[Federal Register Volume 60, Number 199 (Monday, October 16, 1995)]
[Notices]
[Pages 53656-53658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25507]



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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21401; 812-9716]


Liberty All-Star Equity Fund; Notice of Application

October 6, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption Under the Investment 
Company Act of 1940 (the ``Act'').

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applicant: Liberty All-Star Equity Fund.

relevant act sections: Order requested under section 6(c) of the Act 
from section 19(b) of the Act and from rule 19b-1 thereunder.

summary of application: Applicant requests an order to permit applicant 
to make up to four distributions of net long-term capital gains in any 
one taxable year, so long as it maintains in effect a distribution 
policy calling for quarterly distributions of a fixed percentage of its 
net asset value.

filing dates: The application was filed on August 8, 1995, and amended 
on September 22, 1995.

hearing or notification of hearing: An order granting the application 
will be 

[[Page 53657]]
issued unless the SEC orders a hearing. Interested persons may request 
a hearing by writing to the SEC's Secretary and serving applicant with 
a copy of the request, personally or by mail. Hearing requests should 
be received by the SEC by 5:30 p.m. on October 31, 1995, and should be 
accompanied by proof of service on applicant in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of the writer's interest, the reason for the 
request,and the issues contested. Persons who wish to be notified of a 
hearing may request notification by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C. 
20549. Applicant, c/o Liberty Financial Companies, Inc., 600 Atlantic 
Avenue, Boston, MA 02210.

FOR FURTHER INFORMATION CONTACT:
James M. Curtis, Senior Counsel, at (202) 942-0563, or Robert A. 
Robertson, Branch Chief, (202) 942-0564 (Office of Investment Company 
Regulation, Division of Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch.

Applicant's Representations

    1. Applicant is a closed-end management investment company 
organized as a Massachusetts business trust. Applicant's investment 
objective is to seek total investment return, comprised of long-term 
capital appreciation and current income, through investment primarily 
in a diversified portfolio of equity securities.
    2. Since June 1988, applicant's distribution policy (the ``Pay-Out 
Policy'') has been to make four quarterly distributions of an amount 
equal to 2.5% of its net asset value at the time of the declaration, 
for a total of approximately 10% of net asset value per year. If the 
total distributions required by the Pay-Out Policy exceed applicant's 
investment income and net realized capital gains, the excess is treated 
as a return of capital. If applicant's net investment income, net 
realized short-term capital gains, net realized long-term capital 
gains, and returns of capital for any year exceed the amount required 
to be distributed under the Pay-Out Policy, applicant may in its 
discretion retain, and not distribute, net realized long-term capital 
gains to the extent of such excess.
    3. In accordance with rule 19a-1 under the Act, a separate 
statement showing the source of the distribution (net investment 
income, net realized capital gain, or return of capital) accompanies 
each distribution (or the confirmation of the reinvestment thereof 
under applicant's dividend reinvestment plan). Applicant's annual 
reports to shareholders also include this information for all 
distributions during the year. In addition, applicant has described its 
Pay-Out Policy in applicant's other communications to its shareholders, 
including the fact that the distributions called for by the policy will 
include returns of capital to the extent that applicant's net 
investment income and net realized capital gains are insufficient. 
Applicant also will provide an additional statement showing the amount 
and source of each quarterly distribution during the year with the IRS 
Form 1099-DIV reports sent to each shareholder who received 
distributions during the year (including shareholders who have sold 
shares during the year).
    4. To date, applicant has completed three rights offerings of 
additional shares to its shareholders. Each of those rights offerings 
was short in duration and involved relatively small amounts of new 
shares. The rights in each of applicant's rights offerings were non-
transferable and offered only to existing shareholders. The rights were 
offered only by means of the statutory prospectus, without solicitation 
by brokers and without payment of any commission or other underwriting 
fees.
    5. Applicant requests relief to permit applicant to make up to four 
distributions of net long-term capital gains in any one taxable year, 
so long as it maintains in effect a distribution policy calling for 
quarterly distributions of a fixed percentage of its net asset value.

