[Federal Register Volume 64, Number 227 (Friday, November 26, 1999)]
[Notices]
[Pages 66517-66519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30772]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-24147; 812-11860]
The First Australia Prime Income Fund, Inc., et al.; Notice of
Application
November 19, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
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: The First Australia Prime Income Fund, Inc.
(``FAX'') requests an order to permit it to make periodic distributions
of net long-term capital gains in any one taxable year, so long as it
maintains in effect distribution policies: (i) With respect to its
common stock calling for monthly distributions of a fixed percentage of
the net asset value of the common stock; and (ii) with respect to its
preferred stock calling for periodic dividends of a specified
percentage of the liquidation preference of the preferred stock. In
addition, The First Commonwealth Fund, Inc. (``FCO'') seeks to amend an
existing order to extend the relief granted with respect to its common
stock to its preferred stock.\1\
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\1\ The First Commonwealth Fund, Inc., Investment Company Act
Release Nos. 23936 (Aug. 9, 1999) (notice) and 23993 (Sept. 3, 1999)
(order).
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Applicants: FAX and FCO.
Filing Date: The application was filed on November 18, 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 December 13, 1999, and should be accompanied by proof of
service on the 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 Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC
20549-0609. FAX, Gateway Center 3, 100 Mulberry Street, Newark, New
Jersey 07102. FCO, 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
FOR FURTHER INFORMATION CONTACT:
Paula L. Kashtan, Senior Counsel, at (202) 942-0615, 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
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington,
DC 20549-0102 (tel. (202) 942-8090).
Applicants' Representations
1. FAX is incorporated in Maryland and registered under the Act as
a closed-end, non-diversified management
[[Page 66518]]
investment company. FAX's investment objective is to provide current
income through investment primarily in Australian debt securities. Up
to 35% of its total assets may be invested in certain Asian debt
securities. FAX's common shares are listed on the American Stock
Exchange and have traded at various times at either a premium or a
discount to net asset value. FAX's Auction Market Preferred Shares are
traded in weekly or monthly auctions, depending on the series,
conducted by The Chase Manhattan Bank (``Chase''), FAX's auction agent.
EquitiLink International management Limited (``EquitiLink''), FAX's
investment manager, is registered as an investment adviser under the
Investment Advisers Act of 1940.
2. FCO is incorporated in Maryland and registered under the Act as
a closed-end, non-diversified management investment company. FCO's
primary investment objective is to provide high current income,
primarily through investments in fixed-income securities denominated in
the currency of Australia, Canada, New Zealand, and the United Kingdom.
Up to 35% of its total assets may be invested in certain global debt
securities. FCO's Auction Market Preferred Shares are traded in weekly
auctions conducted by Chase. EquitiLink is FCO's investment manager.
3. On June 10, 1999, FAX's board of directors (``FAX Board''),
including a majority of the directors who are not ``interested
persons'' as defined in section 2(a)(19) of the Act, adopted a
distribution plan with respect to its common stock (``Monthly
Distribution Plan'') that calls for regular monthly distributions at a
monthly cash distribution rate (``Monthly Cash Distribution Rate'') set
in March of each year by the Board. Among other things, the FAX Board
considered empirical evidence that, in some cases, market discounts to
net asset value have narrowed upon adoption of similar distribution
policies by other closed-end funds. The FAX Board has set the
annualized Monthly Cash Distribution Rate for the period March 1999,
through February 2000, at 6 cents per share per month, subject to
market conditions. If, for any taxable year, the total distributions
required by its Monthly Distribution plan exceed FAX's annual net
investment income and net realized capital gains, the excess will
generally be treated as a return of capital (up to the amount of the
shareholder's adjusted tax basis in his shares).
4. FAX requests relief to permit it, so long as it maintains in
effect the Monthly Distribution Plan, to make up to twelve
distributions of long-term capital gains in any one taxable year. FAX
and FCO also request relief to permit them, so long as their
outstanding Auction Market Preferred Shares and any other preferred
stock to be issued by FAX or FCO in the future (collectively ``AMPS'')
required periodic dividend payment (``specified periodic payments'') in
amounts equal to a specified percentage of the liquidation preference
of their respective AMPS, such percentage to be determined at periodic
auctions, to make up to fifty-two periodic distributions of long-term
capital gains in any one taxable year. If, for any taxable year, the
total dividends required by either applicant's specified periodic
payments exceeds either applicant's net investment income and net
capital gains, the excess will be treated as a return of capital.
