[Federal Register Volume 64, Number 13 (Thursday, January 21, 1999)]
[Notices]
[Pages 3326-3328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1326]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23649; 812-11342]


Templeton Dragon Fund, Inc.; Notice of Application

January 13, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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SUMMARY OF APPLICATION: Applicant, Templeton Dragon Fund, Inc. (the 
``Fund''), a registered closed-end management investment company, 
requests an order 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 with respect to its common 
stock calling for quarterly distributions of a fixed percentage of its 
net asset value (``NAV'').

FILING DATES: The application was filed on October 7, 1998, and amended 
on January 11, 1999.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicant with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on February 8, 1999 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 may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th 
Street, NW, Washington, DC 20549. Applicant, 500 East Broward 
Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091.

FOR FURTHER INFORMATION CONTACT:
Lawrence W. Pisto, Senior Counsel, at (202) 942-0527, or George J. 
Zornada, 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

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Commission's Public Reference Branch, 450 5th Street, NW, Washington, 
DC 20549 (tel. 202-942-8090).

Applicant's Representations

    1. The Fund is registered under the Act as a closed-end management 
investment company and organized as a Maryland corporation. The Fund's 
investment objective is to seek long-term capital appreciation by 
investing at least 45% of its total assets in ``China companies,'' as 
defined in the Fund's prospectus. Shares of the Fund are listed on the 
New York Stock Exchange and the Osaka Stock Exchange. Templeton Asset 
Management Ltd.--Hong Kong branch is the fund's investment adviser and 
is registered under the Investment Advisers Act of 1940.
    2. On July 22, 1998, the fund's board of directors (``Board''), 
including a majority of the independent directors, adopted a 
distribution plan with respect to applicant's common stock under which 
the Fund will make quarterly distributions to its shareholders in an 
amount equal to 2.5% of the Fund's NAV, determined as the Friday prior 
to the declaration date (``Distribution Policy''). The Board concluded 
that adoption of the Distribution Policy would be in the best interests 
of the Fund's shareholders and could help reduce the discount from NAV 
at which applicant's shares generally have traded. Applicant requests 
relief to permit it to make up to four distributions of net long-term 
capital gains in one taxable year, so long as the Fund 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 Commission may prescribe, distribute long-term capital gains 
more often than once every twelve months. Rule 19b-1(a) under the Act 
permits a registered investment company, with respect to any one 
taxable year, to make one capital gains distribution, as defined in 
section 852(b)(3)(C) of the Internal Revenue Code of 1986, as amended 
(the ``Code''). Rule 19b-1(a) also permits a supplemental distribution 
to be made pursuant to section 855 of the Code not exceeding 10% of the 
total amount distributed for the year. Rule 19b-1(f) permits one 
additional long-term capital gains distribution to be made to avoid the 
excise tax under section 4982 of the Code.
    2. Applicant asserts that rule 19b-1, by limiting the number of net 
long-term capital gains distributions that the Fund may make with 
respect to any one year, would prevent the normal operation of its 
Distribution Policy whenever applicant's realized net long-term gains 
in any year exceed the total of the fixed quarterly distributions that 
under rule 19b-1 may include such capital gains. As a result, applicant 
states that it must fund these quarterly distributions with returns of 
capital (to the extent net investment income and realized short-term 
capital gains are insufficient to cover quarterly distributions). 
Applicant further asserts that the long-term capital gains in excess of 
the fixed quarterly distributions permitted by rule 19b-1 then must 
either be added to one of the permitted capital gains distributions, 
thus exceeding the total minimum amount called for by the Distribution 
Policy, or be retained by the applicant, with the applicant paying 
taxes on the amount retained. Applicant believes that the application 
of rule 19b-1 to its Distribution Policy may create pressure to limit 
the realization of long-term capital gains to the total amount of the 
fixed quarterly distributions that under the rule may include such 
gains.
    3. Applicant believes that the concerns underlying section 19(b) 
and rule 19b-1 are not present in applicant's situation. One of the 
concerns leading to the adoption of the rule was that shareholders 
might not be able to distinguish between frequent distributions of 
capital gains and dividends from net investment income. Applicant 
states that it will fully describe the Distribution Policy, including 
that quarterly distributions called for by the Distribution Policy will 
include returns of capital to the extent that applicant's net 
investment income and net long-term realized capital gains are 
insufficient to meet the fixed dividends, in periodic communications. 
The Fund has described to shareholders the Distribution Policy in the 
Fund's most recent proxy material and shareholder report. In accordance 
with rule 19a-1 under the Act, a separate statement showing the source 
of the distribution (net investment company taxable income, net long-
term realized capital gain or return 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 each distribution during the year will 
be included with the applicant's annual tax information reporting 
distributions for that year and sent to each shareholder who received 
distributions during the year, including shareholders who have sold 
shares during the year.
    4. Another concern underlying section 19(b) and rule 19b-1 is that 
frequent capital gains distributions could facilitate improper sales 
practices, including, in particular, the practice of urging an investor 
to purchase fund shares on the basis of an upcoming dividend (``selling 
the dividend''), when the dividend would result in an immediate 
corresponding reduction in NAV and would be, in effect, a return of the 
investor's capital. Applicant submits that this concern does not apply 
to closed-end investment companies, such as applicant, that do not 
continuously distribute shares. Applicant further asserts that if it 
makes a rights offering to its shareholders, the rights offering will 
be timed so that shares issuable upon exercise of the rights will be 
issued only in the six week period immediately following the record 
date for the declaration of a dividend. Thus, the abuse of selling the 
dividend could not occur as a matter of timing. Applicant further 
states that any offering by applicant of transferable rights will 
comply with all Commission and staff guidelines concerning such 
offering. In determining compliance with these guidelines, the Board 
will consider, among other things, the brokerage commissions that would 
be paid in connection with the offering. Any such offering by applicant 
of transferable rights will also comply with any applicable NASD rules 
regarding the fairness of compensation.
    5. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provisions of the Act, 
or 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 meets the standards set forth in section 6(c) of 
the Act.

Applicant's Condition

    The Fund agrees that the 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 the Fund of 
its shares other than:
    (i) a rights offering with respect to the Fund's common stock to 
holders of the Fund's common stock, in which (a) shares are issued only 
within the six-week period immediately following the

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record date of a quarterly dividend, (b) the prospectus for such rights 
offering makes it clear that shareholders exercising the rights will 
not be entitled to receive such dividend, and (c) the Fund has not 
engaged in more than one rights offering during any given calendar 
year; or
    (ii) an offering in connection with a merger, consolidation, 
acquisition, spin-off or reorganization of the Fund, 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. 99-1326 Filed 1-20-99; 8:45 am]
BILLING CODE 8010-01-M