Applicant's Legal Analysis

    1. Section 19(b) provides that registered investment companies may 
not, in contravention of such rules, regulations, or orders as the SEC 
may prescribe, distribute long term capital gains more often than once 
every twelve months. Rule 19b-1 limits the number of capital gains 
distributions, as defined in section 852(b)(3)(C) of the Internal 
Revenue Code of 1986, as amended, (the ``Code''), that applicant may 
make with respect to any one taxable year to one, plus a supplemental 
distribution made pursuant to section 855 of the Code not exceeding 10% 
of the total amount distributed for the year, plus one additional long 
term capital gains distribution made to avoid the excise tax under 
section 4982 of the Code.
    2. Rule 19b-1, by limiting the number of net long-term capital gain 
distributions that applicant may make with respect to any one year, 
prevents the operation of the Pay-Out Policy whenever applicant's 
realized net long-term capital gains in any year exceed the total of 
the fixed quarterly distributions that under rule 19b-1 may include 
such capital gains. In that situation, the rule effectively forces the 
fixed quarterly distributions that under the rule may not include such 
capital gains to be funded with returns of capital (to the extent net 
investment income and realized short-term capital gains are 
insufficient), even though net realized long-term capital gains would 
otherwise be available therefor. The long-term capital gains in excess 
of the fixed quarterly distributions permitted by the rule then must 
either be added as an ``extra'' to one of the permitted capital gains 
distributions, thus exceeding the total annual amount called for by the 
policy, or be retained by applicant (with applicant paying taxes 
thereon).
    3. Applicant believes that granting the requested relief would 
limit applicant's return of capital distributions to that amount 
necessary to make up any shortfall between applicant's guaranteed 
distribution and the total of its investment income and capital gains. 
The likelihood that applicant's shareholders would be subject to the 
additional tax return complexities involving when applicant retains and 
pays taxes on long term capital gains would be substantially reduced.
    4. One of the concerns leading to the adoption of section 19(b) and 
rule 19b-1 was that shareholders might be unable to distinguish between 
frequent distributions of capital gain and dividends from investment 
income. Through the disclosures accompanying applicant's distributions, 
in applicant's prospectuses and annual reports, and in other 
communications with shareholders, applicant states that its 
shareholders will understand that applicant's fixed distributions are 
not tied to its investment income and realized capital gains and will 
not represent yield or investment return.
    5. Another concern that led to the adoption of section 19(b) and 
rule 19b-1 was that frequent capital gain distributions could 
facilitate improper fund distribution practices, including in 
particular the practice of urging an investor to purchase fund shares 
on the basis of an upcoming dividend (``selling the dividend''), where 
the dividend results in an immediate corresponding reduction in net 
asset value and is in effect a return of the investor's capital. 
Applicant believes that this concern does not apply to closed-end 
investment 

[[Page 53658]]
companies, such as applicant, which do not continuously distribute 
shares. Any rights offering, moreover, that applicant makes in the 
future will be non-transferable and will be offered only by means of 
the statutory prospectus, without solicitation by brokers and without 
payment of any commission or other underwriting fees and accordingly 
would provide no opportunity for selling the dividend.
    6. Applicant states that another concern leading to the adoption of 
section 19(b) and rule 19b-1, increase in administrative costs, is not 
present because applicant will continue to make quarterly distributions 
regardless of what portion thereof is composed of capital gains.
    7. For the reasons stated above, applicant believes that the 
requested exemption from section 19(b) of the Act and rule 19b-1 
thereunder would be consistent with the standards set forth in section 
6(c) of the Act, and would be in the best interests of applicant and 
its shareholders.

Applicant's Condition

    Applicant agrees that any SEC order granting the requested relief 
shall terminate upon the effective date of a registration statement 
under the Securities Act of 1933 for any future public offering by 
applicant of shares of applicant other than:
    (i) A non-transferable rights offering to shareholders of 
applicant, provided that such offering does not include solicitation by 
brokers or the payment of any commissions or underwriting fee; and
    (ii) An offering in connection with a merger, consolidation, 
acquisition or reorganization.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-25507 Filed 10-13-95; 8:45 am]
BILLING CODE 8010-01-M