[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