00-384. H&Q Healthcare Investors and H&Q Life Sciences Investors; Notice of Application  

  • [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
    
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    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
    
    
    

Document Information

Published:
01/07/2000
Department:
Securities and Exchange Commission
Entry Type:
Notice
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.
Document Number:
00-384
Dates:
The application was filed on October 27, 1999, and was amended on December 21, 1999.
Pages:
1201-1202 (2 pages)
Docket Numbers:
Investment Company Act Release No. 24232, 812-11828
PDF File:
00-384.pdf