLPs, regardless of whether theydistribute any cash to the Fund. Based on a review ofthe historic results of the types of MLPs in which theFund invests, the Adviser currently expects that, thecash distributions it receives with respect to itsinvestments in equity securities of MLPs from time totime will exceed the net taxable income allocated to theFund from such MLPs, due to a variety of factors,including significant non-cash deductions such asdepreciation and depletion. If this expectation is notrealized, the Fund will have a larger corporate incometax expense than expected, which will result in less cashavailable to distribute to shareholders, and a higherpercentage of its distributions in a taxable year mayconstitute ordinary dividends. In particular, theaccelerated deductions available in respect of a MLP’sactivities may cause the Fund to realize taxable incomein excess of its cash flow from, or its economic gain onthe disposition of, such MLP securities.

As the holder of a MLP equity security, the Fund incurs acurrent tax liability on its allocable share of an MLP’sincome and gains that is not offset by tax deductions,losses and credits, or the Fund’s net operating losses orcapital loss carryforwards, if any. The portion, if any, of acash distribution received by the Fund as the holder ofan MLP equity security that is in excess of the Fund’sallocable share of the MLP’s net income is treated as atax-deferred return of capital to the extent of the Fund’stax basis in the MLP security, which might causesubsequent distributions in respect of the MLP securityto give rise to taxable income, or cause taxable incomeor gains to be higher, or losses to be lower, upon theultimate sale of the MLP security by the Fund. TheFund’s corporate income tax liability may be materiallyaffected by, among other factors, the availability of netoperating loss or capital loss carryforwards, and theextent to which the Fund disposes of MLP equitysecurities during a particular year, including, ifnecessary, to meet Fund shareholder redemptionrequests. In addition, the Fund’s corporate income taxliability may fluctuate materially from year to year,depending on a number of other factors involving theFund and/or its MLP or other investments.


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The final amount of the allocations of taxable incomereceived by the Fund from underlying MLPs in respect ofa taxable year will not be known until the Fund receivesSchedules K-1 from all of its MLP investments, and thepercentage of an MLP’s income and gains that is offsetby tax deductions, losses and credits fluctuates overtime for various reasons. A significant slowdown inacquisition activity or capital spending by MLPs held inthe Fund’s portfolio could result in a reduction ofaccelerated depreciation generated by new acquisitions,which may result in increased current tax liability for theFund and a greater portion of distributions paid by theFund to its shareholders taxable as ordinary dividends.The Fund’s tax liability for a taxable year will not finallybe known until the Fund completes its annual taxreturn. The Fund’s tax estimates could vary substantiallyfrom the actual liability and therefore the finaldetermination of the Fund’s actual tax liability may havea material impact on the Fund’s net asset value. See“Calculation of NAV Risk” below. The payment ofcorporate income taxes imposed on the Fund decreasescash available for distribution to shareholders.

From time to time, the Fund may need to sell MLPequity securities in order to meet redemption requests,and any such dispositions could result in the Fund’srecognition of income or gains, which could besubstantial, that are taxable to the Fund and for whichthe Fund will have to pay U.S. federal (and state andlocal) taxes.

Due to the tax treatment of the Fund’s allocations anddistributions from MLPs, as described above, theAdviser currently expects that a significant portion ofthe Fund’s distributions to shareholders will from timeto time be treated as a return of capital in the hands ofshareholders for U.S. federal income tax purposes (i.e.,as distributions in excess of the Fund’s current andaccumulated earnings and profits) and thus would notbe subject U.S. federal income tax to the extent of theshareholder’s basis in its Fund shares, but would havethe effect of reducing a shareholder’s basis in its Fundshares, which would cause gains to be higher, or lossesto be lower, upon the subsequent redemption of sharesby the shareholder. However, no assurance can be givenin this regard; just as the Fund’s corporate income taxliability can fluctuate materially from year to year, theextent to which the Fund is able to make return ofcapital distributions also can vary materially from yearto year depending on a number of factors involving theFund and/or its MLP or other investments, includingthose described above.

In certain cases, the Fund may be required to amend taxinformation reported to shareholders in respect of aparticular year. In this event, shareholders may berequired to file amended U.S. federal income or othertax returns in respect of such amended information andpay additional taxes (including potentially interest andpenalties), and may incur other related costs. See“Taxation” below for more information.

• Calculation of NAV Risk: In calculating the daily NAV,the Fund accounts for its deferred tax liability and/orasset balances. The Fund may accrue, in accordancewith generally accepted accounting principles (“GAAP”),a deferred income tax liability balance, at the currentlyeffective statutory U.S. federal income tax rate plus anestimated state and local income tax rate, for its futuretax liability associated with the capital appreciation ofits investments, the distributions received by the Fundon equity securities of MLPs considered to be return ofcapital and any net operating income or realized gains.Any deferred tax liability balance reduces the Fund’sNAV. Upon the Fund’s sale of a portfolio security, theFund may be liable for previously deferred taxes. If theFund is required to sell portfolio securities to meetredemption requests, the Fund may recognize incomeand gains for U.S. federal, state and local income taxpurposes, which would result in corporate income taxesimposed on the Fund.

The Fund may accrue, in accordance with GAAP, adeferred tax asset balance, at the currently effectivestatutory U.S. federal income tax rate, which reflects anestimate of the Fund’s future tax benefit associated withnet operating losses, capital loss carryforwards andunrealized losses. To the extent the Fund has a netdeferred tax asset balance, the Fund may record avaluation allowance, which would offset the value ofsome or all of the Fund’s deferred tax asset balance. TheFund assesses whether a valuation allowance isrequired, considering all available positive and negativeevidence related to the realization of the Fund’sdeferred tax asset in connection with the calculation ofthe Fund’s daily NAV. However, to the extent the finalvaluation allowance for a financial statement perioddiffers from the estimates the Fund used in calculatingthe Fund’s daily NAV, the application of such finalvaluation allowance could have a material impact on theFund’s NAV. The assessment considers, among othermatters, the nature, frequency and severity of currentand cumulative losses, forecasts of future profitability(which are highly dependent on future cashdistributions from the Fund’s MLP holdings), theduration of statutory carryforward periods and the


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associated risk that operating and capital losscarryforwards may expire unused. From time to time,the Fund may modify its estimates or assumptionsregarding its deferred tax liability and/or asset balancesand the application of a valuation allowance withrespect to a deferred tax asset as new informationbecomes available. Such modifications, changes ingenerally accepted accounting principles or relatedguidance or interpretations thereof, limitations imposedon net operating and capital losses (if any) and changesin applicable tax law could result in increases ordecreases in the Fund’s NAV per share, which could bematerial.

• Tax Law Changes Risk: Changes in tax laws, regulationsor interpretations of those laws or regulations in thefuture, which could have retroactive effect, couldadversely affect the Fund or its MLP or otherinvestments. Any such changes could negatively affectthe Fund’s shareholders, including any increase in Fund-level tax rates, which could reduce the amount of cashavailable for distribution to shareholders and the valueof their investment in the Fund. For example, from timeto time, legislation is introduced or administrativeproposals are made that would modify existing federalincome tax laws to eliminate partnership tax treatmentfor certain publicly traded partnerships andrecharacterize certain types of income received frompartnerships. If successful, any such changes couldnegatively affect the value of an investment in an MLPand therefore the value of an investment in the Fund.

Underlying Funds Risk: The Highland Global Allocation Fundmay invest in ETFs, mutual funds and closed-end funds. As aresult, your cost of investing in such Fund will be higher thanthe cost of investing directly in ETFs, mutual funds andclosed-end funds and may be higher than other mutual fundsthat invest directly in stocks and bonds. You will indirectlybear fees and expenses charged by the Underlying Funds inaddition to the Highland Global Allocation Fund’s direct feesand expenses.

Valuation Risk: Portfolio securities may be valued usingtechniques other than market quotations, under thecircumstances described under “Net Asset Value.” The valueestablished for a portfolio security may be different thanwhat would be produced through the use of anothermethodology or if it had been priced using marketquotations. Portfolio securities that are valued usingtechniques other than market quotations, including “fairvalued” securities, may be subject to greater fluctuation intheir value from one day to the next than would be the case ifmarket quotations were used. In addition, there is noassurance that a Fund could sell a portfolio security for the

value established for it at any time and it is possible that aFund would incur a loss because a portfolio security is sold ata discount to its established value.

Disclosure of Portfolio Holdings

The Funds have adopted policies and procedures to protectthe Funds’ portfolio information and to prevent the misuse ofthat information by a third party. A description of the Funds’policies and procedures relating to the disclosure of portfolioholdings is available in the Funds’ SAI on the Funds’ website(www.highlandfunds.com).

Management of the Funds

Each Fund is a party to contractual arrangements with variousparties, including, among others, the Fund’s investmentadviser, administrator, distributor, and shareholder servicingagent, who provide services to the Fund. Shareholders arenot parties to, or intended (“third-party”) beneficiaries of, anysuch contractual arrangements, and such contractualarrangements are not intended to create in any individualshareholder or group of shareholders any right to enforcethem against the service providers or to seek any remedyunder them against the service providers, either directly or onbehalf of the Fund.

Neither this prospectus, nor the related statement ofadditional information, is intended, or should be read, to beor to give rise to an agreement or contract between the Trustor the Funds and any investor, or to give rise to any rights inany shareholder or other person other than any rights underfederal or state law that may not be waived.

Board of Trustees and Investment Adviser

The Board of Trustees (the “Board”) has overall managementresponsibility for the Funds. See “Management of the Trust”in the SAI for the names of and other information about theTrustees and officers of the Funds. The Board also has overallmanagement responsibility for funds advised by NexPointAdvisors, L.P., including NexPoint Credit Strategies Fund andNexPoint Capital, Inc. (a closed-end management investmentcompany that has elected to be treated as a businessdevelopment company under the 1940 Act). NexPointAdvisors, L.P. is an affiliate of Highland Capital ManagementFund Advisors, L.P.

Highland Capital Management Fund Advisors, L.P. (“HCMFA”or the “Adviser”) (formerly, Pyxis Capital, L.P.) serves asinvestment adviser to each Fund. The address of the Adviseris 200 Crescent Court, Suite 700, Dallas, Texas 75201.Organized in February 2009, HCMFA is registered as aninvestment adviser under the Investment Advisers Act of1940, as amended.


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As of December 31, 2015, HCMFA had approximately$4.3 billion in assets under management. HCMFA is alsoHighland Energy MLP Fund’s administrator. HCMFA is ownedby Highland Capital Management Services, Inc., a Delawarecorporation (“HCM Services”) and its general partner, StrandAdvisors XVI, Inc., of which James Dondero is the solestockholder. HCM Services is controlled by Mr. Dondero andMr. Mark Okada by virtue of their respective shareownership.

Management Fee

Each Fund has entered into an investment advisoryagreement with HCMFA (each, an “Investment AdvisoryAgreement”) pursuant to which HCMFA provides, or has hireda sub-adviser to provide, the day-to-day management of theFund’s portfolio of securities, which includes buying andselling securities for the Fund and conducting investmentresearch. If a sub-adviser has been hired, the sub-adviserprovides advisory services pursuant to a sub-advisoryagreement (each, a “Sub-Advisory Agreement”) betweenHCMFA and the relevant sub-adviser with respect to theappropriate Fund, subject to HCMFA’s general oversight.Additionally, through December 15, 2015, HCMFA paid thecompensation of the Trustee of the Fund who was HCMFA’semployee until December 4, 2015 (for purposes of thissection only, the “HCMFA Trustee”). The Trust willcompensate the HCFMA Trustee at the same rate as theIndependent Trustees from December 16, 2015 untilDecember 4, 2017.

In return for its advisory services, each Fund pays the Advisera monthly fee, computed and accrued daily, based on anannual rate of the Fund’s average daily managed assets.“Average Daily Managed Assets” of a Fund shall mean theaverage daily value of the total assets of the Fund, less allaccrued liabilities of the Fund (other than the aggregateamount of any outstanding borrowings constituting financialleverage).

A discussion regarding the basis for the Board’s approval ofthe Investment Advisory Agreements and Sub-AdvisoryAgreements appears in the Funds’ annual reports toshareholders for the period ended September 30, 2015.

Each Investment Advisory Agreement may be terminated atany time, without payment of any penalty, by the Board, orby vote of a majority of the outstanding voting securities ofsuch Fund or by the Adviser, in each case on not more than60 days’ nor less than 30 days’ prior written notice to theother party. In addition, each Investment Advisory Agreementautomatically terminates in the event of its “assignment”, asdefined in the 1940 Act and the rules thereunder, or upon thetermination of the relevant Investment Advisory Agreement.

The table below shows the advisory fees that the Adviserreceived for each Fund for the fiscal year endedSeptember 30, 2015 and each Fund’s contractual advisory feewith the Adviser:

Fund

Advisory Fees Paid as aPercentage of AverageDaily Managed Assetsfor the Fiscal PeriodEnded September 30,

2015

Contractual AdvisoryFee as a Percentage of

Average DailyManaged Assets

Highland Energy MLPFund1 0.79% 1.00%

Highland Premier GrowthEquity Fund 0.60% 0.60%

Highland Small-Cap EquityFund 0.49% 0.95%

Highland Fixed IncomeFund 0.30% 0.30%

Highland Tax-ExemptFund 0.23% 0.35%

Highland Global AllocationFund 0.40% 0.40%

Highland Total ReturnFund 0.50% 0.50%

1 In addition to the advisory fees set forth in this table, the Adviser isentitled to receive administration fees of 0.20% of the Fund’s AverageDaily Managed Assets as discussed below.

HCMFA has contractually agreed to limit the total annualoperating expenses (exclusive of fees paid by the Fundpursuant to its distribution plan under Rule 12b-1 under the1940 Act, taxes, such as deferred tax expenses, dividendexpenses on short sales, interest payments, brokeragecommissions and other transaction costs, acquired fund feesand expenses and extraordinary expenses (collectively, the“Excluded Expenses”)) of Highland Energy MLP Fund,Highland Small-Cap Equity Fund, Highland Fixed Income Fund,Highland Tax-Exempt Fund, Highland Global Allocation Fundand Highland Total Return Fund to 1.10%, 0.95%, 0.65%,0.65%, 0.65% and 0.95% of average daily net assetsattributable to any class of such Fund, respectively (each, an“Expense Cap” and collectively, the “Expense Caps”). TheExpense Caps will continue through at least January 31, 2017,and may not be terminated prior to this date without theaction or consent of the Board. The Trust, on behalf of eachFund, has contractually agreed to pay the Adviser all amountspreviously paid, waived or reimbursed by the Adviser withrespect to a Fund pursuant to its respective Expense Cap,provided that the amount of such additional payment in anyyear, together with all other expenses (excluding ExcludedExpenses) of such Fund, in the aggregate, would not cause aFund’s total annual operating expenses in any such year toexceed the amount of its Expense Cap, and provided furtherthat no additional payments by the Trust will be made withrespect to amounts paid, waived or reimbursed by the


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Adviser more than 36 months after the date such amountswere paid, waived or reimbursed. The Adviser may notrecoup any amounts previously paid, waived or reimbursedunder an Expense Cap before payment of a Fund’s operatingexpenses for the year in which the Adviser intends to recoupsuch amounts.

Investment Sub-Adviser

HCMFA seeks to make the best managers available to Fundshareholders, whether that means accessing HCMFA’s wealthof internal talent or using external talent (sub-advisers).When HCMFA feels the need to access specialists outside, itinvestigates and engages sub-advisers with strongperformance records and styles that match the investmentobjectives of the Funds. HCMFA is proud to engage thefollowing sub-adviser who is responsible for the day-to-daymanagement of a portion of the respective Fund’s assetsallocated to the sub-adviser (the “Allocated Assets”). Thesub-adviser’s services include buying and selling securities forits respective Fund and conducting investment research. Aswith HCMFA’s portfolio managers, the sub-adviser maychange the portfolio managers who are responsible formanaging a portion of the respective Fund’s Allocated Assetsfrom time to time.

First Foundation Advisors (“FFA”)18101 Von Karman Avenue, Suite 700Irvine, California 92612

FFA is the investment sub-adviser of each of Highland FixedIncome Fund, Highland Tax-Exempt Fund and Highland TotalReturn Fund. FFA is a wholly-owned subsidiary of FirstFoundation Inc. and a registered investment adviser. As ofDecember 31, 2015, FFA’s assets under management wereapproximately $3.5 billion.

Sub-Advisory Fees:

HCMFA pays each sub-adviser an investment sub-advisory feeout of the management fee that it receives from therespective Fund. The investment sub-advisory fee is paid byHCMFA monthly and is based upon the Average DailyManaged Assets of each respective Fund’s Allocated Assets.Each sub-adviser will be entitled to receive from HCMFA amonthly fee, computed and accrued daily, based on theannual rates set forth below:

Highland Premier Growth Equity Fund1 0.30%

Highland Fixed Income Fund 0.15%

Highland Tax-Exempt Fund 0.175%

Highland Total Return Fund 0.25%1 Prior to January 31, 2016, GE Asset Management Incorporated (“GEAM”)was the investment sub-adviser for Highland Premier Growth Equity Fund.GEAM received from HCMFA the monthly fee set out above, computedand accrued daily, on behalf of the Fund.