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. In addition, applicants
state that 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.
2. The applicants assert that rule 19b-1, by limiting the number of
net long-term capital gains distributions and dividends that the
applicants may make with respect to any one year, would prohibit the
applicants from including available net long-term capital gains in
certain of their fixed monthly distributions and periodic dividends. As
a result, the applicants state that they could be required to fund
these monthly distributions and periodic dividends with returns of
capital (to the extent that net investment income and net realized
short-term capital gains are insufficient to cover the distributions
and dividends). FAX asserts that, with respect to its common shares, in
order to distribute all the long-term capital gains within the limits
in rule 19b-1, it may be required to make total distributions in excess
of the annual amount called for by the Monthly Distribution Plan or
retain and pay taxes on the excess amount. The applicants also note
that the application of rule 19b-1 to pay-out policies may create
pressure to limit the realization of long-term capital gains based on
considerations unrelated to investment goals.
3. the applicants submit that the concerns underlying section 19(b)
and rule 19b-1 are not present in their situation. 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.
With respect to its common stock, FAX represents that the Monthly
Distribution Plan has been described in its periodic communications to
its shareholders. In accordance with rule 19a-1 under the Act, a
separate statement showing the sources of the distribution will
accompany each distribution (or the confirmation of the reinvestment
thereof under FAX's dividend reinvestment plan). With respect to the
AMPS, the applicants state that there is little chance for investor
confusion since all an investor expects to receive is the specified
distribution for any specified dividend period, and no more, and that
there is little or no chance for shareholder confusion regarding the
yield or investment return generated by the dividends. In accordance
with rule 19a-1, a separate statement showing the sources of the
distribution will accompany each AMPS periodic dividend, with a
statement provided near the end of the last dividend period in a fiscal
year indicating the sources of each distribution make during the fiscal
year (i.e., net income, net capital gains and/or return of capital). In
addition, for both the common stock and the AMPS, a statement showing
the amount and sources of distributions received during the year will
be included on each applicant's IRS Form 1099-DIV report sent to each
shareholder who received distributions during the year(including
shareholders who have sold shares during the year). This information on
an aggregate basis will also be included in each applicant's annual
report to shareholders.
4. another concern underlying section 19(b) and rule 19b-1 is that
frequent capital gains distributions could
[[Page 66519]]
improperly influence distribution practices including, in particular,
the practice of urging an investor to purchase shares of a fund on the
basis of an upcoming dividend (``selling the dividend''), when the
dividend results in an immediate corresponding reduction in net asset
value and is, in effect, a return of the investor's capital. FAX
submits that this concern does not arise with regard to closed-end
management investment companies, such as the applicant, that do not
continuously distribute shares of their common stock. The applicants
also believe that this concern does not apply to the 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 an accumulated
dividends. Finally, the applicants note that the condition to the
requested relief should further assure that the concern about selling
the dividend will not arise in connection with a rights offering by
either of the applicants.
5. Applicants state that if any rights offerings by either of them
will be timed so that shares issuable upon exercise of the rights will
be issued only in the 15-day 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. The applicants further
state that any rights offering will comply with all relevant Commission
and staff guidelines. In determining compliance with these guidelines,
each applicant's board of directors will consider, among other things,
the brokerage commissions that would be paid in connection with the
offering. Any such offering by either applicant of transferable rights
will also comply with any applicable NASD rules regarding the fairness
of compensation.
6. The applicants state that increased administrative costs also
are a concern underlying section 19(b) and rule 19b-1. The applicants
assert that this concern is not present because the applicants will
continue to make regular periodic distributions regardless of whether
long-term capital gains are included in any particular distribution.
7. Section 6(c) of the Act provides that the Commission may exempt
any person or transaction from any provision of the Act or any rule
under the Act to the extent that 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, the applicants
believe that the requested relief satisfies this standard.
Condition
Each of FAX and FCO agrees that the order granting the requested
relief with respect to its common stock will terminate upon the
effective date of a registration statement under the Securities Act of
1933 for any future public offering by such applicant of its common
shares other than:
(i) a rights offering with respect to holders of such applicant's
common stock, in which (a) shares are issued only within the 15-day
period immediately following the record date of a monthly dividend, (b)
the prospectus for such rights offering makes it clear that common
shareholders exercising rights will not be entitled to receive such
dividend, and (c) the applicant 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 such applicant, unless the
applicant 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,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30772 Filed 11-24-99 8:45 am]
BILLING CODE 8010-01-M