[Federal Register Volume 69, Number 41 (Tuesday, March 2, 2004)]
[Notices]
[Pages 9880-9882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4569]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26369; 812-12927]


Real Estate Income Fund Inc., et al.; Notice of Application

February 25, 2004.
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 
periodic distributions of long-term capital gains, as often as monthly, 
on their outstanding common stock and as often as distributions are 
specified in the terms of any preferred stock.
    Applicants: Real Estate Income Fund Inc. (``REIF''), Salomon 
Brothers Capital Income Fund Inc. (``SBCIF''), Citi Fund Management 
Inc. (``CFMI''), Salomon Brothers Asset Management Inc. (``SBAM,'' 
together with CFMI, the ``Advisers'') and each registered closed-end 
management investment company currently or in the future advised by an 
Adviser (including any successor in interest) \1\ or by an entity 
controlling, controlled by, or under common control (within the meaning 
of section 2(a)(9) of the Act) with the Advisers (included in the term 
Advisers) that decides in the future to rely on the requested relief 
(together with REIF and SBCIF, the ``Funds'').\2\
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    \1\ A successor in interest is limited to any entity that 
results from a reorganization into another jurisdiction or a change 
in the type of business organization.
    \2\ All existing Funds currently intending to rely on the 
requested order are named as applicants, and any Fund that may rely 
on the order in the future will comply with the terms and conditions 
of the application.
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    Filing Dates: The application was filed on February 6, 2003 and 
amended on February 23, 2004.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a

[[Page 9881]]

hearing. Interested persons may request a hearing by writing to the 
Commission's Secretary and serving the 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 March 22, 2004, 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. Applicant, c/o Burton M. Leibert, Esq., Willkie Farr & 
Gallagher, 787 Seventh Avenue, New York, NY 10019.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 942-0634, or Todd 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. REIF is organized as a Maryland corporation and is registered 
under the Act as a non-diversified closed-end management investment 
company. REIF's primary investment objective is to seek high current 
income by investing at least 90% of its assets in income-producing 
equity securities and debt securities issued by real estate companies. 
REIF's common stock is listed and traded on the New York Stock Exchange 
(``NYSE''). SBCIF is organized as a Maryland corporation and is 
registered under the Act as a non-diversified closed-end management 
investment company. SBCIF's investment objective is total return with 
an emphasis on income by investing at least 80% of its assets in equity 
and fixed income securities of U.S. and foreign issuers. SBCIF's common 
stock has been approved for listing on the NYSE, subject to notice of 
issuance. CFMI and SBAM are registered as investment advisers under the 
Investment Advisers Act of 1940 and serves as investment adviser to 
REIF and SBCIF, respectively. CFMI and SBAM are indirect wholly owned 
subsidiaries of Citigroup Inc.
    2. The periodic pay-out policy with respect to a Fund's common 
shares will be initially established and will be reviewed at least 
annually by the board of directors/trustees (``Board'') of the Fund, 
including a majority of the directors who are not ``interested 
persons,'' as defined in section 2(a)(19) of the Act (``Independent 
Members''). On June 19, 2002, and November 13, 2003, REIF's Board, 
including a majority of the Independent Members, concluded that the 
proposed distribution policies of REIF, with respect to common shares 
only, would be in the best interests of REIF's shareholders. On January 
20, 2004, SBCIF's Board, including a majority of the Independent 
Members, concluded that the proposed distribution policies of SBCIF, 
with respect to common shares only, would be in the best interests of 
SBCIF's shareholders.
    3. The order would permit each Fund to make periodic long-term 
capital gains distributions as often as monthly with respect to its 
common stock and as often as distributions are specified in the terms 
of its preferred stock,\3\ so long as it maintains in effect a 
distribution policy (a) with regard to their common stock of at least a 
minimum fixed percentage per year of the net asset value (``NAV'') or 
market price per share of its common stock or at least a minimum fixed 
dollar amount per year, and (b) with regard to each series of their 
preferred stock of a specified percentage of liquidation preference, 
whether such specified percentage is determined at the time the 
preferred stock is initially issued, or pursuant to periodic 
remarketing or auctions (``Distribution Policies''). The Boards also 
considered that the Distribution Policies may help each Fund attract 
new investors which could have a positive effect on the market price of 
each Fund's common shares. In addition, applicants state that to the 
extent that any of the Fund's preferred stock pays dividends less 
frequently than investors in that type of preferred stock would expect, 
the Funds are at a competitive disadvantage and, consequently, are 
likely to be required to pay a higher dividend rate on their preferred 
stock than issuers who pay at the desired frequency. Applicants state 
that the frequency of the specified periodic payments with respect to 
preferred stock of the Funds and the periodic pay-out with respect to 
common stock of the Funds will not be related to one another in any way 
other than that the Funds' ability to comply with Revenue Ruling 89-81 
will be enhanced.
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    \3\ SBCIF has not issued and currently does not intend to issue 
preferred stock.
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    4. Applicants request relief to permit each Fund, so long as it 
maintains in effect a Distribution Policy, to make periodic long-term 
capital gains distributions, as often as monthly, on its outstanding 
common stock and as specified by the terms of any preferred stock 
outstanding.