Administrator/Sub-Administrator

For the Highland Energy MLP Fund, HCMFA providesadministration services for a monthly administration fee. Insuch capacity, HCMFA generally assists the Fund in all aspectsof its administration and operations. Additionally, HCMFAfurnishes offices, necessary facilities, equipment andpersonnel. Under a separate sub-administration agreement,HCMFA has delegated certain administrative functions toState Street Bank and Trust Company, One Lincoln Street,Boston, Massachusetts 02111 (“State Street”), and pays StateStreet a portion of the fee it receives from the Fund. Underthe sub-administration agreement, State Street has agreed toprovide corporate secretarial services; prepare and filevarious reports with the appropriate regulatory agencies;assist in preparing various materials required by the SEC; andprepare various materials required by any state securitiescommission having jurisdiction over each Fund.

On behalf of the rest of the Funds, Highland Funds II hasentered into an administration agreement with State Streetand pays State Street a fee for administration services. Aswith the Highland Energy MLP Fund, HCMFA generally assistsin all aspects of the Funds’ administration and operations andfurnishes offices, necessary facilities, equipment andpersonnel.

For more information about the Funds’ administrationagreements, please see “Administrator/Sub-Administrator” inthe SAI.

Multi-Manager Structure

The Trust and the Adviser qualify for exemptive relief under amulti-managers’ exemptive order (the “Order”) from certainprovisions of the 1940 Act, pursuant to which the Adviser will,subject to the oversight of the Board, be permitted to enterinto and materially amend sub-advisory agreements onbehalf of each Fund with sub-advisers unaffiliated with theAdviser without such agreements being approved by theshareholders of each Fund (the “Multi-Manager Structure”).The Board and the Adviser will therefore have the right tohire, terminate or replace sub-advisers without first obtainingshareholder approval, including in the event that asub-advisory agreement has automatically terminated as aresult of an assignment. The Adviser will continue to have theultimate responsibility to oversee each sub-adviser andrecommend its hiring, termination and replacement.Shareholders of the Funds, except for Highland PremierGrowth Equity Fund, have already approved the adoption of aMulti-Manager Structure, which enables these Funds tooperate with greater efficiency and without incurring theexpense and delays associated with obtaining shareholderapprovals for matters relating to sub-advisers or sub-advisoryagreements. Shareholders of Highland Premier Growth Equity


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Fund will have to continue to separately vote to approve anychange HCMFA seeks to make relating to the Fund’ssub-adviser and sub-advisory agreement with respect tonon-affiliated sub-advisers. The Trust and the Adviser will besubject to certain conditions imposed by the Order, includingthe condition that within 90 days of hiring of a newnon-affiliated sub-adviser, a Fund will provide shareholderswith an information statement containing information aboutthe sub-adviser. Shareholders of each Fund retain the right toterminate a sub-advisory agreement for such Fund at anytime by a vote of the majority of such outstanding securitiesof the Fund.

Operation of a Fund under the Multi-Manager Structure willnot: (1) permit management fees paid by a Fund to HCMFA tobe increased without shareholder approval; or (2) diminishHCMFA’s responsibilities to a Fund, including HCMFA’s overallresponsibility for overseeing the portfolio managementservices furnished by its sub-advisers. Shareholders will benotified of any changes made to sub-advisers or sub-advisoryagreements within 90 days of the change.

About the Funds’ Portfolio Managers

Each Fund is managed by either an individual portfoliomanager who is primarily responsible for the day-to-daymanagement of a Fund, or a team of portfolio managers, whoare jointly and primarily responsible for the day-to-daymanagement of a Fund. The portfolio managers of the Fundsgenerally have final authority over all aspects of their portionsof a Fund’s investment portfolio, including securities purchaseand sale decisions, portfolio construction techniques andportfolio risk assessment. The following sets forth the roles ofthe primary portfolio managers of the specified Fundsfollowed by biographical information for each portfoliomanager. The Funds’ SAI provides the following additionalinformation about the portfolio managers: (i) portfoliomanagers’ compensation; (ii) other accounts managed by theportfolio managers; and (iii) the portfolio managers’ownership of shares of a Fund, if any.

Portfolio Management Teams

Highland Energy MLP Fund is managed by James Dondero,Matthew Gray and Jon Poglitsch.

Highland Premier Growth Equity Fund is managed by JamesDondero and Michael Gregory.

Highland Small-Cap Equity Fund is managed by JamesDondero and Michael Gregory.

Highland Fixed Income Fund is managed by a team ofportfolio managers that includes John Hakopian and SusanKing Riechel.

Highland Tax-Exempt Fund is managed by a team of portfoliomanagers that includes John Hakopian and Susan KingRiechel.

Highland Global Allocation Fund is managed by JamesDondero.

Highland Total Return Fund is managed by a team ofportfolio managers that includes John Hakopian, Jim Garrisonand Eric Speron.

Portfolio Manager Biographies

The following sets forth biographical information for thoseindividuals who are primarily responsible for managing thespecified Fund’s investments. The portfolio managers maychange from time to time.

James Dondero is a founder and President of Highland CapitalManagement, L.P. (“Highland”) (an alternative asset managerspecializing in high-yield fixed income investments). He is thesenior portfolio manager of Highland Global Allocation Fundand has served in that capacity since April 2013. He is also aportfolio manager of Highland Small-Cap Equity Fund,Highland Opportunistic Credit Fund, Highland PremierGrowth Equity Fund and Highland Energy MLP Fund and hasserved in that capacity since July 1, 2015, May 18, 2005,January 31, 2016 and January 2015, respectively.Mr. Dondero has over 25 years of experience in the creditmarkets. Prior to founding Highland in 1993, Mr. Donderoserved as Chief Investment Officer of Protective Life’s GICsubsidiary and helped grow the business from concept toover $2 billion between 1989 and 1993. His portfoliomanagement experience includes mortgage-backedsecurities, investment grade corporates, leveraged bankloans, high-yield bonds, emerging market debt, derivatives,preferred stocks and common stocks. From 1985 to 1989,Mr. Dondero managed approximately $1 billion in fixedincome funds for American Express. Prior to AmericanExpress, he completed his financial training at MorganGuaranty Trust Company. Mr. Dondero is a Beta GammaSigma graduate of the University of Virginia (1984) withdegrees in Accounting and Finance. Mr. Dondero has earnedthe right to use the Chartered Financial Analyst designation.Mr. Dondero is a Certified Public Accountant and a CertifiedManagement Accountant. Mr. Dondero currently serves asChairman for CCS Medical and NexBank and serves on theBoard of Directors of American Banknote Corporation,Cornerstone Healthcare Group and Metro-Goldwyn-Mayer.

Jim Garrison is a portfolio manager of Highland Total ReturnFund. Mr. Garrison is part of the investment team managingFFA’s proprietary Large Cap Value Equity Portfolio as well asthe manager of FFA’s Dividend Strategy Portfolio. He is amember of FFA’s Investment Committee, where he assists in


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shaping the portfolio investment process and overall assetallocations. Mr. Garrison also provides research andrecommendations of third-party equity investmentopportunities. Prior to joining FFA in 1999, Mr. Garrisonworked as an internal audit consultant for Arthur Andersen,LLP. Mr. Garrison earned a Bachelor of Science in Agriculturaland Managerial Economics from the University of California,Davis. He has earned the right to use the Chartered FinancialAnalyst designation.

Matthew Gray is a Director at the Adviser covering theChemicals, Competitive Power and Utilities industries. He hasbeen involved in Highland’s Energy and Materials investmenteffort since 2008, and has helped manage the HighlandEnergy MLP Fund since its inception in December 2011. Priorto his current role, Mr. Gray worked as a Senior PortfolioAnalyst. Prior to joining HCM in July 2007, Mr. Gray wasemployed by GW Equity as an Associate in Mergers &Acquisitions. He was responsible for issuing private companyvaluation analysis and performing extensive financial analysisof client companies. Prior to that, Mr. Gray was a CreditAnalyst for Reich & Tang Asset Management. He received aBA in Economics and History from Vanderbilt University. Hehas earned the right to use the Chartered Financial Analystdesignation.

Michael Gregory is a CIO and Global Head of HighlandAlternative Investors at Highland in addition to ManagingDirector and Head of Healthcare Credit and Healthcare Long/Short Equity investment strategies. He is also a portfoliomanager of Highland Small-Cap Equity Fund, Highland Long/Short Healthcare Fund and Highland Premier Growth EquityFund and has served in that capacity since July 1, 2015,May 6, 2010 and January 31, 2016, respectively. In 2006, hefounded Cummings Bay Healthcare Fund, a healthcare hedgefund that is currently in the seventh year of operations andbecame an affiliate of Highland in 2010. Mr. Gregory alsoworked as a Partner at Sands Point Capital Management LLC,managing a dedicated healthcare equity hedge fund.Mr. Gregory holds an MBA from the Yale School ofManagement, having completed a highly specialized jointprogram in healthcare within the Yale Schools of Medicine,Management and Public Policy. He holds a BS in Economicsfrom the University of Pennsylvania, Wharton School ofBusiness. He is a Fellow of the Royal Society of Medicine,lecturer at Yale University, and frequent guest on CNBC, FoxBusiness and Morningstar.

John Hakopian is a portfolio manager of Highland FixedIncome Fund, Highland Tax-Exempt Fund and Highland TotalReturn Fund. Mr. Hakopian is President of FFA and a Directorof First Foundation Inc. and First Foundation Bank.

Mr. Hakopian oversees the vision, strategy, operations anddevelopment of the investment management service for FFA.Having been with FFA since its inception in 1990,Mr. Hakopian has been closely involved in developing anddelivering the firm’s investment services. He becamePresident in 2009. Mr. Hakopian earned a Bachelor of Artsdegree in economics in three years from the University ofCalifornia, Irvine and an MBA in Finance from the Universityof Southern California.

Jon Poglitsch is a Managing Director at the Adviser, where hehas spent a substantial amount of time covering the Energy,Competitive Power, Utilities, and Transportation industries,and has helped manage the Highland Energy MLP Fund sinceits inception in December 2011. In his previous role at HCM,he served as a Senior Portfolio Analyst on both theInstitutional and Retail fund research teams. Prior to joiningthe HCM in 2007, Mr. Poglitsch was a consultant for MuseStancil and Co. (“Muse”), where he provided mergers andacquisition, valuation, and strategic advisory services to avariety of clients in the midstream and downstream energysectors, including integrated oil, independent refinery,pipeline, power, and renewable fuel companies. Prior toMuse, Mr. Poglitsch was a senior financial analyst forAmerican Airlines. He received an MBA with a concentrationin Finance from the University of Texas at Austin and a BS inChemical Engineering from the University of Oklahoma.Mr. Poglitsch has earned the right to use the CharteredFinancial Analyst designation.

Susan King Riechel is a portfolio manager of Highland FixedIncome Fund and Highland Tax-Exempt Fund. Ms. Riechel isManaging Director of Fixed Income Investments at FFA. Ms.Riechel joined FFA in 2010. Ms. Riechel is responsible fordirecting the firm’s actively managed fixed income strategyfor high-net-worth individuals, foundations, endowments andretirement funds. In her role as Managing Director, sheoversees the firm’s taxable and non-taxable fixed incomeinvestments. Ms. Riechel has over thirty years of experiencein investment management and banking. Prior to joining FFA,she was Managing Director - Fixed Income at CovingtonCapital Management in Los Angeles from June 2009 untilSeptember 2010. Formerly, Ms. Riechel was also ManagingDirector at Columbia Management, a successor firm toU.S. Trust Company, where she was Managing Director, Headof Fixed Income serving offices on the west coast. Ms. Riechelstarted her investment management career at First InterstateBank where she was Director of Institutional AssetManagement - Fixed Income. She began her banking career atLloyds Bank PLC, New York and was formerly the head ofglobal funding at Security Pacific Bank. Ms. Riechel graduated


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with a Bachelor of Arts degree in History from University ofNew Hampshire, Durham. She holds an MBA with aconcentration in Finance and Banking from the Lubin Schoolof Business at Pace University.

Eric Speron is a portfolio manager of Highland Total ReturnFund. Mr. Speron is part of the investment team managingFFA’s proprietary Large Cap Value Equity Portfolio as well asthe manager of FFA’s Opportunistic Equity Strategy Portfolio.He is a member of FFA’s Investment Committee, where heassists in shaping the portfolio investment process and overallasset allocations. Mr. Speron also provides research andrecommendations of third-party equity investmentopportunities. Prior to joining FFA in 2007, Mr. Speronworked at Credit Suisse First Boston and JPMorgan.Mr. Speron earned a Bachelor of Arts Degree fromGeorgetown University. He has earned the right to use theChartered Financial Analyst designation.

About the Funds’ Underwriter

The Funds’ shares are offered for sale through HighlandCapital Funds Distributor, Inc. (the “Underwriter”), 200Crescent Court, Suite 700, Dallas, Texas 75201. Shareholdersand Financial Advisors (as defined under “How to BuyShares”) should not send any transaction or account requeststo this address. Transaction or account requests should bedirected to Highland Funds II — (Fund Name), PO Box 8656,Boston, Massachusetts 02266-8656.

Shareowner Guide — How to Invest in HighlandFunds II

How to Buy Shares

You can purchase shares of the Funds on any day that theNew York Stock Exchange (“NYSE”) is open for business (see“Net Asset Value”). You can purchase shares of the Fundsfrom any financial advisor, broker-dealer or other financialintermediary that has entered into an agreement with theUnderwriter or the Funds with respect to the sale of shares ofthe Funds (a “Financial Advisor”), or Boston Financial DataServices, Inc., 30 Dan Road Suite #8656, Canton, MA 02021,the Funds’ transfer agent (the “Transfer Agent”). YourFinancial Advisor can help you establish an appropriateinvestment portfolio, buy shares, and monitor yourinvestments. The Funds have authorized Financial Advisors toreceive purchase and redemption orders on their behalf.Financial Advisors are authorized to designate other

intermediaries to receive purchase and redemption orders onthe Funds’ behalf. The Funds will be deemed to have receiveda purchase or redemption order when a Financial Advisor orits authorized designee receives the order in “good order.”The specific requirements for “good order” depend on thetype of transaction and method of purchase. Contact HCMFAif you have questions about your circumstances. Generally,“good order” means that you placed your order with yourFinancial Advisor or its authorized designee or your payment(made in accordance with any of the methods set forth in thetable below) has been received and your application iscomplete, including all necessary documentation andsignatures. Customer orders will be priced at a Fund’s NAVper share next computed after the orders are received by aFinancial Advisor or its authorized designee in good order.Investors may be charged a fee by their Financial Advisors,payable to the Financial Advisor and not a Fund, if investorseffect a transaction in Fund shares through either a FinancialAdvisor or its authorized designee.

The USA PATRIOT Act may require a Fund, a Financial Advisoror its authorized designee to obtain certain personalinformation from you which will be used to verify youridentity. If you do not provide the information, it may not bepossible to open your account. If a Fund, a Financial Advisoror authorized designee is unable to verify your customerinformation, such Fund reserves the right to close youraccount or to take such other steps as it deems reasonable.

Outlined below are various methods for buying shares of theFunds:

Method Instructions

Through yourFinancial Advisor

Your Financial Advisor can help you establish youraccount and buy shares on your behalf. To receivethe current trading day’s price, your FinancialAdvisor must receive your request in good orderprior to the close of regular trading on the NYSE,usually 4:00 p.m., Eastern time. Your FinancialAdvisor may charge you fees for executing thepurchase for you.

By check (newaccount)(1)

For new accounts, send to the applicable Fund, atthe address noted below,(2) a completed applicationand check made payable to “Highland Funds II— (Fund Name).” All purchases must be in U.S.Dollars and must be drawn on a U.S. bank. HighlandFunds II does not accept cash, U.S. savings bonds,traveler’s checks, money orders, California warrantchecks, starter checks, third-party checks, or creditcard courtesy checks. Checks dated six months oldor older and post-dated checks will not be accepted.


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Method Instructions

By check (existingaccount)(1)

For existing accounts, fill out and return to theapplicable Fund, at the address noted below,(2) theadditional investment stub included in your accountstatement, or send a letter of instruction, includingthe applicable Fund name and account number,with a check made payable to “Highland Funds II— (Fund Name).” All purchases must be in U.S.Dollars and must be drawn on a U.S. bank. HighlandFunds II does not accept cash, U.S. savings bonds,traveler’s checks, money orders, California warrantchecks, starter checks, third-party checks, or creditcard courtesy checks. Checks dated six months oldor older and post-dated checks will not be accepted.

By exchange You or your Financial Advisor may acquire shares ofa Fund for your account by exchanging shares youown in certain other funds advised by HCMFA forshares of the same class of a Fund, subject to theconditions described in “Exchange of Shares” below.In addition, you or your Financial Advisor mayexchange shares of a class of a Fund you own forshares of a different class of the same Fund, subjectto the conditions described in “Exchange of Shares”below. To exchange, send written instructions to theapplicable Fund, at the address noted below(2) orcall 1-877-665-1287.

