[Federal Register Volume 67, Number 244 (Thursday, December 19, 2002)]
[Notices]
[Pages 77819-77821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31932]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25847; 812-12678]


Cohen & Steers Advantage Income Realty Fund, Inc., et al.; Notice 
of Application

December 12, 2002.
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 the Application: Applicants request an order to permit 
certain registered closed-end management investment companies to make 
long-term capital gains distributions to holders of shares of their 
preferred stock.

Applicants: Cohen & Steers Advantage Income Realty Fund, Inc. 
(``RLF''), Cohen & Steers Quality Income Realty Fund, Inc. (``RQI''), 
Cohen & Steers Premium Income Realty Fund, Inc. (``RPF''; each of RPF, 
RQI and RLF, an ``Existing Fund'' and collectively, the ``Existing 
Funds''), Cohen & Steers Capital Management, Inc. (including any 
successor in interest\1\, the ``Adviser'') and each registered closed-
end management investment company to be advised in the future by the 
Adviser or by an entity controlling, controlled by, or under common 
control (within the meaning of section 2(a)(9) of the Act) with the 
Adviser (such

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investment companies, the ``Future Funds'' and together with the 
Existing Funds, the ``Funds'').\2\
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    \1\ A successor in interest is limited to entities that result 
from a reorganization into another jurisdiction or a change in the 
type of business organization.
    \2\ All existing registered closed-end management investment 
companies that currently intend to rely on the requested order are 
named as applicants and any Future Fund that may rely on the order 
in the future will comply with the terms of the application.

Filing Dates: The application was filed on October 31, 2001 and amended 
on December 11, 2002. Applicants have agreed to file an amendment 
during the notice period, the substance of which is reflected in this 
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notice.

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 the 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 6, 2003 and should be accompanied by proof of service 
on the 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, NW, Washington, DC 
20549-0609. Applicants, c/o Laurence B. Stoller, 757 Third Avenue, New 
York, New York 10017.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, at (202) 942-0567, or 
Todd F. Kuehl, 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 from 
the Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone (202) 942-8090).

Applicants' Representations

    1. The Existing Funds are organized as Maryland corporations and 
registered under the Act as non-diversified, closed-end management 
investment companies. The primary objective of each Existing Fund is 
high current income through investment in real estate securities. The 
Adviser, an investment adviser registered under the Investment Advisers 
Act of 1940, serves as the investment adviser to the Existing Funds.
    2. Each Fund has or will have two classes of stock: a single class 
of common stock and a single class of auction rate cumulative preferred 
stock issued in one or more series. The common stock of each Existing 
Fund is listed and traded on the New York Stock Exchange. Shares of 
preferred stock of each Fund are, or will be, subject to purchase and 
sale at auctions that are generally held at seven or twenty-eight day 
intervals or at such other interval as specified in the articles 
supplementary or other corporate organizational documents creating such 
auction rate preferred stock (each of the foregoing, an ``Auction 
Interval'').
    3. Each Fund has paid or will pay dividends on its preferred stock 
at an Auction Interval. The Board of Directors of each Fund (each, a 
``Board'') has set or will set the initial dividend rate on each series 
of the Fund's preferred stock as a specified percentage of the 
liquidation preference of the series of the preferred stock.\3\ 
Thereafter, each Fund pays or will pay an amount of dividend based on 
rates determined by auction or, under certain circumstances, by a 
predetermined formula. All investment income remaining after the 
payment of each Fund's preferred stock dividends and expenses will be 
paid monthly to holders of common stock at a specified amount.
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    \3\ The respective Board of each of RLF, RQI and RPF set the 
initial dividend rate on each series of the respective Fund's 
preferred stock on July 20, 2001, April 1, 2002 and October 10, 
2002.
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    4. Each Fund also will make annual distributions of realized long-
term capital gains, if any, to both holders of common and preferred 
stock. Distributions of long-term capital gains are designed to comply 
with IRS Revenue Ruling 89-81, 1989-1 C.B. 226 (``Revenue Ruling 89-
81''). Depending upon the amount of long-term capital gains realized in 
a fiscal year, the period of time between auctions, and the amount of 
the dividend as set by auction, each Fund may be required to distribute 
a greater number of long-term capital gains distributions to its 
preferred stockholders than is permitted by section 19(b) of the Act 
and rule 19b-1 under the Act to comply with Revenue Ruling 89-81. 
Holders of common stock in each Fund will receive long-term capital 
gains distributions in compliance with section 19(b) and rule 19b-1.
    5. Applicants request relief to permit each Fund to make long-term 
capital gains distributions to its preferred stockholders in any one 
taxable year to the extent necessary to comply with Revenue Ruling 89-
81, provided that, the Fund maintains in effect a distribution policy 
calling for distributions to its preferred stockholders at each Auction 
Interval at rates determined by the Board of the Fund at the time a 
series of such preferred stock is initially issued, and thereafter 
pursuant to auction, or under certain circumstances, by a predetermined 
formula.

