[Federal Register Volume 63, Number 99 (Friday, May 22, 1998)]
[Notices]
[Pages 28431-28432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13646]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23189; 812-10972]


General American Investors Company, Inc.; Notice of Application

May 15, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of application for an exemption under section 6(c) of 
the Investment Company Act of 1940 (the ``Act'') from section 19(b) of 
the Act and rule 19b-1 under the Act.

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SUMMARY OF APPLICATION: Applicant, General American Investors Company, 
Inc., requests an order to permit it to make periodic distributions of 
net long-term capital gains in any one taxable year, so long as 
applicant maintains in effect a distribution policy with respect to its 
preferred stock calling for periodic dividends in an amount equal to a 
specified percentage of the liquidation preference of the preferred 
stock.

FILING DATES: The application was filed on January 16, 1998 and amended 
on April 29, 1998.

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 
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 June 9, 1998, 
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 Fifth Street, NW., Washington, DC 20549. 
Applicant: General American Investors Company, Inc., 450 Lexington 
Avenue, New York, New York 10017.

FOR FURTHER INFORMATION CONTACT:
Edward P. Macdonald, Branch Chief, at (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, 450 Fifth Street, NW., Washington, DC 
20549 (tel. 202-942-8090).

Applicant's Representations

    1. Applicant is registered under the Act as an internally-managed 
closed-end management investment company organized as a Delaware 
corporation. Applicant's board of directors has authorized it to issue 
and sell cumulative preferred stock. Applicant's investment objective 
is long term capital appreciation.
    2. Applicant wishes to institute a dividend payment policy with 
respect to its cumulative preferred stock, and any future preferred 
stock, to be issued by applicant calling for periodic dividends in an 
amount equal to a specified percentage of the liquidation preference of 
applicant's preferred stock (``Distribution Policy''). The specified 
percentage may be determined at the time the preferred stock is 
initially issued, pursuant to periodic remarketings or auctions, or 
otherwise. Under the requested relief, the periodic payments may 
include long-term capital gains so long as applicant maintains in 
effect the Distribution Policy.

Applicant's Legal Analysis

    1. Section 19(b) of the Act provides that a registered investment 
company 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 under the Act limits the 
number of capital gains distributions, as defined in section 
851(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 net long-term capital gains distribution made 
in whole or in part to avoid the excise tax under section 4982 of the 
Code.
    2. Applicant argues that rule 19b-1 may prevent the normal 
operation of the Distribution Policy whenever applicant's realized net 
long-term capital gains in any year exceed the total of the periodic 
distributions that under rule 19b-1 may include capital gains. In that 
situation, applicant asserts that rule 19b-1 effectively forces the 
distributions that under rule 19b-1 may not include these capital gains 
to be treated as a return of capital to stockholders, even though net 
long-term capital gains would otherwise be available. Applicant further 
states that federal tax rules require that current earnings and profits 
be allocated proportionately among all distributions

[[Page 28432]]

made for that year. The net long-term capital gains in excess of the 
periodic distributions permitted by rule 19b-1 then must either be 
added to one of the permitted capital gains distributions resulting in 
the total distributions for the year in excess of the amount required 
to be paid, added to a permitted distribution of long-term capital 
gains on the common stock, or retained by applicant (with applicant 
paying taxes on those amounts). Accordingly, applicant states that the 
requested relief would permit it to operate the Distribution Policy 
with respect to the preferred stock without these unintended adverse 
consequences.
    3. Applicant asserts that its requested relief does not give rise 
to the concerns underlying section 19(b) of the Act and rule 19b-1. One 
of these concerns was that stockholders might not be able to 
distinguish between frequent distributions of capital gains and 
dividends from investment income. Applicant states that in the case of 
preferred stock there is little chance for investor confusion since all 
an investor expects to receive is the specified distribution for any 
particular dividend period, and no more. Moreover, in accordance with 
rule 19a-1 under the Act, a separate statement showing the sources of 
the distribution will accompany each periodic dividend, with a 
statement provided near the end of the last dividend period in a year 
indicating the sources (i.e., net investment income and short-term 
capital gains, net long-term capital gains and return of capital) of 
each distribution that was made during the year. In addition, applicant 
notes that the amount and sources of distributions received during the 
year will be included on applicant's IRS Form 1099-DIV report sent to 
stockholders who received distributions during the year. This 
information will also be included in applicant's annual report to 
stockholders.
    4. Applicant submits that another concern underlying section 19(b) 
and rule 19b-1, was that frequent capital gains distributions could 
facilitate improper fund distribution practices, including the practice 
of urging an investor to purchase 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 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. Applicant also states that 
this concern does not arise with regard to closed-end investment 
companies which do not continuously distribute their shares.
    5. Section 6(c) of the Act provides that the SEC may exempt any 
person, security, or transaction from any provision of the Act, or from 
any rule thereunder, if 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 from section 19(b) of the Act and rule 19b-1, meets the 
standards set forth in section 6(c) of the Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-13646 Filed 5-21-98; 8:45 am]
BILLING CODE 8010-01-M