By wire You may purchase shares of a Fund by wiring moneyfrom your bank account to your Fund account. Priorto sending wire transfers, please contactShareholder Services at 1-877-665-1287 for specificwiring instructions and to facilitate prompt andaccurate credit upon receipt of your wire. You canalso find the specific wiring instructions athttp://highlandfunds.com/literature/#forms.

To receive the current trading day’s price, your wire,along with a valid account number, must bereceived in your Fund account prior to the close ofregular trading on the NYSE, usually 4:00 p.m.,Eastern time.

If your initial purchase of shares is by wire, you mustfirst complete a new account application andpromptly mail it to Highland Funds II — (FundName), at the address noted below.(2) Aftercompleting a new account application, please call1-877-665-1287 to obtain your account number.Please include your account number on the wire.

By electronic fundstransfer via anautomated clearinghouse (“ACH”)transaction(1)

You may purchase shares of a Fund by electronicallytransferring money from your bank account to yourFund account by calling 1-877-665-1287. Anelectronic funds transfer may take up to twobusiness days to settle and be considered in goodorder. You must set up this feature prior to yourtelephone request. Be sure to complete theappropriate section of the application.

Automaticinvestment plan

You may make monthly or quarterly investmentsautomatically from your bank account to your Fundaccount. You may select a pre-authorized amount tobe sent via electronic funds transfer. For thisfeature, please call the applicable Fund at1-877-665-1287 or visit the Funds’ website, (http://highlandfunds.com/literature/#forms), where youmay obtain a copy of the “Account Options Form.”

(1) The redemption of shares purchased by check or an automated clearinghouse (“ACH”) transaction is subject to certain limitations (see“Redemption of Shares”). Any purchase by check or ACH transactionthat does not clear may be cancelled, and the investor will beresponsible for any associated expenses and losses to the applicableFund.

(2) Regular Mail: Send to “Highland Funds II — (Fund Name),” PO Box 8656,Boston, MA 02266-8656. Overnight Mail: Send to “Highland Funds II —(Fund Name),” 30 Dan Road, Suite #8656, Canton, MA 02021-2809

The following minimum investment amounts apply to directaccounts with a Fund.

Minimum Investments for Class A and Class C Shares




Accounts that fall below the $500 account minimum may beautomatically redeemed by a Fund on 30 days’ notice and theaccount shareholder will bear any associated transactioncosts, market exposure risks and tax consequences.

Minimum Investments for Class Y Shares (eligible investors only)



Class Y shares are available to investors who invest throughprograms or platforms maintained by an authorized financialintermediary. There is no minimum investment for purchasesof shares by eligible investors. Individual investors that investdirectly with a Fund are not eligible to invest in Class Y shares.

Unless the requirement is expressly waived by a Fund, eachFund reserves the right to change or waive the investmentminimums and reserves the right to liquidate a shareholder’saccount if the value of shares held in the account is less thanthe minimum account size. Each Fund also reserves the rightto reject for any reason, or cancel as permitted or required bylaw, any purchase order. In addition, without notice, a Fundmay stop offering shares completely, or may offer shares onlyon a limited basis, for a period of time or permanently.

Retirement Plans

Shares of the Funds, other than the Highland Tax-ExemptFund, are available for purchase through individualretirement accounts (IRAs) and other retirement plans. EachFund offers several different types of IRAs, includingprototype IRAs, Roth IRAs, simplified employee pension


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(“SEP”) IRAs and Simple IRAs for both individuals andemployers. For further information, please call the Funds at1-877-665-1287 or your Financial Advisor.

Purchases in Kind — If You Invest More than $10 Million

Large investments in a Fund ($10 million or more) may bedetrimental to existing shareholders because they cansignificantly increase transaction costs charged to existingshareholders. In these circumstances, the Fund may requirethat you purchase Fund shares “in kind,” or provide the Fundwith securities instead of cash. The Fund or the TransferAgent would inform you of the securities acceptable to theFund. The securities would be accepted by the Fund at theirmarket value in return for Fund shares of equal value. Youmay have to pay associated brokerage commissions for thesecurities that you purchase. The transfer of securities to theFund will be a taxable event.

Choosing a Share Class

Each Fund offers three classes of shares in this Prospectus –Class A, Class C and Class Y Shares. Each share class has itsown sales charge and expense structure. Determining whichshare class is best for you depends on the dollar amount youare investing and number of years for which you are willing toinvest. Based on your personal situation, your FinancialAdvisor can help you decide which class of shares makes themost sense for you. Sales charges and expenses aredetermined by the share class you select and manner inwhich you purchase.

Class A Shares carry an initial sales charge. Class A Sharesbought without an initial sales charge in accounts aggregating$1 million or more at the time of purchase are subject to a0.50% contingent deferred sales charge (“CDSC”) if the Sharesare sold within one year of purchase. Class C Shares areoffered without an initial sales charge, but are subject to aCDSC for one year after purchase. Class Y Shares are offered

without an initial sales charge or a CDSC, but are not availableto individual investors that invest directly with the Fund.Class C Shares have higher annual operating expenses thanClass A and Class Y Shares because of higher distribution andshareholder service fees.

Your Financial Advisor may receive different compensationfor selling one class of shares than for selling another class. Itis important to remember that the CDSCs and distributionand shareholder service fees for the Class C Shares have thesame purpose as the front-end sales charge on sales ofClass A Shares: to compensate the Underwriter forconcessions and expenses it pays to Financial Advisors.

The Funds may modify the manner in which shares areoffered, minimum investments, or sales charge rates orwaivers at any time without prior notice.

Purchasing Class A Shares

Class A Shares may be appropriate for long-term investorswho compensate their investment professionals for theservices they provide with traditional front-end sales chargesand for investors who qualify for quantity discounts orwaivers. Your purchases of Class A Shares are made at thepublic offering price for these shares, that is, the NAV pershare for Class A Shares plus a front-end sales charge that isbased on the amount of your initial investment when youopen your account. The front-end sales charge you pay on anadditional investment is based on your total net investmentin the Fund, including the amount of your additionalpurchase. Shares you purchase with reinvested dividends orother distributions are not subject to a sales charge. Asshown in the tables below, a portion of the sales charge ispaid as a commission (or dealers’ reallowance) to yourFinancial Advisor on the sale of Class A Shares. The totalamount of the sales charge, if any, differs depending on theamount you invest as shown in the tables below.

Highland Energy MLP Fund, Highland Premier Growth Equity Fund, Highland Small-Cap Equity Fund, Highland Global Allocation Fund, andHighland Total Return Fund

Front-End Sales ChargeMaximum Dealers’

Reallowance*

Your Investment** (As a % of Purchase Price) (As a % of Your Net Investment) (As a % of Purchase Price)

Less than $50,000 5.75% 6.10% 5.25%

$50,000 but less than $100,000 4.25% 4.44% 3.75%

$100,000 but less than $250,000 3.25% 3.36% 2.75%

$250,000 but less than $500,000 2.50% 2.56% 2.00%

$500,000 but less than $1,000,000 2.00% 2.04% 1.55%

$1,000,000 or more*** None None †

Shareowner Guide — How to Invest in Highland Funds II

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Highland Fixed Income Fund and Highland Tax-Exempt Fund

Front-End Sales ChargeMaximum Dealers’

Reallowance*

Your Investment** (As a % of Purchase Price) (As a % of Your Net Investment) (As a % of Purchase Price)

Less than $100,000 4.25% 4.44% 3.75%

$100,000 but less than $250,000 3.25% 3.36% 2.75%

$250,000 but less than $500,000 2.50% 2.56% 2.00%

$500,000 but less than $1,000,000 2.00% 2.04% 1.55%

$1,000,000 or more*** None None †* From time to time, the Fund may decide to reallow the entire amount of the front-end sales charge to dealers. Dealers who receive more than 90% of the

sales charge may be considered “underwriters” under the U.S. securities laws.

** Except for certain employee benefit plans that select Class C Shares (see “Purchasing Class C Shares” below), purchases of $1,000,000 or more intended forClass C Shares should be made in Class A Shares (for individual investors) or in Class Y Shares (for institutional investors).

*** Purchases of $1 million or more of Class A Shares pursuant to a sales charge waiver are subject to a 0.50% CDSC if redeemed within one year of purchase.The Class A Shares CDSC does not apply to investors purchasing $1 million or more of any Fund’s Class A Shares if such investors are otherwise eligible topurchase Class A Shares pursuant to another sales charge waiver. The CDSC is calculated by multiplying the CDSC percentage by the lesser of the shareclass’ net asset value at the time of the purchase or its net asset value at the time of redemption.

† For purchases through a Financial Advisor that exceed $1 million, the Financial Advisor will receive a concession of 0.50% of any amounts under $3 million,0.40% of any amounts greater than $3 million and less than $5 million, 0.25% of any amounts greater than $5 million and less than $25 million and 0.12%thereafter, to the selling dealer.

Reduced Sales Charges for Class A Shares

You may pay a lower sales charge when purchasing Class AShares through Rights of Accumulation, which works asfollows: if the combined value (determined at the currentpublic offering price) of your accounts in all classes of sharesof a Fund and other Participating Funds (as defined below)maintained by you, your spouse or domestic partner or yourminor children, together with the value (also determined atthe current public offering price) of your current purchase,reaches a sales charge discount level (according to the abovechart), your current purchase will receive the lower salescharge, provided that you have notified the Fund or theUnderwriter and your Financial Advisor, if any, in writing ofthe identity of such other accounts and your relationship tothe other account holders and submitted information (suchas account statements) sufficient to substantiate youreligibility for a reduced sales charge. Such reduced salescharge will be applied upon confirmation of suchshareholders’ holdings by the Transfer Agent. A Fund mayterminate or amend this Right of Accumulation at any timewithout notice. As used herein, “Participating Funds” refers toany series of Highland Funds I (except for Highland iBoxxSenior Loan ETF, Highland HFR Global ETF, Highland HFREvent-Driven ETF and Highland HFR Equity Hedge ETF (eachan “ETF”), any series of Highland Funds II, the Liquid ReservesFund (as defined below under “Exchange of Shares”) andregistered, open-end investment companies advised by theAdviser and distributed by the Underwriter as otherwisepermitted from time to time by the Board.

You may also pay a lower sales charge when purchasingClass A Shares and shares of other Participating Funds bysigning a Letter of Intent within 90 days of your purchase. Bydoing so, you would be able to pay the lower sales charge onall purchases by agreeing to invest a total of at least $100,000within 13 months. If your Letter of Intent purchases are notcompleted within 13 months, your account will be adjustedby redemption of the amount of shares needed to pay thehigher initial sales charge level for the amount actuallypurchased. Upon your request, a Letter of Intent may reflectpurchases within the previous 90 days. See the SAI foradditional information about this privilege. More informationregarding reduced sales charges is available free of charge inthe Funds’ SAI on the Funds’ website at:http://highlandfunds.com/literature.

In addition, certain investors may purchase shares at no salescharge or at a reduced sales charge. For example, Class AShares are offered at no sales charge to investors who areclients of financial intermediaries who have entered into anagreement with the Underwriter to offer Fund shares throughself-directed investment brokerage accounts that do notcharge transaction fees to their clients. Whether a salescharge waiver is available for your retirement plan orcharitable account depends upon the policies and proceduresof your intermediary. Please consult your financial adviser forfurther information. See the SAI for a description of this andother situations in which sales charges are reduced or waived.


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Purchasing Class C Shares

Class C Shares may be appropriate for shorter-term investors,if you do not want to pay a traditional front-end sales chargeon your purchase of Fund shares or are unsure of the lengthof time you will hold your investment.

Class C Shares are available for investment through programsor platforms maintained by Financial Advisors, provided thatthe cost to HCMFA (or its affiliates) for providing or paying forany selling or administrative servicing activities in connectionwith investor accounts on such programs or platforms doesnot typically exceed an amount equal to 1.00% (reflecting theClass C Shares distribution and service fees or Rule 12b-1fees) of the average net asset value of such accounts. There isno program asset size or minimum investment requirementsfor initial and subsequent purchases of shares by eligibleomnibus account investors.

Because you may purchase Class C Shares at the NAV nextdetermined without paying an initial sales charge, your entireinvestment in Class C Shares is available to work for you.However, Class C Shares pay higher Rule 12b-1 fees than eachof the other share classes and never convert to Class AShares. In that regard, Class C Shares may be moreappropriate for investors with a shorter investment horizonbecause long-term shareholders of Class C Shares may paymore than the economic equivalent of Class A Shares’maximum front-end sales charge.

Trail commissions of up to 1.00% may be paid by theUnderwriter or Adviser to Financial Advisors that provideon-going services with respect to Class C Shares.

Class C Shares are subject to a 1% CDSC if redeemed withinone year of purchase. Proceeds from the CDSC may be usedto defray the expenses of the Fund and HCMFA related to thesale of Class C Shares, including the payment ofcompensation to Financial Advisors. The CDSC is applied tothe NAV at the time of purchase or redemption, whichever islower. For purposes of calculating the CDSC, the start of theholding period is the date on which the purchase is made.Shares you purchase with reinvested dividends or capitalgains are not subject to a CDSC. When shares are redeemed,the Funds will automatically redeem those shares (if any) notsubject to a CDSC and then those you have held the longest.In certain circumstances, CDSCs may be waived, as describedin the SAI.

The CDSC is calculated by multiplying the CDSC percentage bythe lesser of the share class’ net asset value of the block ofshares being redeemed at the time of their purchase or thenet asset value at the time of redemption.

Intended purchases of Class C Shares of $1,000,000 or moreby investors not eligible for Class Y Shares should be made inClass A Shares. An amount up to 1% of the amount investedin Class C Shares may be paid to Financial Advisors.

Purchasing Class Y Shares

Your purchase of Class Y Shares are made at NAV without asales charge or CDSC. Class Y Shares are only available toeligible investors.

Eligible Investors

The Funds offer Class Y Shares exclusively to certaininstitutional and other eligible investors. Eligible investors areas follows:

• Clients of broker-dealers or registered investmentadvisers that both recommend the purchase of Fundshares and charge clients an asset-based fee;

• A retirement plan (or the custodian for such plan) withaggregate plan assets of at least $5 million at the time ofpurchase and that purchases shares directly from theFund or through a third party broker-dealer;

• Any insurance company, trust company or bankpurchasing shares for its own account;

• Any endowment, investment company or foundation;and

• Any trustee of a Fund, any employee of HCMFA and anyfamily member of any such trustee or employee.

Each Fund reserves the right to change the criteria for eligibleinvestors. Each Fund also reserves the right to refuse apurchase order for any reason, including if it believes thatdoing so would be in the best interests of the Fund and itsshareholders.

Redemption of Shares

Each Fund redeems its shares based on the NAV nextdetermined after the Transfer Agent or Financial Advisorreceives your redemption request in good order. Each Fundreserves the right to reject any redemption request that is notin good order. The specific requirements for good orderdepend on the type of account and transaction and themethod of redemption. Contact HCMFA if you have anyquestions about your particular circumstances. Generally,“good order” means that the redemption request meets allapplicable requirements described in this Prospectus. See“Net Asset Value” for a description of the calculation of NAVper share.


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You can redeem shares of a Fund on any day that the NYSE isopen for business. Each Fund, however, may suspend theright of redemption and postpone payment for more thanseven days: (i) during periods when trading on the NYSE isclosed on days other than weekdays or holidays; (ii) duringperiods when trading on the NYSE is restricted; (iii) during anyemergency which makes it impractical for a Fund to disposeof its securities or fairly determine the NAV of the Fund; and(iv) during any other period permitted by the SEC for yourprotection.

The Funds are meant for long-term investing. They are notmeant for “market timing” or other types of frequent orshort-term trading (“disruptive trading”). Disruptive tradingcan adversely affect Fund performance and the interests oflong-term investors by, among other things, interfering withthe efficient management of the Fund’s investment portfolio.Accordingly, the Funds have adopted, and the Board hasapproved, policies and procedures reasonably designed tomonitor Fund trading activity and, where disruptive trading isdetected, to take action to stop such activity. The Fundsreserve the right to amend these policies and procedures atany time without prior notice to investors or FinancialAdvisor.

Direct Investor Accounts. An investor that redeems orexchanges out of (or purchases) a particular Fund within30 days of a purchase or exchange into (or redemption outof) that same Fund may be restricted from further investing inany series of Highland Funds I or Highland Funds II orexchanging between Participating Funds, as defined in thisProspectus, subject to the exceptions described below, allwithout prior notice to the investor. The Funds may alsorestrict investments and exchanges by investors that arebelieved to have engaged in a pattern of disruptive trading. Inaddition, the Funds may reject purchase orders or terminateor restrict the exchange privileges of any account associatedwith a broker-dealer representative, branch office, or firmthat the Funds have determined to be a source or facilitatorof disruptive trading, even if no disruptive trading hasoccurred in that particular account. Exchanges and purchasesmay be permitted again for restricted investors under certaincircumstances in the sole discretion of HCMFA. The foregoingrestrictions apply to direct investor accounts and do not applyto shares held on the books of Financial Advisors throughomnibus accounts with the Funds. The restrictions applicableto omnibus accounts with Financial Advisors are discussedbelow.