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 gain 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 under the Act, by limiting the 
number of net long-term capital gains distributions that the Funds may 
make in any one year, would prevent implementation of the Funds' 
proposed Distribution Policies. Applicants state that because each Fund 
expects to realize net long-term capital gains as often as every month, 
the combination of Revenue Ruling 89-81 and the accounting 
interpretation relating to rule 19b-1 would cause each Fund to treat a 
portion of such net long-term capital gains as being distributed each 
time it has incremental or undistributed long-term capital gains for 
the current distribution period. 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 year as consisting of more than such class's proportionate 
share of particular types of income, such as capital gains. 
Consequently, applicants state that any payments of long-term capital 
gains to holders of common stock require proportionate allocations of 
such long-term capital gains to the preferred stock, which can be 
extremely difficult to do.
    3. Applicants submit that one of the concerns leading to the 
enactment of section 19(b) and the adoption of the

[[Page 9882]]

rule was that shareholders might be unable to distinguish between 
frequent distributions of capital gains and dividends from net 
investment income. Applicants state that, in accordance with rule 19a-1 
under the Act, a statement showing the source or sources of the 
distribution will accompany each distribution (or the confirmation of 
the reinvestment thereof under a Fund's common stock distribution 
reinvestment plan). Applicants state that, for both the common stock 
and the preferred stock, the amount and sources of distributions 
received during the year has been or will be included on each Fund's 
IRS Form 1099-DIV reports of distributions during the year, which will 
be sent to each shareholder who received distributions (including 
shareholders who have sold shares during the year). Applicants state 
that this information, on an aggregate basis, also has been, or will 
be, included in each Fund's annual report to shareholders.
    4. Another concern underlying section 19(b) and rule 19b-1 is that 
frequent 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 
distribution (``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 assert that by paying out periodically any capital 
gains that have occurred, at least up to the fixed periodic payout 
amount, the Funds' Distribution Policies help avoid the buildup of end-
of-the-year distributions and accordingly actually help avoid the 
scenario in which an investor acquires shares in the open market that 
are subject to a large upcoming capital gains dividend. Applicants also 
state that the ``selling the dividend'' concern is not applicable to 
preferred stock, which entitles a holder to a specific periodic 
dividend and, like a debt security, is initially sold at a price based 
on its liquidation preference, credit quality, dividend rate and 
frequency of payment. In addition, applicants state that any rights 
offering 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 monthly dividend, or in the 
six-week period immediately following the record date of a quarterly 
dividend. Thus, applicants state that, in a rights offering, the abuse 
of selling the dividend could not occur as a matter of timing. Any 
rights offering also will comply with all relevant Commission and staff 
guidelines. In determining compliance with theses guidelines, a Fund's 
Board will consider, among other things, the brokerage commissions that 
would be paid in connection with the offering. Any offering by a Fund 
of transferable rights will comply with any applicable rules of the 
National Association of Securities Dealers, Inc. regarding the fairness 
of compensation.
    5. 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 relief 
satisfies this standard.

Applicants' Condition

    Applicants agree that any order granting the requested relief with 
respect to a Fund's common stock shall terminate with respect to the 
Fund upon the effective date of a registration statement under the 
Securities Act of 1933, as amended, for any future public offering of 
common stock of the Fund after the date of the requested order and 
after the Fund's initial public offering other than:
    (i) A rights offering to shareholders of such Fund, provided that 
(a) shares are issued only within a 15-day period immediately following 
the record date of a monthly dividend, or 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 common 
shareholders exercising rights will not be entitled to receive such 
dividend with respect to shares issued pursuant to such rights 
offering; and (c) such 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, unless such 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. 04-4569 Filed 3-1-04; 8:45 am]
BILLING CODE 8010-01-P