[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Notices]
[Pages 1201-1202]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-384]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24232; 812-11828]
H&Q Healthcare Investors and H&Q Life Sciences Investors; Notice
of Application
January 3, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (``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: Applicants, H&Q Healthcare Investors (``HQH'')
and H&Q Life Sciences Investors (``HQL'') (each a ``Fund,'' and
together the ``Funds''), request an order to permit each fund to make
up to four distributors of net long-term capital gains in any one
taxable year, so long as it maintains in effect a distribution policy
calling for quarterly distributions of a fixed percentage of net asset
value.
FILING DATES: The application was filed on October 27, 1999, and was
amended on December 21, 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 applicants with a copy of the request, personally or by
mail. hearing requests should be received by the Commission by 5:30
p.m. on January 28, 2000, 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 who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549-0609; Applicants, 50 Rowes Wharf, Fourth Floor, Boston,
Massachusetts 02110-3328.
FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, at
(202) 942-0574 or George J. Zornada, 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, N.W.,
Washington, D.C. 20549-0102 (telephone (202) 942-8090).
Applicants' Representations
1. The Funds are registered under the Act as closed-end,
diversified management investment companies and organized as
Massachusetts business trusts. The investment objective of HQH is long-
term capital appreciation through investment in securities of companies
in the healthcare industry. The investment objective of HQL is long-
term capital appreciation through investment in securities of companies
in the life sciences industry. Hambrecht & Quist Capital Management
Incorporated, an investment adviser registered under the Investment
Adviser Act of 1940, serves as each Fund's investment adviser.
2. On May 10, 1999, each Fund's board of trustees (``Board''),
adopted a managed distribution policy (``distribution'') with respect
to the Fund's common shares. Each Fund's shares are listed and traded
on the New York Stock Exchange. Under the Distribution Policy, each
Fund intends to make quarterly distributions to its shareholders equal
to 2.0% of the Fund's net asset value (``NAV''). The Boards, including
a majority of the members who are not ``interested persons'' of the
Funds, as defined in section 2(a)(19) of the Act, concluded that
adoption of the Distribution Policy would be in the best interests of
the Funds' shareholders. Applicants state that, while at times since
inception each Fund's shares have traded at a premium, each Fund's
shares generally have traded at a discount to NAV. In this regard, the
Boards took into account empirical evidence that, in some cases, market
price discounts to NAV have narrowed upon adoption of similar
distribution policies by other closed-end investment companies.
3. Each Fund requests relief to permit it, so long as it maintains
in effect the Distribution Policy, to make up to four long-term capital
gains distributions in any one taxable year.
Applicants' 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 very 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. Applicants assert that rule 19b-1, by limiting the number and
amount of net long-term capital gains distributions that each Fund may
make with respect to any one year, may prevent the normal operation of
the Distribution Policy whenever the Fund's realized net long-term
capital gains in any year exceed the total of the long-term capital
gains that under rule 19b-1 may include such capital gains. As a
result, applicants state that each Fund might have to combine the third
and fourth quarter dividends to comply with rule 19b-1, thereby
disturbing the regularity of the dividend policy or fund the
distributions with a return of capital. Applicants further state that
the long-term capital gains in excess of the fixed distributions
permitted by rule 19b-1 then would have to 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 each
Fund, with each Fund paying taxes on the long-term capital gains that
are retained. Applicants believe 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 long-term capital gains.
3. Applicants submit that one of the concerns leading to the
adoption of section 19(b) and rule 19b-1 was that
[[Page 1202]]
shareholders might be unable to distinguish between frequent
distributions of capital gains and dividends from investment income.
Applicants state that each Fund's Distribution Policy, including the
fact that quarterly dividends may include returns of capital to the
extent that net investment income and net long-term capital gains are
insufficient to meet the distribution obligation, will be described in
periodic communications to its shareholders. Applicants further state
that in accordance with rule 19a-1 under the Act, a separate statement
showing the source of the distribution (investment company taxable
income, net long-term realized capital gains or return of capital) will
accompany any distribution (or the confirmation of its reinvestment
under each Fund's dividend reinvestment plan) that is not from the Fund
's net investment income. In addition, a statement showing the amount
and character of the distributions during the year will be included
with each Fund's IRS Form 1099-DIV and Form 1099-B reports, which will
be sent to each shareholder of record who received distributions during
the year (including shareholders who sold shares during the year).
4. Applicants submit that another concern underlying section 19(b)
and rule 19b-1 is that frequent capital gains distributions could
facilitate improper fund 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''),
where the dividend results in an immediate corresponding reduction in
NAV and is in effect a return of the investor's capital. Applicants
state that this concern does not apply to closed-end investment
companies such as the Funds which do not continuously distribute
shares. Applicants also state that the condition to the requested
relief would further assure that the concern about selling the dividend
would not arise in connection with a rights offering by the applicants.
Applicants state that any transferable rights offering by either Fund
will comply with the guidelines of the Commission and its staff. In
making the requisite findings in connection with such an offering, the
Boards will consider, among other things, the brokerage commissions
that would be paid in connection with the offering. Applicants also
state that any such offering will also comply with any applicable
National Association of Securities Dealers, Inc. rules regarding the
fairness of compensation.
5. Applicants state that increased administrative costs also are a
concern underlying section 19(b) and rule 19b-1. Applicants assert that
the anticipated benefits to the Fund's shareholders are such that each
Fund will continue to make quarterly distributions regardless of what
portion is composed of long-term capital gains.
6. 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.
Applicant's Condition
Each 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 shares to holders
of the Fund's shares, in which (a) shares are issued only within the
six-week period immediately following the 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,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-384 Filed 1-6-00; 8:45 am]
BILLING CODE 8010-01-M