The restrictions described above do not apply to(1) systematic withdrawals (e.g., regular periodic automaticredemptions, dividend and capital gain distributions, andsystematic share class conversions); (2) systematic purchases(e.g., regular periodic automatic purchases, payrollcontributions, and dividend reinvestments) where the entity

maintaining the shareholder account is able to identify thetransaction as a systematic withdrawal or purchase;(3) transactions by fund-of-funds advised by HCMFA; (4)transactions initiated by the trustee or adviser to a donoradvised charitable fund; and (5) certain transactions (plancontributions, plan benefit payments, plan expenses andportfolio rebalancing) by defined benefit plans that receiveasset allocation services from HCMFA. The Funds may alsoexclude small transactions less than an amount set from timeto time under the Funds’ policies.

Omnibus Accounts with Financial Advisors. The Funds are alsooffered through Financial Advisors that may establish an“omnibus” account with the Funds. Because the Funds maynot receive information on the trading activity of theunderlying individual investors, it may be difficult orimpossible for the Funds to detect or stop disruptive tradingin omnibus accounts. The difficulty may be even greater ifthere are multiple tiers of Financial Advisors or if omnibusaccounts are used to hide disruptive trading within thetrading activity of a large number of underlying investors.

In deciding whether to establish an omnibus account with aFinancial Advisor, the Funds will consider whether theFinancial Advisor has its own disruptive trading policies andprocedures (which policies and procedures may differmaterially from those applied by the Fund to direct accounts).If the Financial Advisor has its own disruptive trading policiesand procedures, the Funds will seek assurance from theFinancial Advisor that such policies and procedures will beeffectively enforced.

If the Financial Advisor does not have its own disruptivetrading policies and procedures, the Funds will seek to obtainthe Financial Advisor’s cooperation in enforcing the Funds’disruptive trading policies and procedures to the extentfeasible. Such cooperation may include periodically providingthe Funds with the trading activity of its underlying investorsand, if disruptive trading is detected by the Funds, makingefforts to stop it.

There are a number of existing omnibus accounts withFinancial Advisors that were established prior to the adoptionof the foregoing policies and procedures. These FinancialAdvisors may not have their own disruptive trading policiesand procedures and/or the Funds may not have obtainedtheir cooperation in enforcing the Funds’ disruptive tradingpolicies and procedures. The Funds will continue to makereasonable efforts to work with these Financial Advisors toimplement the policies and procedures described above,although there is no guarantee that such efforts will besuccessful.

Defined Contribution Plans. Participants in certain definedcontribution plans that exchange out of any Fund may berestricted from further exchanging back into that same Fund


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for a period of at least 30 days. This restriction does not affectthe participant’s ability to exchange into any investmentoption that has not been restricted or the participant’s abilityto continue contributions into the participant’s definedcontribution plan (including that same Fund). This restrictionalso does not apply to certain withdrawals (such asdistributions, hardship withdrawals and plan loans),systematic rebalancing or loan repayments. Ask your planadministrator or visit your plan administrator’s website formore information.

Reservation of Rights to Reject Purchase or Exchange Orders.The Funds reserve the right to reject any purchase orexchange order at any time for any reason without priornotice to the investor or Financial Advisor.

Limitations on Ability to Prevent Disruptive Trading. Despitethe efforts of the Funds and the Underwriter to protect theFunds from harm caused by disruptive trading, there is noguarantee that the Fund’s disruptive trading policies andprocedures will be effective. As discussed above, it may bedifficult or impossible for the Funds to detect or stopdisruptive trading in certain omnibus accounts with FinancialAdvisors. Regardless of whether those Financial Advisors havetheir own disruptive trading policies and procedures orcooperate in enforcing the Funds’ policies and procedures tothe extent feasible, there is no guarantee that they will beeffective and they may differ materially from those applied bythe Funds to direct accounts. In addition, investors thatpurposely engage in disruptive trading may employ strategiesto avoid detection. Consequently, the Funds may not be ableto detect or stop disruptive trading until harm to the Fundshas already occurred.

Risks of Disruptive Trading. Disruptive trading, especiallyinvolving large dollar amounts, may adversely affect Fundperformance and the interests of long-term investors byinterfering with efficient portfolio management and theimplementation of long-term investment strategies. Inparticular, disruptive trading may: (1) require a Fund to keepmore assets in cash or other liquid holdings than it wouldotherwise consider appropriate, causing the Fund to miss outon gains in a rising market; (2) require a Fund to sell some ofits investments sooner than it would otherwise considerappropriate in order to honor redemptions; and (3) increase

brokerage commissions and other portfolio transactionexpenses by causing the Fund to buy and sell securities morefrequently as assets move in and out.

Funds that invest in foreign securities may be particularlysusceptible to disruptive trading because of investorsattempting to engage in “time-zone arbitrage,” a tradingstrategy that exploits the fact that the closing prices offoreign securities owned by the Fund are established sometime before the Fund calculates its own share price (whichtypically occurs at 4:00 p.m. Eastern Time). Funds that investsignificantly in high-yield securities or small-cap equitysecurities may be particularly susceptible to disruptive tradingbecause of investors attempting to engage in “liquidityarbitrage,” a trading strategy that exploits knowledge of thevalue of securities and the fact that they are ofteninfrequently traded. Such disruptive trading strategies mayinterfere with the efficient management of a Fund’s portfolioto an even greater degree than other types of disruptivetrading and may dilute the value of Fund shares held by otherinvestors.

Financial Advisors may impose short-term trading restrictionsthat differ from those of the Funds. Any shareholderpurchasing shares of a Fund through a Financial Advisorshould check with the Financial Advisor or the Fund todetermine whether the shares will be subject to a short-termtrading fee.

Each Fund reserves all rights, including the right to refuse anypurchase request (including requests to purchase byexchange) from any person or group who, in the Fund’s view,is likely to engage in excessive trading or if such purchase orexchange is not in the best interests of the Fund and to limit,delay or impose other conditions on purchases or exchanges.Each Fund has adopted a policy of seeking to minimizeshort-term trading in its shares and monitors purchase,exchange and redemption activities to assist in minimizingshort-term trading.

You may redeem shares of a Fund through your FinancialAdvisor or its authorized designee or directly from the Fundthrough the Transfer Agent. Your Financial Advisor maycharge a fee for such services. If you hold your shares in anindividual retirement account (“IRA”), you should consult a


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tax advisor concerning the current tax rules applicable toIRAs. Outlined below are various methods for redeemingshares:

Method Instructions

By letter You may mail a letter requesting redemption ofshares to: “Highland Funds II — (Fund Name),” POBox 8656, Boston, MA 02266-8656 . Your lettershould state the name of the Fund, the share class,the dollar amount or number of shares you areredeeming and your account number. You must signthe letter in exactly the same way the account isregistered. If there is more than one owner ofshares, all must sign. A Medallion signatureguarantee is required for each signature on yourredemption letter. You can obtain a Medallionsignature guarantee from financial institutions, suchas commercial banks, brokers, dealers and savingsassociations. A notary public cannot provide aMedallion signature guarantee. If the account isregistered to a corporation, trust or other entity,additional documentation may be needed. Pleasecall 1-877-665-1287 for further details.

By telephone or theInternet

Unless you have requested that telephone orInternet redemptions from your account not bepermitted, you may redeem your shares in anaccount (excluding an IRA) directly registered withthe Transfer Agent by calling 1-877-665-1287 orvisiting the Funds’ website athttp://www.highlandfunds.com. If the TransferAgent acts on telephone or Internet instructionsafter following reasonable procedures to protectagainst unauthorized transactions, neither theTransfer Agent nor the Fund will be responsible forany losses due to unauthorized telephone orInternet transactions and instead you would beresponsible. You may request that proceeds fromtelephone or Internet redemptions be mailed to youby check (if your address has not changed in theprior 30 days) or forwarded to you by bank wire. Ifyou would like to request that such proceeds beinvested in shares of other Highland funds or otherregistered, open-end investment companies advisedby the Adviser and distributed by the Underwriter,please see “Exchange of Shares” below. Among theprocedures the Transfer Agent may use arepasswords or verification of personal information.The Funds may impose limitations from time to timeon telephone or Internet redemptions.

Proceeds by check The Funds will make checks payable to the name(s)in which the account is registered and normally willmail the check to the address of record within sevendays.

Proceeds by bankwire

The Funds accept telephone or Internet requests forwire redemption in amounts of at least $1,000. TheFunds will send a wire to either a bank designatedon your new account application or on a subsequentletter in good order as described above under theinstructions for redeeming shares “By letter.” Theproceeds are normally wired on the next businessday.

Automatic Cash Withdrawal Plan

You may automatically redeem shares on a monthly basis ifyou have at least $10,000 in your account and if your accountis directly registered with the Transfer Agent. Call1-877-665-1287 or visithttp://highlandfunds.com/literature/#forms for moreinformation about this plan.

Involuntary Redemption

A Fund may redeem all shares in your account (other than anIRA) if their aggregate value falls below $5,000 as a result ofredemptions (but not as a result of a decline in NAV). You willbe notified in writing if a Fund initiates such action andallowed 30 days to increase the value of your account to atleast $5,000.

Redemption Proceeds

A redemption request received by a Fund will be effected atthe NAV per share next determined after the Fund receivesthe request in good order. If you request redemptionproceeds by check, the Fund will normally mail the check toyou within seven days after receipt of your redemptionrequest. If, however, you purchased your Fund shares bycheck or ACH transaction, and unless you havedocumentation satisfactory to the Fund that your transactionhas cleared, the Fund may hold proceeds for sharespurchased by check or ACH until the purchase amount hasbeen deemed collected, which is eight business days from thedate of purchase for checks and five business days from thedate of purchase for ACH transactions. While the Fund willdelay the processing of the payment until the check clears,your shares will be valued at the NAV per share nextdetermined after receipt by the Transfer Agent or yourFinancial Advisor of your redemption request in good order.

The Funds may pay your redemption proceeds wholly orpartially in portfolio securities. Payments would be made inportfolio securities, which may include illiquid securities, onlyif the Adviser or the Board believes that it would be in aFund’s best interests not to pay redemption proceeds in cash.If a Fund pays your redemption proceeds in portfoliosecurities, you will be exposed to market risk until youconvert these portfolio securities into cash, and you will likelypay commissions upon any such conversion. If you receiveilliquid securities, you could find it more difficult to sell suchsecurities and may not be able to sell such securities at pricesthat reflect the Adviser’s or your assessment of their fairvalue or the amount paid for them by the Funds. Illiquidity


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may result from the absence of an established market forsuch securities as well as legal, contractual or otherrestrictions on their resale and other factors. Unless you are atax-exempt investor or investing through a tax-deferredretirement plan or other tax-advantaged arrangement, aredemption of shares, whether you receive the redemptionproceeds in cash or securities, is generally a taxable event,and you may realize a gain or a loss for U.S. federal incometax purposes (see “Taxation” below).

Exchange of Shares

Shareholders of a Fund may exchange their Fund shares onany business day for shares of the same share class of anyseries of Highland Funds II (currently, Highland Energy MLPFund, Highland Premier Growth Equity Fund, HighlandSmall-Cap Equity Fund, Highland Fixed Income Fund, HighlandTax-Exempt Fund, Highland Global Allocation Fund andHighland Total Return Fund), Highland Funds I, except for anETF, (currently, Highland Long/Short Equity Fund, HighlandLong/Short Healthcare Fund, Highland Floating RateOpportunities Fund and Highland Opportunistic Credit Fund),and any other Participating Fund and such exchanges will beeffected at the relative daily NAVs per share, plus anyapplicable redemption/exchange fee with respect to theexchanged shares (see “Redemption of Shares”). If you do notcurrently have an account in the fund into which you wish toexchange your shares, you will need to exchange enoughFund shares to satisfy such fund’s current minimuminvestment account requirement. Call 1-877-665-1287 for theapplicable prospectus, including applicable investmentminimums, and read it carefully before investing.

Additionally, you can also exchange your Fund shares on anybusiness day for shares of the Highland Liquid Reserves Fund(the “Liquid Reserves Fund”), a money market mutual fundadvised by SSgA Funds Management, Inc. The minimum toopen an account in the Liquid Reserves Fund is currently$1,000. Call 1-877-665-1287 for the Liquid Reserves Fundprospectus, including applicable investment minimums, andread it carefully before investing.

Shareholders of the Funds may exchange their shares in aclass of a Fund daily for shares of a different class of the sameFund, provided that such shareholder is eligible to purchaseshares of the requested class (a “Same-Fund Exchange”). Inaddition, in connection with the liquidation of Class R sharesof the Funds effective on March 15, 2016 (the “LiquidationDate”), Class R shareholders of each Fund may exchange theirClass R shares for Class Y shares of the same Fund pursuant tothe procedures described in this section at any time prior tothe Liquidation Date, even if they do not otherwise qualify topurchase Class Y shares.

If the shares of the Funds or any Participating Fund, otherthan the Liquid Reserves Fund, that you are exchanging (the“Exchanged Shares”) are subject to a CDSC, you will not becharged that CDSC upon the exchange. However, when yousell the shares acquired through the exchange (the “AcquiredShares”), the shares sold may be subject to a CDSC,depending upon when you originally purchased theExchanged Shares. For purposes of determining theapplicability of a CDSC, the length of time you own yourshares will be computed from the date of your originalpurchase of the Exchanged Shares (and includes the periodduring which the Acquired Shares were held), and theapplicable CDSC will be based on the CDSC schedule of theExchanged Shares. No CDSC is charged when you exchangeyour shares of the Funds into the Liquid Reserves Fund;however, notwithstanding any statement above to thecontrary, the applicable CDSC (based on the CSDC schedule ofthe Exchanged Shares) will be imposed when shares areredeemed from the Liquid Reserves Fund and will becalculated without regard to the holding time of the LiquidReserves Fund.

Your exchange privilege will be revoked if the exchangeactivity is considered excessive. In addition, the ParticipatingFunds may reject any exchange request for any reason,including if they do not think that the exchange is in the bestinterests of the Participating Funds and/or their shareholders.The Participating Funds may also terminate your exchangeprivilege if the Adviser determines that your exchange activityis likely to adversely impact its ability to manage theParticipating Funds or if the Participating Funds otherwisedetermine that your exchange activity is contrary to theirshort-term trading policies and procedures.

Unless you are a tax-exempt investor or investing through atax-deferred retirement plan or other tax-advantagedarrangement, an exchange, other than a Same-FundExchange, is generally a taxable event, and you may realize again or a loss for U.S. federal income tax purposes. ASame-Fund Exchange is not expected to result in yourrealization of a gain or loss for U.S. federal income taxpurposes. See “Taxation” below.

To exchange via the Internet, visit the Funds’ website athttp://www.highlandfunds.com. To exchange by telephone,call 1-877-665-1287. Please have your account number andtaxpayer identification number available when calling.

Cost Basis Reporting

Upon the redemption or exchange of your shares in a Fund,the Fund or, if you purchase your shares through a FinancialAdvisor or other intermediary, your Financial Advisor or otherintermediary, as applicable, generally will be required toprovide you and the Internal Revenue Service (“IRS”) with


74

cost basis and certain other related tax information about theFund shares you redeemed or exchanged. This cost basisreporting requirement is effective for shares purchased,including through dividend reinvestment, on or afterJanuary 1, 2012. Please contact the Funds’ Transfer Agent at1-877-665-1287 or consult your Financial Advisor or otherintermediary, as appropriate, for more information regardingavailable methods for cost basis reporting and how to select aparticular method. Please consult your tax advisor todetermine which available cost basis method is best for you.

Distribution and Shareholder Service Fees

Each Fund is authorized under a distribution plan (each a“Plan” and collectively the “Plans”) to use the assetsattributable to such Fund’s Class A and Class C Shares, asapplicable, to finance certain activities relating to thedistribution of shares to investors and maintenance ofshareholder accounts. These activities include marketing andother activities to support the distribution of the Class Aand Class C Shares and the services provided to you by yourFinancial Advisor. The Plan operates in a manner consistentwith Rule 12b-1 under the 1940 Act, which regulates themanner in which an open-end investment company maydirectly or indirectly bear the expenses of distributing itsshares.

