[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24967-24968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12465]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-21956; 812-9920]
Blue Chip Value Fund, Inc.; Notice of Application
May 14, 1996.
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: Blue Chip Value Fund, Inc.
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
Act that would grant an exemption from section 19(b) of the Act and
rule 19b-1 thereunder.
SUMMARY of APPLICATION: Applicant requests an order to make up to four
distributions of long-term capital gains in any one taxable year, so
long as applicant 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 January 2, 1996, and amended
on April 18, 1996.
HEARING or NOTIFICATION of HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on June 10, 1996,
and should be accompanied by proof of service on applicants, 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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549.
Applicant, 1225 Seventeenth Street, 26th Floor, Denver, Colorado 80202.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Staff Attorney, at (202) 942-0572, or Alison E. Baur,
Branch Chief, at (202) 942-0564 (Division of Investment Management,
Office of Investment Company Regulation).
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 closed-end management investment company organized
as a Maryland corporation. Applicant's investment objective is to seek
a high level of total investment return, comprised of capital
appreciation and current income, through investment primarily in a
diversified portfolio of equity securities.
2. From 1989 to April 1994, applicant had a fixed distribution
policy calling for 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 its net asset value per year. Any realized
capital gains from 1989 through 1993 were offset by capital loss
carryforwards. On April 4, 1994, applicant announced a change in its
distribution policy to three quarterly distributions of net investment
income, followed by a fourth distribution of an amount equal to the
greater of 10% of net asset value less the prior three distributions or
the sum of applicant's net investment income and net capital gains.
3. Applicant requests relief to permit it 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
(the ``Pay-Out Policy'').
[[Page 24968]]
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, has
prevented the operation of the Pay-Out Policy because applicant's
realized net long-term capital gains in any year may 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'' on one of the permitted capital gains
distributions, thus exceeding the total annual amount called for by the
Pay-Out Policy, or be retained by applicant (with applicant paying
taxes thereon).
3. Applicant believes that granting the required 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 additional tax return
complexities involved when applicant retains and pays taxes on long-
term capital gains would therefore be avoided.
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 gains and dividends from investment
income. In accordance with rule 19a-1, a separate statement showing the
source of the distribution (net investment income, net realized capital
gains, or returns of capital) will accompany each distribution (or the
confirmation of the reinvestment thereof under applicant's dividend
reinvestment plan). In addition, a statement showing the amount and
source of distributions received during the year will be included with
applicant's IRS Form 1099-DIV reports sent to each shareholder who
received distributions during the year (including shareholders who sold
shares during the year). This information will also be included in
applicant's annual report to shareholders. Through these disclosures
and 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 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 companies,
such as applicant, which do not continuously distribute shares.
Although, to date, applicant has completed one rights offering of
additional shares to shareholders, the rights offering was short in
duration and involved a relatively small number of new shares. The
rights in the rights offering 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 fee.
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. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction, or any class or classes of persons,
securities, or transactions, from any provisions of the Act, if and to
the extent such exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act. For
the reasons stated above, applicant believes that the requested
exemption meets the standards set forth in section 6(c).
Applicant's Condition
Applicant agrees that the order granting the exemption shall
terminate upon the effective date of a registration statement under the
Securities Act of 1933 for any future public offering by applicant of
its shares 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 Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12465 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M