[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Notices]
[Pages 28077-28079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13454]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-22665; 812-10456]


Royce Global Trust, Inc., et al.; Notice of Application

May 16, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').

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

-----------------------------------------------------------------------

APPLICANTS: Royce Global Trust, Inc., Royce Mirco-Cap Trust, Inc. 
(``RMC'') Royce Value Trust, Inc. (``RVT'') (collectively, the 
foregoing are the ``Funds''), and Quest Advisory Corp. (``Quest'').

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: Applicants request an order to permit the Funds 
to make periodic distributions of long-term capital gains in any one 
taxable year, so long as they maintain in effect distribution policies 
with respect to their preferred stock calling for periodic dividends of 
a specified percentage of the liquidation preference of a Fund's 
preferred stock or distribution policies with respect to their common 
stock calling for periodic distributions of an amount equal to a fixed 
percentage of a Fund's net asset value or the market price per share of 
common stock or a fixed dollar amount.

FILING DATES: The application was filed on December 6, 1996, and 
amended on May 9, 1997.

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 my mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on June 10, 1997, 
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. 
Applicants, 1414 Avenue of the Americas, New York, New York 10019.

FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Senior Counsel, at 
(202) 942-0572, or Mary Kay Frech, 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.

Applicants' Representations

    1. Each Fund is a closed-end management investment company 
organized as a Maryland corporation. Each Fund issues common stock and, 
in addition, RVT has outstanding one class of preferred stock. Each 
Fund's investment objective is to seek long-term capital appreciation 
by investing in a portfolio of equity securities. Quest is the 
investment adviser of the Funds.
    2. The Funds wish to institute dividend payment policies 
(``specified periodic payments'') with respect to the RVT preferred 
stock an any other preferred stock that may be issued by the Funds 
calling for periodic dividends in an amount equal to a specified 
percentage of the liquidation preference of such Funds's preferred 
stock. The specified percentage may be determined at the time the 
preferred stock is initially issued, pursuant to periodic remarketings 
or auctions, or otherwise. The specified periodic payments may include 
long-term capital gains so long as a Fund maintains in effect the 
specified periodic payments.
    3. The Funds also wish to institute distribution policies 
(``periodic pay-out policies'') with respect to their common stock 
calling for periodic (but in no event, more frequently than 
quarterly)\1\ distributions of an amount equal to a fixed percentage of 
such Funds's net asset value or market price per share of common stock 
at the time of the declaration or payment or of a fixed dollar amount. 
Such payments may include long-term capital gains so long as a Fund 
maintains in effect the periodic pay-out policies.
---------------------------------------------------------------------------

    \1\ The frequency of the specific periodic payments with respect 
to preferred stock of the Funds and the periodic pay-out policies 
with respect to common stock of the Funds will not be related to one 
another in any way.
---------------------------------------------------------------------------

    4. The periodic pay-out policy will be initially established and 
reviewed at least annually in light of the Fund's performance by each 
Fund's board of directors and will be changeable at the discretion of 
the Fund's board of directors. The annual distribution rate under the 
periodic pay-out policy generally will be independent of the Fund's 
performance in any of the first three quarters of the Fund's fiscal 
year. The rate may be adjusted in a Fund's fourth fiscal quarter in 
light of such Fund's performance for the fiscal year to enable the Fund 
to comply with the requirements of the Internal Revenue Code of 1986, 
as amended (the ``Code''), for the year.
    5. Applicants request that relief be extended to the Funds and to 
each registered closed-end investment company to be advised in the 
future by Quest or an entity controlling, controlled by, or under 
common control (within the meaning of section 2(a)(9) of the Act) with 
Quest. (Such investment companies are also the ``Funds.'')

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, that the Funds 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. In addition, Revenue Ruling 89-81 takes the position that if 
a regulated investment company has two classes of shares, it may not 
designate distributions made to either class in any years as consisting 
of more than such class's proportionate share of particular types of 
income, such as capital gains.

[[Page 28078]]