Under the Plans, distribution and service fees paid by eachFund to the Underwriter will be at the rates shown in thetable below. The Underwriter may pay all or a portion ofthese fees to Financial Advisors whose clients own shares ofthe Funds. In addition, these fees may includereimbursements to HCMFA for certain distribution- andservice-related expenses actually incurred by HCMFA onbehalf of the Funds, pursuant to reimbursement guidelinesapproved by the Board, and to the extent consistent with thePlans and the 1940 Act. The Underwriter may also makepayments from the distribution and service fees they receivesfrom the Funds to NexBank Securities, Inc., a FINRA memberbroker-dealer that is an affiliate of the Adviser. Because thedistribution and service fees are payable regardless of theUnderwriter’s expenses, the Underwriter may realize a profitfrom the fees. The Plans authorize any other payments by theFunds to the Underwriter and its affiliates to the extent thatsuch payments might be construed to be indirect financing ofthe distribution of shares of the Funds. Because these feesare paid out of a Fund’s assets on an ongoing basis, these feeswill increase the cost of your investment in the Fund. Bypurchasing a class of shares subject to higher distribution feesand service fees, you may pay more over time than on a classof shares with other types of sales charge arrangements.Long-term shareholders may pay more than the economicequivalent of the maximum front-end sales chargespermitted by the rules of FINRA.

The Plan will continue in effect from year to year so long ascontinuance is specifically approved at least annually by avote of the Board, including a majority of the Trustees whoare not “interested persons” (as defined in the 1940 Act) ofthe Funds and who have no direct or indirect financialinterest in the operation of the Plan or in any agreementsrelated to the Plan (the “Independent Trustees”), cast inperson at a meeting called for the purpose of voting on thePlan. The Plan may not be amended to increase the feesmaterially without approval by a vote of a majority of theoutstanding voting securities of the relevant class of shares,and all material amendments of the Plan must be approvedby the Trustees in the manner provided in the foregoingsentence. The Plan may be terminated with respect to a classat any time by a vote of a majority of the IndependentTrustees or by a vote of a majority of the outstanding votingsecurities of the relevant class of shares.

In addition to payments under the Plan, from time to time theFunds may pay broker-dealers and other intermediaries’account-based fees for networking and account maintenance.

In addition, HCMFA and/or the Underwriter may, from timeto time, at their own expense out of the revenues theyreceive from the Funds and/or their own financial resources,make cash payments to broker-dealers and other financialintermediaries (directly and not as an expense of a Fund) asan incentive to sell shares of the Funds and/or to promoteretention of their customers’ assets in the Funds. Such cashpayments may be calculated on sales of shares of the Funds(“Sales-Based Payments”) or on the average daily net assetsof the Funds attributable to that particular broker-dealer orother financial intermediary (“Asset-Based Payments”). Eachof HCMFA and/or the Underwriter may agree to make suchcash payments to a broker-dealer or other financialintermediary in the form of either or both Sales-BasedPayments and Asset-Based Payments.

HCMFA and/or the Underwriter may also make other cashpayments to broker-dealers or other financial intermediariesin addition to or in lieu of Sales-Based Payments andAsset-Based Payments, in the form of payment for travelexpenses, including lodging, incurred in connection with tripstaken by qualifying registered representatives of thosebroker-dealers or other financial intermediaries and theirfamilies to places within or outside the United States;meeting fees; entertainment; transaction processing andtransmission charges; advertising or other promotionalexpenses; allocable portions, based on shares of the Fundssold, of salaries and bonuses of registered representatives ofan affiliated broker-dealer or other financial intermediarythat is a Financial Advisor; or other expenses as determined inHCMFA’s or the Underwriter’s discretion, as applicable. Incertain cases these other payments could be significant to thebroker-dealers or other financial intermediaries. Any


75

payments described above will not change the price paid byinvestors for the purchase of the shares of the Funds, theamount that the Funds will receive as proceeds from suchsales, or the amounts payable under the Plans.

Each of HCMFA and/or the Underwriter determines the cashpayments described above in its discretion in response torequests from broker-dealers or other financialintermediaries, based on factors it deems relevant.Broker-dealers or other financial intermediaries may not usesales of the Funds’ shares to qualify for any incentives to theextent that such incentives may be prohibited by law.

Amounts paid by HCMFA and/or the Underwriter to anybroker-dealer or other financial intermediary in connectionwith the distribution of any shares of the Funds will counttowards the maximum imposed by FINRA on underwritercompensation in connection with the public offering ofsecurities. In addition, HCMFA may utilize its own resourcesto compensate the Underwriter for distribution or serviceactivities on behalf of the Funds. These payments are notreflected in the “Annual Fund Operating Expenses” table forthe Funds.

Distribution and Shareholder Service Fee Rates

All Funds except Highland Energy MLP Fund Highland Energy MLP Fund

Distribution Fee Service Fee Distribution Fee Service Fee

Class A 0.00%* 0.25%* Class A 0.10%** 0.25%

Class C 0.75% 0.25% Class C 0.75% 0.25%

Class Y None None Class Y None None

* Under the Funds’ Plan, a Fund may pay up to 0.25% for distribution fees and/or shareholder servicing fees.

** Currently, Highland Energy MLP Fund is not authorized by the Board to charge any distribution fees for Class A Shares, although the Board may authorizesuch payments at any time without shareholder approval.

These distribution and service fees may be voluntarily reduced on a temporary basis for certain share classes, and may bereturned to their stated levels, at any time, without prior notice.


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The NAV per share of each class of shares of each Fund iscalculated as of 4:00 p.m., Eastern Time, on each day that theNYSE is open for business, except on days on which regulartrading on the NYSE is scheduled to close before 4:00 p.m.,when each Fund calculates NAV as of the scheduled close ofregular trading. The NYSE is open Monday through Friday, butcurrently is scheduled to be closed on New Year’s Day,Dr. Martin Luther King, Jr. Day, Presidents’ Day, Good Friday,Memorial Day, Independence Day, Labor Day, ThanksgivingDay and Christmas Day or on the preceding Friday orsubsequent Monday when a holiday falls on a Saturday orSunday, respectively.

The NAV per share of each class of shares of a Fund iscomputed by dividing the value of the Fund’s net assets (i.e.,the value of its securities and other assets less its liabilities,including expenses payable or accrued but excluding capitalstock and surplus) attributable to the class of shares by thetotal number of shares of the class outstanding at the timethe determination is made. The price of a particular class of aFund’s shares for the purpose of purchase and redemptionorders will be based upon the calculation of NAV per share ofthe Fund next made after the purchase or redemption orderis received in good order. The value of a Fund’s portfolioassets may change on days the Fund is closed and on whichyou are not able to purchase or sell your shares.

Each Fund’s portfolio securities are valued in accordance withthe Fund’s valuation policies approved by the Board. Thevalue of the Funds’ investments is generally determined asfollows:

• Portfolio securities for which market quotations arereadily available are valued at their current marketvalue.

• Foreign securities listed on foreign exchanges are valuedbased on quotations from the primary market in whichthey are traded and are translated from the localcurrency into U.S. dollars using current exchange rates.Foreign securities may trade on weekends or other dayswhen a Fund does not calculate NAV. As a result, themarket value of these investments may change on dayswhen you cannot buy or redeem shares of a Fund.

• Investments by a Fund in any other mutual fund arevalued at their respective NAVs as determined by thosemutual funds each business day. The prospectuses forthose mutual funds explain the circumstances underwhich those funds will use fair value pricing and theeffects of using fair value pricing.

• All other portfolio securities, including derivatives andcases where market quotations are not readily available,or when the market price is determined to be

unreliable, are valued at fair value as determined ingood faith pursuant to procedures established by theBoard subject to approval or ratification by the Board atits next regularly scheduled quarterly meeting. Pursuantto the Funds’ pricing procedures, securities for whichmarket quotations are not readily available or for whichthe market price is determined to be unreliable, mayinclude, but are not limited to, securities that aresubject to legal or contractual restrictions on resale,securities for which no or limited trading activity hasoccurred for a period of time, or securities that areotherwise deemed to be illiquid (i.e., securities thatcannot be disposed of within seven days atapproximately the price at which the security iscurrently priced by the Fund which holds the security).Market quotations may also be not “readily available” ifa significant event occurs after the close of the principalexchange on which a portfolio security trades (butbefore the time for calculation of a Fund’s NAV) if thatevent affects or is likely to affect (more than minimally)the NAV per share of a Fund. In determining the fairvalue price of a security, HCMFA may use a number ofother methodologies, including those based ondiscounted cash flows, multiples, recovery rates, yield tomaturity or discounts to public comparables.

• Fair value pricing involves judgments that are inherentlysubjective and inexact; as a result, there can be noassurance that fair value pricing will reflect actualmarket value, and it is possible that the fair valuedetermined for a security will be materially differentfrom the value that actually could be or is realized uponthe sale of that asset.

Additional Information Regarding Deferred Tax Liabilityand Deferred Tax Assets

In calculating the Highland Energy MLP Fund’s daily NAV, theFund will, among other things, account for its deferred taxliability and/or asset balances.

The Fund accrues, in accordance with generally acceptedaccounting principles, a deferred income tax liability balanceat the currently effective statutory U.S. federal corporateincome tax rate (generally at a rate of 35%) plus an assumedstate and local income tax rate, for its future tax liabilityassociated with the capital appreciation of its investmentsand the distributions received by the Fund on equitysecurities of MLPs considered to be return of capital and forany net operating income or gains. The Fund’s current anddeferred tax liability, if any, depends upon the Fund’s netinvestment gains and losses and realized and unrealized gainsand losses on investments and therefore may vary greatly

Net Asset Value (NAV)


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from year to year and from day to day depending on thenature of the Fund’s investments, the performance of thoseinvestments and general market conditions. Any deferred taxliability balance reduces the Fund’s NAV.

The Fund also accrues, in accordance with generally acceptedaccounting principles, a deferred tax asset balance whichreflects an estimate of the Fund’s future tax benefitassociated with net operating losses, capital losscarryforwards and unrealized losses. Any deferred tax assetbalance increases the Fund’s NAV. To the extent the Fund hasa deferred tax asset balance, the Fund assesses, inaccordance with generally accepted accounting principles,whether a valuation allowance, which would offset the valueof some or all of the Fund’s deferred tax asset balance, isrequired. Pursuant to Financial Accounting Standards BoardAccounting Standards Codification 740 (FASB ASC 740), theFund assesses a valuation allowance to reduce some or all ofthe deferred tax asset balance if, based on the weight of allavailable evidence, both negative and positive, it is morelikely than not that some or all of the deferred tax asset willnot be realized. The Fund uses judgment in considering therelative impact of negative and positive evidence. The weightgiven to the potential effect of negative and positive evidenceis commensurate with the extent to which such evidence canbe objectively verified. The Fund’s assessment considers,among other matters, the nature, frequency and severity ofcurrent and cumulative losses, forecasts of future profitability(which are dependent on, among other factors, future MLPcash distributions), the duration of statutory carryforwardperiods and the associated risk that operating loss and capitalloss carryforwards may be limited or expire unused. However,this assessment generally may not consider the potential formarket value increases with respect to the Fund’sinvestments in equity securities of MLPs or any othersecurities or assets. Significant weight is given to the Fund’sforecast of future taxable income, which is based on, amongother factors, the expected continuation of MLP cashdistributions at or near current levels. Consideration is alsogiven to the effects of the potential for additional futurerealized and unrealized gains or losses on investments andthe period over which deferred tax assets can be realized, asfederal tax net operating loss carry forwards expire in twentyyears and federal capital loss carry forwards expire in fiveyears for regular C Corporations. Recovery of a deferred taxasset is dependent on continued payment of the MLP cashdistributions at or near current levels in the future and theresultant generation of taxable income. The Fund assesseswhether a valuation allowance is required to offset some orall of any deferred tax asset in connection with thecalculation of the Fund’s NAV per share each day; however,

to the extent the final valuation allowance differs from theestimates the Fund used in calculating the Fund’s daily NAV,the application of such final valuation allowance could have amaterial impact on the Fund’s NAV.

The Fund’s deferred tax asset and/or liability balances areestimated using estimates of effective tax rates expected toapply to taxable income in the years such balances arerealized. The Fund relies to some extent on informationprovided by MLPs in determining the extent to whichdistributions received from MLPs constitute a return ofcapital, which information may not be provided to the Fundon a timely basis, in order to estimate the Fund’s deferred taxliability and/or asset balances for purposes of financialstatement reporting and determining its NAV. If suchinformation is not received from such MLPs on a timely basis,the Fund estimates the extent to which distributions receivedfrom MLPs constitute a return of capital based on averagehistorical tax characterization of distributions made by MLPs.Average historical tax characterization of distributions isdetermined by reference to historical data, if available,specific to each MLP in which the Fund invests; when no suchdata are available, the Fund generally relies on industry-widedata. The Fund’s estimates regarding its deferred tax liabilityand/or asset balances are made in good faith; however, thedaily estimate of the Fund’s deferred tax liability and/or assetbalances used to calculate the Fund’s NAV could varydramatically from the Fund’s actual tax liability. Actualincome tax expense, if any, will be incurred over many years,depending on if and when investment gains and losses arerealized, the then-current basis of the Fund’s assets, theamount of time the Fund holds a particular MLP investment,the composition of the Fund’s portfolio and other factors. Asa result, the determination of the Fund’s actual tax liabilitymay have a material impact on the Fund’s NAV. The Fund’sdaily NAV calculation is based on then current estimates andassumptions regarding the Fund’s deferred tax liability and/orasset balances and any applicable valuation allowance, basedon all information available to the Fund at such time. Fromtime to time, the Fund may modify its estimates orassumptions regarding its deferred tax liability and/or assetbalances and any applicable valuation allowance as newinformation becomes available. Modifications of the Fund’sestimates or assumptions regarding its deferred tax liabilityand/or asset balances and any applicable valuationallowance, changes in generally accepted accountingprinciples or related guidance or interpretations thereof,limitations imposed on net operating and capital losses (ifany) and changes in applicable tax law could result inincreases or decreases in the Fund’s NAV per share, whichcould be material.

Net Asset Value (NAV)

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Dividends and Other Distributions (Funds Other ThanHighland Energy MLP Fund)

The Funds declare and pay dividends of their net investmentincome according to the schedule below. The Funds declareand pay dividends of any net realized capital gains once eachyear. Unless you instruct a Fund to pay dividends of netinvestment income and dividends of net realized capital gainsto you in a check mailed to you, they will automatically bereinvested in your account. There are no fees or charges toreinvest dividends or other distributions. Dividends aregenerally taxable to you in the manner described below evenif they are reinvested in additional shares of the Funds.

The Funds are generally subject to a 4% excise tax on netinvestment income and net realized capital gains that are notdistributed on a calendar-year basis. To avoid this tax orFund-level U.S. federal income taxes, the Funds may paydividends of net investment income and net realized capitalgains more frequently than shown in the schedule below. See“Taxation” below.

Fund Distribution Schedule

Highland Premier Growth Equity FundHighland Small-Cap Equity FundHighland Total Return Fund

• Dividends of investment incomeare typically declared and paidannually.

• Short-term and long-term capitalgains, if any, are typically declaredand paid annually.

Highland Global Allocation Fund • Dividends of investment incomeare typically declared and paidquarterly.


Highland Fixed Income FundHighland Tax-Exempt Fund

• Dividends of investment incomeare declared daily and paidmonthly.


Dividends and Other Distributions (Highland Energy MLPFund)

The Fund intends to make quarterly cash distributions of allor substantially all cash distributions the Fund receives fromMLP investments, after allowance for any fund-level taxes, toits shareholders.

Due to the tax treatment of the Fund’s allocations anddistributions from MLPs (as discussed in “Taxation” below),HCMFA expects that a significant portion of the Fund’sdistributions to shareholders will typically be treated as areturn of capital in the hands of shareholders for U.S. federalincome tax purposes (i.e., as distributions in excess of theFund’s current and accumulated earnings and profits asdescribed below). However, no assurance can be given in thisregard; just as the Fund’s corporate income tax liability can

fluctuate materially from year to year, the extent to whichthe Fund is able to make return-of-capital distributions alsocan vary materially from year to year depending on a numberof different factors, including the composition of the Fund’sportfolio (i.e., as between MLP equity securities and otherinvestments), the level of allocations of net income and othertax items for the Fund from its underlying MLP investmentsduring a particular taxable year, the length of time the Fundhas owned the MLP equity securities in its portfolio, and theextent to which the Fund disposes of MLP equity securitiesduring a particular year, including, if necessary, to meet Fundshareholder redemption requests.

In general, a distribution will constitute a return of capital to ashareholder, rather than a dividend, to the extent suchdistribution exceeds the Fund’s current and accumulatedearnings and profits. The portion of any distribution treatedas a return of capital will constitute a tax-free return ofcapital to the extent of the shareholder’s basis in its Fundshares and thereafter generally will be taxable to theshareholder as capital gain. Any such distribution, in turn, willresult in a reduction in a shareholder’s basis in the Fund’sshares (but not below zero) to the extent of the return ofcapital, and, when the shareholder later sells shares of theFund, in the shareholder’s recognizing more gain or less loss,potentially increasing the shareholder’s tax liability. To permitthe Fund to maintain a more stable distribution rate, theFund may distribute less or more than the entire amount ofcash it receives from its investments in a particular period.Any undistributed cash would be available to supplementfuture distributions, and until distributed would add to theFund’s net asset value. Correspondingly, once distributed,such amounts reduce the Fund’s net asset value. In addition,in the discretion of the Fund, the Fund may determine not tomake distributions at one or more times during the year,including by reason of potential adverse tax consequences toshareholders. See “Taxation -- Highland Energy MLP Fund”below.