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 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. Revenue Ruling 89-81 requires that a regulated investment 
company that has two or more classes of stock make designations of 
various types of income in the same proportion as the total dividends 
distributed to each class for the taxable year. To satisfy the 
proportionate designation requirements of Revenue Ruling 89-81, 
whenever a Fund has realized a long-term capital gain with respect to a 
given tax year, the Fund designates the required proportionate share of 
such capital gain to be included in common and preferred stock 
dividends. The Fund calculates the ratio by dividing the total 
dividends paid to preferred stockholders during a taxable year by the 
total dividends paid to all classes during that year. The Fund then 
declares and distributes designated long-term capital gains dividends 
to the common and preferred stockholders in proportion to this ratio.
    3. Applicants state that under certain circumstances, a Fund will 
be able to comply with both Revenue Ruling 89-81 and rule 19b-1. For 
example, if the entire dividend payment set at auction distributes in a 
single dividend the full amount of long-term capital gains required to 
be distributed by Revenue Ruling 89-81, the Fund will comply with both 
Revenue Ruling 89-81 and rule 19b-1. Applicants assert, however, that 
circumstances may arise when a

[[Page 77821]]

Fund must make additional long-term capital gains distributions to 
comply with Revenue Ruling 89-81 that conflict with rule 19b-1. 
Applicants note that while rule 19b-1 does give a Fund some flexibility 
with respect to capital gains distributions, a Fund could have used all 
of the exceptions provided by rule 19b-1 and, in need of making further 
distributions to its preferred stockholders, be unable to comply with 
Revenue Ruling 89-81, section 19(b) and rule 19b-1.
    4. Applicants submit that one of the concerns leading to the 
enactment of section 19(b) and the adoption of rule 19b-1 was that 
investors might be unable to distinguish between regular distributions 
of capital gains and distributions of investment income. In the case of 
preferred stock, applicants state there is little chance for investor 
confusion since all an investor expects to receive is the cash amount 
representing the specified dividend distribution for any particular 
dividend period and no more. Applicants state that in accordance with 
rule 19a-1 under the Act, a separate statement showing the net 
investment income component of the distribution will accompany each 
Fund's preferred stock dividend, with a statement being provided near 
the end of the last dividend period in a year indicating the source or 
sources of each distribution (i.e., net investment income (including 
short-term capital gains), net long-term capital gains and/or returns 
of capital) that was made on preferred stock during the year. 
Applicants also state that in each Fund's annual reports and other 
communications with stockholders, the Fund will regularly inform its 
stockholders that the Fund's dividends and distributions may not be 
tied to its investment income and capital gains and could represent a 
return of the Fund's capital, and that any return of the Fund's capital 
would not represent yield or investment on the Fund's investment 
portfolio. In addition, applicants state that, for its preferred stock, 
each Fund will include the amount and sources of distributions received 
during the year on the Fund's IRS Form 1099-DIV report of distributions 
and send that report to each stockholder who received distributions 
during the year (including stockholders who sold shares during the 
year). Applicants state that this information on an aggregate basis 
also will be included in each Fund's annual report to stockholders.
    5. Another concern underlying section 19(b) and rule 19b-1 is that 
frequent long-term capital gains distributions could facilitate 
improper distribution practices, including, in particular, the practice 
of urging an investor to purchase fund 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 would 
be, in effect, a return of the investor's capital. Applicants submit 
that this concern does not apply to closed-end investment companies, 
such as the Funds, which do not continuously distribute their shares. 
Applicants also state that the ``selling the dividend'' concern is not 
applicable 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, credit quality, 
dividend rate and frequency of payment.
    6. Applicants state that another concern leading to the adoption of 
section 19 and rule 19b-1, increase in administrative costs, is not 
present because the Funds will make periodic distributions with respect 
to their preferred stock regardless of what portion is composed of 
long-term capital gains.
    7. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction or class or classes of any persons, 
securities, or transactions 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, applicants believe that the requested 
exemption meets the standards set forth in section 6(c).

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31932 Filed 12-18-02; 8:45 am]
BILLING CODE 8010-01-P