[Federal Register Volume 64, Number 13 (Thursday, January 21, 1999)]
[Notices]
[Pages 3326-3328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1326]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23649; 812-11342]
Templeton Dragon Fund, Inc.; Notice of Application
January 13, 1999.
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 APPLICATION: Applicant, Templeton Dragon Fund, Inc. (the
``Fund''), a registered closed-end management investment company,
requests an order to permit it to make up to four distributions of net
long-term capital gains in any one taxable year, so long as it
maintains in effect a distribution policy with respect to its common
stock calling for quarterly distributions of a fixed percentage of its
net asset value (``NAV'').
FILING DATES: The application was filed on October 7, 1998, and amended
on January 11, 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 February 8, 1999 and should be accompanied by proof of service
on 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 may request notification of a hearing by writing to
the Commission's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 450 5th
Street, NW, Washington, DC 20549. Applicant, 500 East Broward
Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091.
FOR FURTHER INFORMATION CONTACT:
Lawrence W. Pisto, Senior Counsel, at (202) 942-0527, or George J.
Zornada, Branch Chief at (202) 942-0564, Office of Investment Company
Regulation, Division of Investment Management.
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
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Commission's Public Reference Branch, 450 5th Street, NW, Washington,
DC 20549 (tel. 202-942-8090).
Applicant's Representations
1. The Fund is registered under the Act as a closed-end management
investment company and organized as a Maryland corporation. The Fund's
investment objective is to seek long-term capital appreciation by
investing at least 45% of its total assets in ``China companies,'' as
defined in the Fund's prospectus. Shares of the Fund are listed on the
New York Stock Exchange and the Osaka Stock Exchange. Templeton Asset
Management Ltd.--Hong Kong branch is the fund's investment adviser and
is registered under the Investment Advisers Act of 1940.
2. On July 22, 1998, the fund's board of directors (``Board''),
including a majority of the independent directors, adopted a
distribution plan with respect to applicant's common stock under which
the Fund will make quarterly distributions to its shareholders in an
amount equal to 2.5% of the Fund's NAV, determined as the Friday prior
to the declaration date (``Distribution Policy''). The Board concluded
that adoption of the Distribution Policy would be in the best interests
of the Fund's shareholders and could help reduce the discount from NAV
at which applicant's shares generally have traded. Applicant requests
relief to permit it to make up to four distributions of net long-term
capital gains in one taxable year, so long as the Fund maintains in
effect the Distribution Policy.
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.
2. Applicant asserts that rule 19b-1, by limiting the number of net
long-term capital gains distributions that the Fund may make with
respect to any one year, would prevent the normal operation of its
Distribution Policy whenever applicant's realized net long-term gains
in any year exceed the total of the fixed quarterly distributions that
under rule 19b-1 may include such capital gains. As a result, applicant
states that it must fund these quarterly distributions with returns of
capital (to the extent net investment income and realized short-term
capital gains are insufficient to cover quarterly distributions).
Applicant further asserts that the long-term capital gains in excess of
the fixed quarterly distributions permitted by rule 19b-1 then must
either 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 the applicant, with the applicant paying
taxes on the amount retained. Applicant believes 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 such
gains.
3. Applicant believes that the concerns underlying section 19(b)
and rule 19b-1 are not present in applicant's situation. One of the
concerns leading to the adoption of the rule was that shareholders
might not be able to distinguish between frequent distributions of
capital gains and dividends from net investment income. Applicant
states that it will fully describe the Distribution Policy, including
that quarterly distributions called for by the Distribution Policy will
include returns of capital to the extent that applicant's net
investment income and net long-term realized capital gains are
insufficient to meet the fixed dividends, in periodic communications.
The Fund has described to shareholders the Distribution Policy in the
Fund's most recent proxy material and shareholder report. In accordance
with rule 19a-1 under the Act, a separate statement showing the source
of the distribution (net investment company taxable income, net long-
term realized capital gain or return of capital) will accompany each
distribution (or the confirmation of the reinvestment thereof under
applicant's dividend reinvestment plan). In addition, a statement
showing the amount and source of each distribution during the year will
be included with the applicant's annual tax information reporting
distributions for that year and sent to each shareholder who received
distributions during the year, including shareholders who have sold
shares during the year.
4. Another concern underlying section 19(b) and rule 19b-1 is that
frequent capital gains distributions could facilitate improper sales
practices, including, in particular, the practice of urging an investor
to purchase fund shares on the basis of an upcoming dividend (``selling
the dividend''), when the dividend would result in an immediate
corresponding reduction in NAV and would be, in effect, a return of the
investor's capital. Applicant submits that this concern does not apply
to closed-end investment companies, such as applicant, that do not
continuously distribute shares. Applicant further asserts that if it
makes a rights offering to its shareholders, the rights offering will
be timed so that shares issuable upon exercise of the rights will be
issued only in the six week 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. Applicant further
states that any offering by applicant of transferable rights will
comply with all Commission and staff guidelines concerning such
offering. In determining compliance with these guidelines, the Board
will consider, among other things, the brokerage commissions that would
be paid in connection with the offering. Any such offering by applicant
of transferable rights will also comply with any applicable NASD rules
regarding the fairness of compensation.
5. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction, or any class or classes of
persons, securities, or transactions, from any provisions of the Act,
or 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, applicant believes that the
requested exemption meets the standards set forth in section 6(c) of
the Act.
Applicant's Condition
The 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 common stock to
holders of the Fund's common stock, in which (a) shares are issued only
within the six-week period immediately following the
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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,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-1326 Filed 1-20-99; 8:45 am]
BILLING CODE 8010-01-M