Unless you instruct the Fund to pay distributions to you in acheck mailed to you, they will automatically be reinvested inyour account. There are no fees or charges to reinvestdividends or distributions in excess of the Fund’s earnings andprofits. Distributions that are reinvested in additional sharesof the Fund are generally treated in the same manner for U.S.federal income tax purposes as comparable cash dividends ordistributions. See “Taxation -- Highland Energy MLP Fund”below.

Taxation

The following discussion is a summary of some of theimportant U.S. federal income tax considerations generallyapplicable to an investment in a Fund. Your investment mayhave other tax implications. The discussion reflects provisions


79

of the Code, existing Treasury regulations, rulings publishedby the IRS, and other applicable authorities, as of the date ofthis Prospectus. These authorities may be changed, possiblywith retroactive effect, or subject to new legislative,administrative or judicial interpretations. No attempt is madeto present a detailed explanation of all U.S. federal, state,local and foreign tax law concerns affecting the Funds andtheir shareholders, or to address all aspects of taxation thatmay apply to individual shareholders or to specific types ofshareholders, such as foreign persons, that may qualify forspecial treatment under U.S. federal income tax laws. Thediscussion set forth herein does not constitute tax advice.Please consult your tax advisor about foreign, federal, state,local or other tax laws applicable to you in light of yourparticular circumstances. For more information, including fora summary of certain tax consequences to foreign investorsof investing in a Fund, please see “Income TaxConsiderations” in the SAI.

All Funds Other Than Highland Energy MLP Fund

Taxation of the Funds

Each Fund has elected to be treated and intends to qualifyannually as a regulated investment company (a “RIC”) underSubchapter M of the Code, including by complying with theapplicable qualifying income and diversificationrequirements. If a Fund so qualifies and satisfies certaindistribution requirements, the Fund generally will not besubject to U.S. federal income tax on income and gains thatthe Fund distributes to its shareholders in a timely manner inthe form of dividends, including capital gain dividends (asdefined below). As described in “Dividends and OtherDistributions (Funds Other Than Highland Energy MLP Fund)”above, each Fund intends to distribute at least annually all orsubstantially all of its net investment income and net realizedcapital gains. A Fund will be subject to a Fund-level incometax at regular corporate income tax rates on any taxableincome or gains that it does not distribute to its shareholders.

Amounts not distributed on a timely basis in accordance witha calendar year distribution requirement will be subject to anondeductible 4% U.S. federal excise tax at the Fund level. Toavoid the tax, a Fund must distribute during each calendaryear an amount at least equal to the sum of (i) 98% of itsordinary income (not taking into account any capital gains orlosses) for the calendar year, (ii) 98.2% of its capital gains inexcess of its capital losses (adjusted for certain ordinarylosses) for a one-year period ending on October 31 of thecalendar year, and (iii) any undistributed amounts describedin (i) and (ii) above from the prior year on which the Fundpaid no U.S. federal income tax. While each Fund intends todistribute any income and capital gain in the mannernecessary to minimize imposition of the 4% U.S. federalexcise tax, there can be no assurance that sufficient amounts

of a Fund’s taxable income and capital gain will be distributedto avoid entirely the imposition of the tax. In that event, aFund will be liable for the excise tax only on the amount bywhich it does not meet the foregoing distributionrequirement.

Additionally, if for any taxable year a Fund were not to qualifyas a RIC, and were ineligible to or otherwise did not cure suchfailure, all of its taxable income and gain would be subject toa Fund-level tax at regular corporate income tax rates withoutany deduction for distributions to shareholders. Thistreatment would reduce the Fund’s net income available forinvestment or distribution to its shareholders. In addition, alldistributions from earnings and profits, including any netlong-term capital gains and, in the case of HighlandTax-Exempt Fund, exempt interest dividends, would betaxable to shareholders as ordinary income. Some portions ofsuch distributions might be eligible for the dividends-receiveddeduction in the case of corporate shareholders or to betreated as “qualified dividend income” in the case ofindividual shareholders. The Fund also could be required torecognize unrealized gains, pay substantial taxes and interestand make substantial distributions before requalifying as aRIC that is accorded special tax treatment.

The tax rules applicable to certain derivative instruments, aswell as certain ETNs, in which a Fund may invest are uncertainunder current law, including the provisions applicable to RICsunder Subchapter M of the Code. For instance, the timing andcharacter of income or gains arising from ETNs can beuncertain, including for Subchapter M purposes. Accordingly,while each Fund intends to account for such transactions in amanner it deems to be appropriate, an adversedetermination or future guidance by the IRS with respect toone or more of these rules (which determination or guidancecould be retroactive) may adversely affect a Fund’s ability tomeet one or more of the relevant requirements to maintainits qualification as a RIC, as well as to avoid Fund-level taxes.

Certain of a Fund’s investment practices, including enteringinto futures, options and other derivative transactions, shortsales, and its hedging activities, generally, as well as a Fund’sinvestments in certain types of securities, including certainpreferred stock, debt obligations issued or purchased at adiscount, foreign debt securities, and securities of REITs maybe subject to special and complex U.S. federal income taxprovisions that may, among other things: (i) disallow, suspendor otherwise limit the allowance of certain losses ordeductions; (ii) convert lower taxed long-term capital gain or“qualified dividend income” into higher taxed short-termcapital gain or ordinary income; (iii) accelerate therecognition of income; (iv) convert short-term losses intolong-term losses; (v) cause the Fund to recognize income orgain without a corresponding receipt of cash; (vi) adverselyaffect the time as to when a purchase or sale of stock or

Taxation

80

other securities is deemed to occur; (vii) cause adjustments inthe holding periods of the Fund’s securities; or (vii) otherwiseadversely alter the characterization of certain complexfinancial transactions. These U.S. federal income taxprovisions could therefore affect the amount, timing and/orcharacter of distributions to Fund shareholders. Each Fundintends to monitor its transactions, may make certain taxelections, and may be required to, among other things,dispose of securities (including at a time when it is notadvantageous to do so) to mitigate the effect of theseprovisions, prevent the Fund’s disqualification as a RIC, oravoid incurring Fund-level U.S. federal income and/or excisetax. A Fund’s investments in certain commodity-relatedinvestments, including ETFs and ETNs providing exposure to asingle commodity or a commodities index are or may belimited by its intention to qualify as a RIC, and, in certaincases, may adversely affect the Fund’s ability to qualify as aRIC in a particular year.

Investments by a Fund in foreign securities may be subject toforeign withholding and other taxes, which may decrease theFund’s yield on those securities. Tax treaties between the U.S.and other countries may reduce or eliminate such taxes.Under some circumstances, a Fund may be eligible to make aspecial election that generally will require you to include inincome your share of any foreign income taxes paid by theFund or by certain Underlying Funds in which the Fundinvests. You may be able either to deduct this amount fromyour income or claim it as a foreign tax credit. There is noassurance that a Fund will make this special election for ataxable year even if it is eligible to do so.

Some of the Funds may have high portfolio turnover during ayear. High portfolio turnover can cause a Fund to realizegreater amounts of short-term capital gains or other incomethan in the absence of such turnover and these amounts willgenerally be taxable to shareholders as ordinary incomewhen distributed to them. As noted above, a Fund isgenerally required to distribute such additional income to itsshareholders in respect of each taxable year.

Federal Income Taxation of Shareholders of the Funds

Taxation of Distributions. Distributions paid to you by a Fundfrom net capital gain realized by the Fund (that is, the excessof any net long-term capital gain over net short-term capitalloss, in each case determined with reference to any losscarryforwards) that the Fund properly reports as capital gaindividends (“capital gain dividends”) generally are treated aslong-term capital gain includible in net capital gain andtaxable to individuals at reduced rates, regardless of how longyou have held your shares. Distributions of investmentincome reported by a Fund as derived from “qualifieddividend income” will be taxed in the hands of individuals atthe rates applicable to net capital gains, provided holding

periods and other requirements are met at both theshareholder and Fund level. All other dividends paid to you bya Fund (including dividends from short-term capital gain (thatis, the excess of any net short-term capital gain over any netlong-term capital loss)) from its current or accumulatedearnings and profits, other than exempt-interest dividends(described below), generally are taxable to you as ordinaryincome. Corporations are taxed at the same rate on ordinaryincome as on capital gains. The Fixed Income Fund andTax-Exempt Fund generally do not expect a significant portionof their distributions to qualify as qualified dividend income.

Medicare Tax. A 3.8% Medicare contribution tax is imposedon the net investment income of certain individuals, trustsand estates to the extent their income exceeds certainthreshold amounts. Net investment income generallyincludes for this purpose dividends paid by a Fund, includingany capital gain dividends but excluding any exempt-interestdividends, and net gains recognized on the sale, redemptionor exchange of shares of a Fund. Shareholders are advised toconsult their tax advisors regarding the possible implicationsof this additional tax on their investment in a Fund.

Dividends that the Highland Tax-Exempt Fund properlyreports to you as “exempt-interest dividends” are generallynot subject to federal income taxation, but may be subject tostate and local taxes. The Fund generally intends to distributeprimarily exempt-interest dividends that are also exemptfrom the federal alternative minimum tax. Distributionsderived from other sources, including gains on the sale ofmunicipal obligations, generally will be taxable to you asordinary income or as long-term capital gain. If you receivesocial security or railroad retirement benefits, you shouldconsult your tax advisor to determine what effect, if any, aninvestment in the Highland Tax-Exempt Fund may have onthe federal taxation of your benefits.

If, for any taxable year, a Fund’s total distributions exceedboth its current earnings and profits and accumulatedearnings and profits, the excess will generally be treated as atax-free return of capital up to the amount of your tax basis inthe shares. The amount treated as a tax-free return of capitalwill reduce your tax basis in the shares, thereby increasingyour potential gain or reducing your potential loss on thesubsequent sale of the shares. Any amounts distributed toyou in excess of your tax basis in the shares will be taxable toyou as capital gain (assuming the shares are held as a capitalasset).

Dividends and other taxable distributions are taxable to youas described herein, whether received in cash or reinvested inadditional shares of a Fund. Dividends and other distributionspaid by a Fund generally are treated as received by you at thetime the dividend or distribution is made. If, however, a Fundpays you a dividend in January that was declared in the


81

previous October, November or December and you were ashareholder of record on a specified record date in one ofthose months, then such dividend will be treated for taxpurposes as being paid by the Fund and received by you onDecember 31 of the year in which the dividend was declared.

The price of shares purchased at any time may reflect theamount of a forthcoming dividend or other distribution. If youpurchase shares just prior to a distribution (other than adistribution of exempt-interest dividends or of netinvestment income that a Fund declares daily (see “Dividendsand Other Distributions (Funds Other Than Highland MLPFund)” above), you will receive a distribution that will betaxable to you even though it represents in part a return ofyour invested capital.

Each Fund (or, if Fund shares are purchased through aFinancial Advisor, a Financial Advisor) will send youinformation after the end of each calendar year setting forththe amount and tax status of any dividends or otherdistributions paid to you by the Fund. Dividends and otherdistributions may also be subject to state, local and othertaxes.

Taxation of Sales, Exchanges and Redemptions. If you sell,exchange or otherwise dispose of any of your shares of aFund (including (i) exchanging them for shares of anothereligible Fund (but not for shares of another class of the sameFund in a Same-Fund Exchange) as described in “Exchange ofShares” above or (ii) through a redemption) you will generallyrecognize a gain or loss in an amount equal to the differencebetween your tax basis in such shares of the Fund and theamount you receive upon disposition of such shares. If youhold your shares as capital assets, any such gain or loss will belong-term capital gain or loss if you have held (or are treatedas having held) such shares for more than one year at thetime of sale. All or a portion of any loss you realize on ataxable sale or exchange of your shares of a Fund will bedisallowed if you acquire other shares of the same Fund(whether through the automatic reinvestment of dividends orotherwise) within a 61-day period beginning 30 days beforeand ending 30 days after your sale or exchange of the shares.In such case, the basis of the shares acquired will be adjustedto reflect the disallowed loss.

In addition, any loss realized upon a taxable sale or exchangeof Fund shares held (or deemed held) by you for six monthsor less will be treated as long-term, rather than short-term, tothe extent of any capital gain dividends received (or deemedreceived) by you with respect to those shares. In addition, anyloss realized upon a taxable disposition of shares of theHighland Tax-Exempt Fund held by a shareholder for sixmonths or less may be disallowed, to the extent of certainexempt-interest dividends received by the shareholder withrespect to those shares. This loss disallowance rule does not

apply with respect to a regular exempt-interest dividend paidby the Fund if, as currently expected, the Fund declaressubstantially all of its net tax-exempt income asexempt-interest dividends on a daily basis and pays suchdividends on at least a monthly basis.

Backup Withholding and Information Reporting. A Fund (or, ifFund shares are purchased through a Financial Advisor, aFinancial Advisor) may be required to withhold, for U.S.federal backup withholding tax purposes, a portion of thedividends, distributions and redemption proceeds payable toyou if: (i) you fail to provide the Fund (or Financial Advisor)with your correct taxpayer identification number (in the caseof an individual, generally, such individual’s social securitynumber) or to make the required certification; or (ii) the Fund(or Financial Advisor) has been notified by the IRS that youare subject to backup withholding. Certain shareholders areexempt from backup withholding. Backup withholding is notan additional tax and any amount withheld may be refundedor credited against your U.S. federal income tax liability, ifany, provided that you furnish the required information tothe IRS.

Highland Energy MLP Fund

Taxation of the Fund

The Fund is taxable as a regular corporation, or a “C”corporation, for U.S. federal income tax purposes and thuswill pay entity-level taxes as described below.

The Fund was formed in 2011 as a regulated investmentcompany under the Code, as amended. It adopted its currentinvesting strategy during its taxable year that began inOctober 2012. Because the Fund invests and intends to investprimarily in MLPs, it no longer qualifies for treatment as aregulated investment company, and has not so qualified since2012. Instead, the Fund is treated as a C corporation.

As a C corporation, the Fund is generally subject to U.S.federal income tax on its taxable income at the ratesapplicable to regular C corporations (generally at a rate of35%). Such taxable income generally includes, among otheritems, all of the Fund’s net income and gains from itsinvestments, less Fund expenses. The Fund will be subject toa 20% alternative minimum tax on its alternative minimumtaxable income to the extent, if any, that the alternativeminimum tax exceeds the Fund’s regular income tax liability,as described further below. The Fund’s payment of corporateincome tax or alternative minimum tax could materiallyreduce the amount of cash available for the Fund to makedistributions on Fund shares. In addition, distributions toFund shareholders will be taxed under U.S. federal income taxlaws applicable to corporate distributions, as describedfurther below, and thus the Fund’s income will be subject totwo layers of taxation.

Taxation

82

As a regular C corporation, the Fund is also subject to stateincome tax on its taxable income, and may also be subject tostate franchise tax or local or foreign taxes.

For information about the potential effects of deferredincome tax liabilities and/or asset balances on the calculationof the Fund’s net asset value, see “Additional InformationRegarding Deferred Tax Liability” above.

As described above, the Fund has invested and intends tocontinue to invest a substantial portion of its assets in equitysecurities of MLPs. MLPs are generally characterized as“publicly traded partnerships” for U.S. federal income taxpurposes because MLPs are typically organized as limitedpartnerships or limited liability companies that are publiclytraded. The Fund invests primarily in MLPs that are taxed aspartnerships for U.S. federal income tax purposes, andreferences in this discussion to MLPs include only MLPs thatare so taxed. There is a risk that one or more MLPs in whichthe Fund invests would be treated as corporations for U.S.federal income tax purposes. If any of the MLPs in which theFund invests were treated as corporations for U.S. federalincome tax purposes, such MLPs would be required to payU.S. federal income tax on their taxable income and theafter-tax return to the Fund with respect to its investment insuch MLPs could be significantly reduced.

A cash distribution from an MLP is treated as a tax-free returnof capital to the extent of the Fund’s tax basis in its MLPinterest and as gain from the sale or exchange of the MLPinterest to the extent the distribution exceeds the Fund’s taxbasis in its MLP interest. Based upon a review of the historicresults of the type of MLPs in which the Fund intends toinvest, HCMFA expects that from time to time the cashdistributions it will receive with respect to its investments inequity securities of MLPs will exceed the taxable incomeallocated to the Fund from such MLPs. No assurance can begiven that this result will be obtained. If this expectation isnot realized, the Fund will generally have a larger corporateincome tax expense than expected, which could result in lesscash available to distribute to shareholders and a higherpercentage of its distributions in a taxable year constitutingdividends in the hands of Fund shareholders, as describedbelow. In particular, the accelerated deductions available inrespect of a MLP’s activities may cause the Fund to realizetaxable income in excess of its cash flow from, or itseconomic gain on the disposition of, such MLP securities.