    2. Rule 19b-1, by limiting the number of net long-term capital gain 
distributions that the Funds may make with respect to any one year, 
prevents the operation of the specified periodic payments for the 
preferred stock and the periodic pay-out policies for the common stock 
whenever the Fund's realized net long-term capital gains in any year 
exceed the total of the periodic distributions that under rule 19b-1 
may include such capital gains. In that situation, the rule effectively 
forces the periodic dividends and distributions, that under the rule 
may not include such capital gains, to be treated as 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 net long-term capital 
gains in excess of the periodic distributions permitted by the rule 
then must either be added as an ``extra'' on one of the permitted 
capital gains distributions on the common stock, thus exceeding the 
total annual amount called for by the periodic pay-out policy or be 
retained by the Funds (with the Funds paying taxes thereon). 
Furthermore, because of Revenue Ruling 89-81, any ``extra'' payments of 
long-term capital gains to holders of common stock require 
proportionate allocations of such ``extra'' long-term capital gains to 
the preferred stock, which applicants state can be extremely difficult 
to do.
    3. Applicants believe that granting the requested relief would 
limit the Funds' return of capital distributions to that amount 
necessary to make up any shortfall between the Funds' targeted annual 
distribution and the total of its investment income and capital gains. 
Applicants state that the likelihood that the Funds' shareholders would 
be subject to additional tax return complexities involved when the 
Funds retain and pay taxes on long-term capital gains would also be 
avoided. In addition, with respect to the common stock, applicants 
state that the discount at which each Fund's shares of common stock 
trade will be reduced if the Funds are permitted to pay dividends with 
respect to their common stock more frequently than annually.
    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. In the case of preferred stock, applicants state that there is 
little chance for investor confusion since all an investor expects to 
receive is the specified dividend distribution for any particular 
dividend period, and no more. Applicants argue that as a further 
protection against investor confusion, in accordance with rule 19a-1, a 
separate statement showing the net investment income component of the 
distribution would accompany each preferred stock dividend, with a 
statement being provided near the end of the last dividend period in a 
year indicating the source or sources of each distribution that was 
made on the preferred stock during the year. In the case of common 
stock, applicants argue that in accordance with rule 19a-1 under the 
Act, a separate statement showing the source of the distribution (net 
investment income, net realized capital gains, or returns of capital) 
will accompany each common stock distribution (or the confirmation of 
the reinvestment thereof under the Funds' dividend reinvestment plan). 
In addition, for both the common and the preferred stock, the amount 
and source or sources of distributions received during the year will be 
included on each Fund'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 on an 
aggregate basis will also be included in the Funds' annual report to 
shareholders. Through these disclosures and other communications with 
shareholders, applicants state that the Funds' shareholders will 
understand that the Funds' 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. 
Applicants believe that this concern does not apply to closed-end 
investment companies, such as the Funds, which do not continuously 
distribute common stock. Although, to date, RMC and RVT have completed 
rights offerings of additional shares of common stock to shareholders, 
each of the offerings were short in duration and involved a relatively 
small number of new shares. The rights were non-transferable and 
offered only by means of a statutory prospectus.
    6. In addition, applicants state that a solicitation fee payment to 
broker-dealers in rights offerings of up to 3% may be required in order 
for the broker-dealers to promptly forward materials to shareholders 
and respond to investor inquiries. Applicants state that without such 
solicitation fee, adequate attention by broker-dealers to the rights 
offering of Fund shares of common stock could not be assured. Further, 
applicants state that they will limit the magnitude of the discount 
between the subscription price for the rights offering and the pricing 
date market or bid price to not more than $.50 in order to minimize the 
dilution of existing investor investments and to avoid any appearance 
of ``selling the dividend.''
    7. Furthermore, applicants state that the concern of selling the 
dividend is not applicable to preferred stock, which entitles a holder 
to a specified periodic dividend and no more and, like a debt security, 
is initially sold at a price based on its liquidation preference plus 
an amount equal to any accumulated dividends.
    8. Applicants state that another concern leading to the adoption of 
section 19(b) and rule 19b-1, increase in administrative costs, is not 
present because the Funds will continue to make periodic distributions 
regardless of what portion thereof is composed of capital gains.
    9. 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, applicants believe that the requested 
exemption meets the standards set forth in section 6(c).

Applicants' Condition

    Applicants agree that the order granting the requested relief for 
each Fund's periodic pay-out policies with respect to its common stock 
shall terminate with respect to such Fund upon the effective date of a 
registration statement under the Securities Act of 1933, as amended, 
for any future public offering of common stock of such Fund other than: 
(i) a rights offering of common stock to shareholders of such Fund, 
provided that (a) such offering does not include the payment of 
solicitation fees to brokers in excess of 3% of the subscription price 
per share or the payment of any other commissions or underwriting fees 
in connection with the offering or exercise of the rights, (b) the 
rights will not be

[[Page 28079]]

exercisable between the date a dividend to such Fund's common 
stockholders is declared and the record date of such dividend, (c) such 
Fund has not engaged in more than one rights offering during any given 
calendar year, and (d) the subscription price for a share of common 
stock in such Fund's rights offering is not more than $0.50 per share 
below the closing market or bid price, as the case may be, for the 
common stock on the pricing date for the rights offering; or (ii) an 
offering in connection with a merger, consolidation, acquisition, or 
reorganization; unless the Fund has received from the staff of the 
Commission written assurance that the order will remain in effect.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13454 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-M