The Fund is subject to U.S. federal income tax at the regularcorporate tax rates on any income or gain recognized by theFund on any sale of equity securities of an MLP. Cashdistributions from an MLP to a Fund that exceed the taxableincome allocated to such Fund from such MLP will reduce theFund’s adjusted tax basis in the equity securities of the MLP.These reductions in such Fund’s adjusted tax basis in the MLP

equity securities will increase the amount of income or gain(or decrease the amount of loss) recognized by the Fund on asubsequent sale of the securities. From time to time, theFund may be required to sell MLP securities to meetshareholder redemption requests, in which case it couldrecognize significant income or gains, which would generallyresult in federal and state income taxes imposed at theFund-level and decrease cash available for distribution toshareholders.

Investments in securities other than MLP equity securitiesmay well generate current taxable income to the Fund onwhich it will currently be required to pay income taxes, thuspotentially reducing the amount of cash available fordistribution to the Fund shareholders, the amount ofdistributions treated as a return of capital in the hands ofFund shareholders, and the Fund’s share value.

Any investment by the Fund in foreign securities may besubject to withholding or other taxes imposed by foreigncountries on dividends, interest, or capital gains. Tax treatiesbetween the U.S. and other countries may reduce oreliminate such taxes. Foreign taxes paid by the Fund mayreduce the return from the Fund’s investments to the extentthat the Fund is unable to claim foreign tax credits in respectof such taxes.

Federal Income Taxation of Shareholders of the Fund

Taxation of Distributions. Distributions by the Fund in respectof Fund shares (other than, in general, distributions paid inredemption of Fund shares, as described below) will betaxable to a Fund shareholder as dividend income to theextent the distributions are paid out of the Fund’s current oraccumulated earnings and profits, as determined under U.S.federal income tax principles. Dividend income is generallytaxable to shareholders as ordinary income. However, subjectto certain holding period and other requirements, suchdividend income will generally be eligible for thedividends-received deduction in the case of corporate Fundshareholders and will generally be treated as “qualifieddividend income” eligible for taxation at net capital gain ratesfor non-corporate Fund shareholders (including individuals).Corporations are currently taxed at the same rate on ordinaryincome as on capital gains. Net capital gain rates are currentlylower than ordinary income tax rates for individuals.

To the extent that the amount of any distribution exceeds theFund’s current and accumulated earnings and profits for ataxable year, as determined under U.S. federal income taxprinciples, the distribution will first be treated as a tax-freereturn of capital, causing a reduction in the adjusted basis ofFund shares (but not below zero), thereby increasing theamount of gain, or decreasing the amount of loss, to berecognized by a Fund shareholder on a subsequentdisposition of the Fund shares; the balance in excess of


83

adjusted basis will be taxed as capital gain. Any such capitalgain will be long-term capital gain includible in net capitalgain if such Fund shareholder has held the applicable Fundshares for more than one year.

Distributions are taxable as described herein whethershareholders receive them in cash or reinvest them inadditional shares. The price of shares purchased at any timemay reflect the amount of a forthcoming dividend or otherdistribution. If you purchase shares just prior to a dividend,you may receive a distribution that is taxable to you as anordinary dividend even though it represents in part a returnof your invested capital.

Taxation of Sales, Exchanges and Redemptions. If you sell,exchange, or otherwise dispose of any of your shares of theFund (including through a redemption that is treated as a saleor exchange for U.S. federal income tax purposes), you willgenerally recognize a gain or loss in an amount equal to thedifference between your adjusted tax basis in such shares ofthe Fund and the amount you receive upon disposition ofsuch shares. Generally, a Fund shareholder’s adjusted taxbasis in the Fund shares will be equal to the cost of theholder’s Fund shares, increased by distributions that arereinvested in additional shares of the Fund and reduced (butnot below zero) by adjustments for distributions paid by theFund in excess of its earnings and profits (i.e., returns ofcapital). If you hold your shares as capital assets, any suchgain or loss will be long-term capital gain or loss if you haveheld (or are treated as having held) such shares for more thanone year at the time of sale. All or a portion of any loss yourealize on a taxable sale or exchange of your shares of theFund will be disallowed if you acquire other shares of theFund (whether through the automatic reinvestment ofdividends or otherwise) within a 61-day period beginning30 days before and ending 30 days after your sale orexchange of the shares. In such case, the basis of the sharesacquired will be adjusted to reflect the disallowed loss.

The Fund generally expects redemptions of Fund shares to betreated as sales or exchanges for U.S. federal income taxpurposes. For information about rules under which certainredemptions could instead be treated as distributions for U.S.federal income tax purposes taxable to the redeemingshareholder as dividend income, see the “Taxation” section ofthe SAI.

Medicare Tax. A 3.8% Medicare contribution tax is imposedon the “net investment income” of certain individuals, trustsand estates to the extent their income exceeds certainthreshold amounts. Net investment income generallyincludes for this purpose dividends paid by the Fund, and netcapital gains recognized on the sale, redemption or exchangeof shares of the Fund or on distributions by the Fund in excess

of both the Fund’s current and accumulated earnings andprofits and the applicable shareholder’s basis in its Fundshares. Shareholders are advised to consult their tax advisorsregarding the possible implications of this additional tax ontheir investment in the Fund.

Backup Withholding and Information Reporting. The Fund (or,if Fund shares are purchased through a Financial Advisor, aFinancial Advisor) may be required to withhold, for U.S.federal backup withholding tax purposes, a portion of thedividends, distributions and redemption proceeds payable toyou if: (i) you fail to provide the Fund (or Financial Advisor)with your correct taxpayer identification number (in the caseof an individual, generally, such individual’s social securitynumber) or to make the required certification; or (ii) the Fund(or Financial Advisor) has been notified by the IRS that youare subject to backup withholding. Certain shareholders areexempt from backup withholding. Backup withholding is notan additional tax and any amount withheld may be refundedor credited against your U.S. federal income tax liability, ifany, provided that you furnish the required information tothe IRS.

The Fund will send you information after the end of eachcalendar year setting forth the amount and tax status of anydividends or other distributions paid to you by the Fund.Dividends and other distributions may also be subject tostate, local and other taxes. In certain cases, the Fund may berequired to amend tax information reported to shareholdersin respect of a particular year. In this event, shareholders maybe required to file amended U.S. federal income or other taxreturns in respect of such amended information and payadditional taxes (including potentially interest and penalties),and may incur other related costs. Shareholders shouldconsult their tax advisers in this regard.

Also, to the extent you redeem, exchange or otherwisedispose of your shares during the calendar year, the Fund willprovide you with cost basis and certain related informationafter the end of that calendar year in respect of thatredemption, exchange or other disposition, as describedabove in “Cost Basis Reporting.”

Investment by Tax-Exempt Investors and RICs.

The Fund serves to “block” (that is, prevent the attribution toshareholders of) unrelated business taxable income (“UBTI”)from being realized by tax-exempt shareholders, includingemployee benefit plans and individual retirement plans.Notwithstanding this “blocking” effect, a tax-exemptshareholder could realize UBTI by virtue of its investment inthe Fund if shares in the Fund constitute debt-financedproperty in the hands of the tax-exempt shareholder withinthe meaning of Code Section 514(b).

Taxation

84

As explained above, a holder of Fund shares will not report onits federal income tax return any of the Fund’s items of grossincome, gain, loss and deduction. Instead, the shareholderwill simply report income with respect to Fund distributionsor gain with respect to the sale of Fund shares, both of whichwill constitute qualifying income for a RIC as dividends or gainon the sale of stock or securities. Finally, because the Fund isa regular C corporation and not a RIC for U.S. federal taxpurposes, its shares will not constitute automaticallydiversified assets for purposes of the RIC asset diversificationtest, but rather will be subject to the limitations applied toother securities set forth in that test.

THE FOREGOING IS A GENERAL AND ABBREVIATED SUMMARYOF THE PROVISIONS OF THE CODE AND THE TREASURYREGULATIONS IN EFFECT AS THEY DIRECTLY GOVERN THETAXATION OF THE FUND AND ITS SHAREHOLDERS. THESEPROVISIONS ARE SUBJECT TO CHANGE BY LEGISLATIVE ORADMINISTRATIVE ACTION, AND ANY SUCH CHANGE MAY BERETROACTIVE. A MORE COMPLETE DISCUSSION OF THE TAXRULES APPLICABLE TO THE FUND CAN BE FOUND IN THESTATEMENT OF ADDITIONAL INFORMATION, WHICH ISINCORPORATED BY REFERENCE INTO THIS PROSPECTUS.SHAREHOLDERS ARE URGED TO CONSULT THEIR TAXADVISERS REGARDING SPECIFIC QUESTIONS AS TO U.S.FEDERAL, STATE, LOCAL AND FOREIGN INCOME OR OTHERTAXES.

Financial Highlights

The financial highlights tables that follow are intended to helpyou understand a Fund’s financial performance for the fiscalyears or periods ended September 30.

Certain information may reflect financial results for a singleFund share. The total returns in the table represent the ratethat an investor would have earned or lost on an investmentin the Fund (assuming reinvestment of all dividends anddistributions). This information has been audited by KPMGLLP, the Funds’ independent registered public accountingfirm, whose report, along with the Funds’ financialstatements, are included in the Funds’ Annual Reports, whichare incorporated by reference in the SAI and available uponrequest.


85

For the years or periods ended September 30, 2015Selected data for a share outstanding throughout each period is as follows:

Income (Loss) from Investment Operations Less Distributions From

Net AssetValue,

Beginningof Period

NetInvestmentIncome(Loss)(a)

Net Realizedand UnrealizedGain (Loss) onInvestments

Total fromOperations

NetInvestmentIncome

NetRealizedGains

Return ofCapital

TotalDistributions

Highland Global Allocation FundClass A2015 $10.58 $0.26 $(1.69) $(1.43) $(0.43) $(0.37) $— $(0.80)2014 9.03 0.16 1.89 2.05 (0.16) (0.34) — (0.50)2013 10.24 0.15 1.45 1.60 (0.15) (2.66) — (2.81)2012 8.15 0.07 2.11 2.18 (0.09) — — (0.09)2011 8.45 0.08 (0.31) (0.23) (0.07) — — (0.07)

Class C2015 $9.53 $0.20 $(1.54) $(1.34) $(0.37) $(0.37) $— $(0.74)2014 8.20 0.07 1.72 1.79 (0.12) (0.34) — (0.46)2013 9.51 0.07 1.34 1.41 (0.06) (2.66) — (2.72)2012 7.58 —(e) 1.96 1.96 (0.03) — — (0.03)2011 7.86 0.01 (0.29) (0.28) — — — —

Class Y2015 $12.21 $0.39 $(2.02) $(1.63) $(0.46) $(0.37) $— $(0.83)2014 10.36 0.22 2.16 2.38 (0.19) (0.34) — (0.53)2013 11.38 0.17 1.65 1.82 (0.18) (2.66) — (2.84)2012 9.04 0.08 2.37 2.45 (0.11) — — (0.11)2011 9.37 0.12 (0.36) (0.24) (0.09) — — (0.09)

Highland Premier Growth Equity FundClass A2015 $34.99 $0.04 $(0.25) $(0.21) $— $(2.46) $— $(2.46)2014 31.22 0.06 5.70 5.76 (0.04) (1.95) — (1.99)2013 26.13 0.11 5.12 5.23 (0.14) — — (0.14)2012 19.39 0.03 6.71 6.74 — — — —2011 19.45 —(e) (0.06) (0.06) — — — —

Class C2015 $29.57 $(0.18) $(0.17) $(0.35) $— $(2.46) $— $(2.46)2014 26.82 (0.16) 4.86 4.70 — (1.95) — (1.95)2013 22.50 (0.09) 4.41 4.32 — — — —2012 16.82 (0.12) 5.80 5.68 — — — —2011 17.00 (0.15) (0.03) (0.18) — — — —

Class Y2015 $35.89 $0.14 $(0.28) $(0.14) $— $(2.46) $— $(2.46)2014 31.96 0.14 5.85 5.99 (0.11) (1.95) — (2.06)2013 26.74 0.18 5.24 5.42 (0.20) — — (0.20)2012 19.80 0.09 6.85 6.94 — — — —2011 19.81 0.05 (0.06) (0.01) — — — —


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Ratios and Supplemental Data

RedemptionsFees

Net AssetValue, Endof Period

TotalReturn(b)

Net Assets,End of Period

(000)

NetInvestmentIncome/(Loss)(c)

NetExpenses(c)

GrossExpenses(c)

PortfolioTurnoverRate

$— $8.35 (14.68)% $419,111 2.49% 0.91%(h) 0.93%(i) 108%— 10.58 23.21 484,016 1.53 0.94 0.94 195— 9.03 15.89 214,521 1.38 1.14 1.14 236— 10.24 26.97 194,779 0.77 1.41 1.41 47— 8.15 (2.85) 29,171 0.89 1.13(d) 1.13 47

$— $7.45 (15.28)% $391,754 2.11% 1.66%(h) 1.69%(i) 108%— 9.53 22.32 151,943 0.76 1.69 1.69 195— 8.20 14.97 4,905 0.67 1.88 1.88 236— 9.51 25.97 3,443 0.02 2.16 2.16 47— 7.58 (3.56) 1,361 0.14 1.88(d) 1.88 47

$— $9.75 (14.41)% $775,238 3.16% 0.66%(h) 0.69%(i) 108%— 12.21 23.39 246,907 1.79 0.69 0.69 195— 10.36 16.27 1,495 1.44 0.87 0.87 236— 11.38 27.34 3,124 1.02 1.16 1.16 47— 9.04 (2.68) 94 1.14 0.88(d) 0.88 47

$— $32.32 (1.10)% $169,434 0.13% 1.13% 1.13% 18%— 34.99 19.08 167,187 0.17 1.16 1.16 20— 31.22 20.12 140,949 0.39 1.25 1.27 20— 26.13 34.76 127,028 0.14 1.22 1.31 16— 19.39 (0.31) 109,321 (0.02) 1.07(d) 1.10 23

$— $26.76 (1.82)% $19,096 (0.63)% 1.88% 1.88% 18%— 29.57 18.21 16,290 (0.58) 1.91 1.91 20— 26.82 19.20 13,589 (0.37) 2.00 2.02 20— 22.50 33.77 10,512 (0.61) 1.97 2.06 16— 16.82 (1.06) 10,248 (0.77) 1.82(d) 1.85 23

$— $33.29 (0.87)% $35,521 0.38% 0.88% 0.88% 18%— 35.89 19.40 31,036 0.42 0.91 0.91 20— 31.96 20.45 26,802 0.64 1.00 1.02 20— 26.74 35.05 25,083 0.39 0.97 1.06 16— 19.80 (0.05) 24,705 0.23 0.82(d) 0.85 23



87



Net AssetValue,

Beginningof Period




NetInvestmentIncome

NetRealizedGains

Return ofCapital

TotalDistributions

Highland Small-Cap Equity FundClass A2015 $14.90 $0.01 $(0.27) $(0.26) $— $(1.68) $— $(1.68)2014 14.93 (0.04) 1.07 1.03 — (1.06) — (1.06)2013 12.88 (0.06) 3.07 3.01 — (0.96) — (0.96)2012 10.07 (0.10) 2.91 2.81 — — — —2011 9.64 (0.07) 0.50 0.43 — — — —

Class C2015 $12.06 $(0.08) $(0.19) $(0.27) $— $(1.68) $— $(1.68)2014 12.35 (0.13) 0.90 0.77 — (1.06) — (1.06)2013 10.91 (0.16) 2.56 2.40 — (0.96) — (0.96)2012 8.59 (0.17) 2.49 2.32 — — — —2011 8.29 (0.14) 0.44 0.30 — — — —

Class Y2015 $15.79 $0.04 $(0.29) $(0.25) $— $(1.68) $— $(1.68)2014 15.72 — 1.13 1.13 — (1.06) — (1.06)2013 13.48 (0.05) 3.25 3.20 — (0.96) — (0.96)2012 10.51 (0.08) 3.05 2.97 — — — —2011 10.04 (0.05) 0.52 0.47 — — — —

Highland Total Return FundClass A2015 $24.52 $0.37 $(1.44) $(1.07) $(0.24) $(1.22) $— $(1.46)2014 22.93 0.24 1.57 1.81 (0.22) — — (0.22)2013 20.85 0.20 2.09 2.29 (0.21) — — (0.21)2012 18.03 0.19 2.87 3.06 (0.24) — — (0.24)2011 18.80 0.21 (0.87) (0.66) (0.11) — — (0.11)

Class C2015 $22.58 $0.18 $(1.31) $(1.13) $(0.20) $(1.22) $— $(1.42)2014 21.17 0.05 1.45 1.50 (0.09) — — (0.09)2013 19.25 0.03 1.94 1.97 (0.05) — — (0.05)2012 16.63 0.04 2.65 2.69 (0.07) — — (0.07)2011 17.37 0.06 (0.80) (0.74) — — — —

Class Y2015 $24.82 $0.57 $(1.59) $(1.02) $(0.26) $(1.22) $— $(1.48)2014 23.20 0.30 1.58 1.88 (0.26) — — (0.26)2013 21.09 0.27 2.11 2.38 (0.27) — — (0.27)2012 18.24 0.24 2.90 3.14 (0.29) — — (0.29)2011 19.03 0.27 (0.89) (0.62) (0.17) — — (0.17)


88


RedemptionsFees


TotalReturn(b)


(000)


NetExpenses(c)

GrossExpenses(c)


$— $12.96 (2.47)% $29,765 0.04% 1.21% 1.67% 70%— 14.90 6.93 33,598 (0.27) 1.49 1.62 26— 14.93 25.36 35,882 (0.47) 1.91 1.91 64— 12.88 27.91 33,698 (0.86) 2.00 2.00 24— 10.07 4.46 31,155 (0.65) 1.91(d) 1.92 71

$— $10.11 (3.21)% $2,872 (0.72)% 1.96% 2.42% 70%— 12.06 6.23 3,213 (1.01) 2.23 2.37 26— 12.35 24.39 3,480 (1.21) 2.66 2.66 64— 10.91 26.89 2,947 (1.61) 2.75 2.75 24— 8.59 3.62 2,587 (1.40) 2.66(d) 2.67 71

$— $13.86 (2.25)% $3,579 0.28% 0.96% 1.42% 70%— 15.79 7.24 1,745 (0.01) 1.23 1.37 26— 15.72 25.66 1,539 (0.28) 1.64 1.64 64— 13.48 28.26 460 (0.61) 1.75 1.75 24— 10.51 4.68 209 (0.40) 1.66(d) 1.67 71

$— $21.99 (4.76)% $59,307 1.55% 1.20% 1.20% 175%— 24.52 7.92 69,084 0.99 1.38 1.38 121— 22.93 11.15 71,505 0.92 1.33 1.34 138— 20.85 17.01 75,216 0.97 1.60 1.82 169— 18.03 (3.51) 79,574 1.07 1.42(d) 1.46 177

$— $20.03 (5.45)% $6,292 0.81% 1.95% 1.95% 175%— 22.58 7.10 5,690 0.24 2.13 2.13 121— 21.17 10.28 6,019 0.17 2.08 2.09 138— 19.25 16.17 6,965 0.22 2.35 2.57 169— 16.63 (4.20) 8,183 0.32 2.17(d) 2.21 177

$— $22.32 (4.51)% $7,695 2.39% 0.90% 0.90% 175%— 24.82 8.15 381 1.24 1.14 1.14 121— 23.20 11.41 326 1.22 1.08 1.09 138— 21.09 17.36 217 1.22 1.35 1.57 169— 18.24 (3.36) 238 1.32 1.17(d) 1.21 177



89



Net AssetValue,

Beginningof Period




NetInvestmentIncome

NetRealizedGains

Return ofCapital

TotalDistributions

Highland Tax-Exempt FundClass A2015 $12.08 $0.25 $— $0.25 $(0.26) $(0.13) $— $(0.39)2014 11.64 0.33 0.44 0.77 (0.33) — — (0.33)2013 12.34 0.31 (0.70) (0.39) (0.31) — — (0.31)2012 11.86 0.32 0.48 0.80 (0.32) — — (0.32)2011 11.97 0.34 (0.11) 0.23 (0.34) — — (0.34)

Class C2015 $12.07 $0.16 $— $0.16 $(0.16) $(0.13) $— $(0.29)2014 11.63 0.24 0.44 0.68 (0.24) — — (0.24)2013 12.33 0.22 (0.71) (0.49) (0.21) — — (0.21)2012 11.86 0.23 0.47 0.70 (0.23) — — (0.23)2011 11.96 0.26 (0.10) 0.16 (0.26) — — (0.26)

Class Y2015 $13.06 $0.31 $— $0.31 $(0.31) $(0.13) $— $(0.44)2014 12.58 0.38 0.48 0.86 (0.38) — — (0.38)2013 13.34 0.36 (0.76) (0.40) (0.36) — — (0.36)2012 12.83 0.37 0.51 0.88 (0.37) — — (0.37)2011 12.93 0.40 (0.11) 0.29 (0.39) — — (0.39)


90


RedemptionsFees


TotalReturn(b)


(000)


NetExpenses(c)

GrossExpenses(c)


$— $11.94 2.07% $18,435 2.11% 0.92% 1.06% 17%— 12.08 6.67 27,149 2.76 0.98 0.98 14— 11.64 (3.26) 30,390 2.53 1.12 1.13 16— 12.34 6.79 33,747 2.62 1.14 1.18 26— 11.86 2.06 36,024 2.97 1.15(d) 1.18 40

$— $11.94 1.40% $1,166 1.37% 1.67% 1.81% 17%— 12.07 5.88 925 2.01 1.73 1.73 14— 11.63 (3.98) 1,000 1.77 1.87 1.88 16— 12.33 5.93 1,728 1.87 1.89 1.93 26— 11.86 1.39 1,675 2.22 1.90(d) 1.93 40

$— $12.93 2.42% $426 2.40% 0.67% 0.81% 17%— 13.06 6.97 167 3.01 0.72 0.72 14— 12.58 (3.03) 266 2.78 0.87 0.87 16— 13.34 6.97 180 2.87 0.89 0.93 26— 12.83 2.39 179 3.22 0.90(d) 0.93 40



91



Net AssetValue,

Beginningof Period




NetInvestmentIncome

NetRealizedGains

Return ofCapital

TotalDistributions

Highland Fixed Income FundClass A2015 $12.79 $0.27 $(0.18) $0.09 $(0.27) $— $(0.03) $(0.30)2014 12.61 0.24 0.20 0.44 (0.24) — (0.02) (0.26)2013 13.04 0.17 (0.41) (0.24) (0.17) — (0.02) (0.19)2012 12.54 0.20 0.59 0.79 (0.27) — (0.02) (0.29)2011 12.26 0.37 0.31 0.68 (0.40) — — (0.40)

Class C2015 $12.80 $0.18 $(0.18) $— $(0.17) $— $(0.03) $(0.20)2014 12.62 0.15 0.19 0.34 (0.15) — (0.01) (0.16)2013 13.06 0.07 (0.42) (0.35) (0.07) — (0.02) (0.09)2012 12.56 0.10 0.59 0.69 (0.17) — (0.02) (0.19)2011 12.27 0.27 0.33 0.60 (0.31) — — (0.31)

Class Y2015 $12.78 $0.32 $(0.20) $0.12 $(0.30) $— $(0.03) $(0.33)2014 12.60 0.27 0.20 0.47 (0.27) — (0.02) (0.29)2013 13.03 0.16 (0.37) (0.21) (0.20) — (0.02) (0.22)2012 12.52 0.23 0.60 0.83 (0.29) — (0.03) (0.32)2011 12.24 0.40 0.31 0.71 (0.43) — — (0.43)


92


RedemptionsFees


TotalReturn(b)


(000)


NetExpenses(c)

GrossExpenses(c)


$— $12.58 0.66% $126,892 2.09% 0.86% 0.86% 57%— 12.79 3.47 144,839 1.91 0.97 0.97 283— 12.61 (1.92) 161,673 1.32 1.04 1.04 456— 13.04 6.35 202,060 1.59 1.13 1.14 350— 12.54 5.78 94,079 2.97 0.90(d) 0.91 392

$— $12.60 (0.01)% $3,697 1.35% 1.61% 1.61% 57%— 12.80 2.62 3,082 1.16 1.72 1.72 283— 12.62 (2.57) 3,098 0.57 1.79 1.79 456— 13.06 5.48 5,051 0.84 1.88 1.89 350— 12.56 4.99 846 2.22 1.65(d) 1.66 392

$— $12.57 0.91% $4,029 2.45% 0.61% 0.61% 57%— 12.78 3.73 222 2.13 0.72 0.72 283— 12.60 (1.60) 159 1.27 0.79 0.79 456— 13.03 6.62 1,571 1.84 0.88 0.89 350— 12.52 6.04 1,072 3.22 0.65(d) 0.66 392

(a) Net investment income per share is based on average shares outstanding during the period.(b) Total returns are historical and assume changes in share price, reinvestment of dividends and capital gains distributions, and assume no

sales charge. Had the adviser not absorbed a portion of expenses, total returns would have been lower.(c) The ratios for periods of less than one full year are annualized.(d) Includes waiver of management fee with respect to the Fund’s investment in the Pyxis Money Market Fund II.(e) Less than $0.005 per share or less than 0.005%.(f) Class A commenced operations on November 23, 2011, Class C commenced operations on November 15, 2011 and Class Y commended

operations on November 1, 2011.(g) Not annualized.(h) Excludes dividends and fees on securities sold short. Dividends and fees on securities sold short for the Global Allocation Fund are:

For the Years Ended September 30,

2015 2014 2013 2012 2011

Class A 0.02% —% —% —% —%Class C 0.03 — — — —Class Y 0.03 — — — —

(i) Includes dividends and fees on securities sold short.



93

Highland Energy MLP Fund, Class ASelected data for a share outstanding throughout each period is as follows:

For the Year Ended September 30,For the

Period EndedSeptember 30,

2012(a)2015 2014 2013

Net Asset Value, Beginning of Period $ 12.17 $10.32 $ 10.98 $10.00

Income from Investment Operations:Net investment income/(loss)(b) (0.12) (0.13) (0.08) 0.01Net realized and unrealized gain/(loss) (4.94) 2.52 1.06 1.02

Total from investment operations (5.06) 2.39 0.98 1.03

Less Distributions Declared to Shareholders:From earnings and profits — (0.09) (1.32) (0.05)From return of capital (0.53) (0.45) (0.32) —

Total distributions declared to shareholders (0.53) (0.54) (1.64) (0.05)

Net Asset Value, End of Period $ 6.58 $12.17 $ 10.32 $10.98Total Return(c) (43.12)% 23.83% 10.07% 10.31%(d)

Ratios to Average Net Assets(e)/Supplemental Data:Net assets, end of period (in 000’s) $ 9,575 $2,758 $ 38 $ 11Total operating expenses 2.05% 3.02% 20.12% 6.88%Waiver/reimbursement (0.40)% (1.57)% (18.88)% (4.63)%Net operating expenses(f) 1.65% 1.45% 1.24% 2.25%Dividends for short positions — — — 0.02%Net expenses(f) 1.65% 1.45% 1.24% 2.27%Income tax expense/(benefit) (9.88)% (0.39)%(g) 6.18% —Total expense, net of income taxes (8.23)% 1.06%(g) 7.42% 2.27%Net investment income/(loss), net of income taxes 8.76% (0.68)%(g) (0.74)% 0.07%Portfolio turnover rate 33% 40% 177% 254%(d)

(a) Commenced operations on December 1, 2011.(b) Per share data was calculated using average shares outstanding during the period.(c) Total returns are historical and assume changes in share price, reinvestment of dividends and capital gains distributions, and assume no

sales charge. Had the adviser not absorbed a portion of expenses, total returns would have been lower.(d) Not annualized.(e) All ratios for the period have been annualized, unless otherwise indicated.(f) Net expense ratio has been calculated after applying any waiver/reimbursement, if applicable.(g) Excludes income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation). For the year ended

September 30, 2014, ratios including income tax expense/(benefit) from realized gain/(loss) and change in unrealized appreciation/(depreciation) were the following:

Income tax expense/(benefit) 7.58%Total expense, net of income taxes 9.03%Net investment income/(loss), net of income taxes (8.65)%


94

Highland Energy MLP Fund, Class CSelected data for a share outstanding throughout each period is as follows:



2012(a)2015 2014 2013

Net Asset Value, Beginning of Period $ 12.16 $10.34 $ 10.96 $10.00

Income from Investment Operations:Net investment loss(b) (0.19) (0.20) (0.18) (0.05)Net realized and unrealized gain/(loss) (4.94) 2.52 1.10 1.02




Net Asset Value, End of Period $ 6.56 $12.16 $ 10.34 $10.96Total return(c) (43.55)% 23.02% 9.42% 9.69%(d)

Ratios to Average Net Assets(e)/Supplemental Data:Net assets, end of period (in 000’s) $ 2,523 $ 491 $ 20 $ 11Total operating expenses 2.80% 3.69% 20.61% 7.53%Waiver/reimbursement (0.40)% (1.59)% (18.44)% (4.63)%Net operating expenses(f) 2.40% 2.10% 2.17% 2.90%Dividends for short positions — — — 0.02%Net expenses(f) 2.40% 2.10% 2.17% 2.92%Income tax expense/(benefit) (9.88)% (0.39)%(g) 6.18% —Total expense, net of income taxes (7.48)% 1.71%(g) 8.35% 2.92%Net investment loss 8.02% (1.27)%(g) (1.68)% (0.58)%Portfolio turnover rate 33% 40% 177% 254%(d)







95

Highland Energy MLP Fund, Class YSelected data for a share outstanding throughout each period is as follows:



2012(a)2015 2014 2013

Net Asset Value, Beginning of Period $ 12.21 $ 10.34 $ 10.99 $10.00

Income from Investment Operations:Net investment income/(loss)(b) (0.09) (0.08) (0.07) 0.04Net realized and unrealized gain/(loss) (4.97) 2.52 1.11 1.02




Net Asset Value, End of Period $ 6.60 $ 12.21 $ 10.34 $10.99Total return(c) (43.01)% 24.25% 10.62% 10.63%(d)

Ratios to Average Net Assets(e)/Supplemental Data:Net assets, end of period (in 000’s) $28,707 $29,741 $ 3,392 $4,193Total operating expenses 1.80% 2.68% 11.25% 6.53%Waiver/reimbursement (0.40)% (1.58)% (10.05)% (4.63)%Net operating expenses(f) 1.40% 1.10% 1.20% 1.90%Dividends on short positions — — — 0.02%Net expenses(f) 1.40% 1.10% 1.20% 1.92%Income tax expense/(benefit) (9.88)% (0.39)%(g) 6.18% —Total expense, net of income taxes (8.48)% 0.71%(g) 7.38% 1.92%Net investment (loss) 9.01% (0.28)%(g) (0.71)% 0.42%Portfolio turnover rate 33% 40% 177% 254%(d)






96

In order to reduce duplicative mail and expenses of theFunds, we may, in accordance with applicable law, send asingle copy of the Funds’ Prospectus and shareholder reportsto your household even if more than one family member inyour household owns shares of the Funds. Additional copiesof the Prospectus and shareholder reports may be obtained

by calling 1-877-665-1287. If you do not want us toconsolidate your Fund mailings and would prefer to receiveseparate mailings at any time in the future, please call us atthe telephone number above and we will furnish separatemailings, in accordance with instructions, within 30 days ofyour request.

Mailings to Shareholders


97

Investment AdviserHighland Capital Management Fund Advisors, L.P.200 Crescent Court, Suite 700Dallas, Texas 75201

Investment Sub-Adviser

First Foundation Advisors

18101 Von Karman Avenue, Suite 700Irvine, California 92612

Transfer AgentBoston Financial Data Services, Inc.30 Dan Road, Suite 8656Canton, Massachusetts 02021-2809

CustodianState Street Bank and Trust CompanyOne Lincoln StreetBoston, Massachusetts 02111

DistributorHighland Capital Funds Distributor, Inc.200 Crescent Court, Suite 700Dallas, Texas 75201

Independent Registered Public Accounting FirmKPMG LLPTwo Financial Center60 South StreetBoston, Massachusetts 02111

PO Box 8656Boston, Massachusetts 02266-8656

http://highlandfunds.com

Highland Funds II

You will find additional information about the Funds in the following documents:

Statement of Additional Information (SAI): The SAI contains additional information about each Fund’s investment strategies andpolicies and is incorporated by reference and is legally considered a part of this Prospectus.

Annual/Semi-Annual Reports to Shareholders: Additional information about the Funds’ investments will be available in the Funds’semi-annual reports to shareholders. In the Funds’ annual reports, you will find a discussion of the market conditions and investmentstrategies that significantly affected the Funds’ performance during its last fiscal year.

You may review and copy information about the Funds (including the SAI and other reports) at the Securities and ExchangeCommission’s (SEC) Public Reference Room in Washington, D.C. Please call the SEC at 1-202-551-8090 for information on the hours andoperation of the Public Reference Room. You may also obtain reports and other information about the Funds on the EDGAR Databaseon the SEC’s Internet site at http://www.sec.gov. Copies of this information may also be obtained, after paying a duplicating fee, byelectronic request at the following e-mail address: [email protected], or by writing to the SEC’s Public Reference Section,Washington, D.C. 20549-1520.

You may obtain a free copy of the SAI or the Funds annual/semi-annual reports and make shareholder inquiries by contacting:

Telephone 1-877-665-1287

Website http://highlandfunds.com

Standard Mail:Highland FundsPO Box 8656Boston, Massachusetts 02266-8656

Overnight Mail:Highland Funds30 Dan Road, Suite 8656Canton, MA 02021-2809

The Trust’s Investment Company ActRegistration Number: 811-07142 HFII-PROS-0216

Documents

HIGHLAND FUNDS II Fund Class A Class C Class Y Highland ... · The portfolio manager may also invest in exchange-traded funds (“ETFs”) and use various types of derivatives (such