[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Notices]
[Pages 28077-28079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13454]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22665; 812-10456]
Royce Global Trust, Inc., et al.; Notice of Application
May 16, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Royce Global Trust, Inc., Royce Mirco-Cap Trust, Inc.
(``RMC'') Royce Value Trust, Inc. (``RVT'') (collectively, the
foregoing are the ``Funds''), and Quest Advisory Corp. (``Quest'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) of the
Act that would grant an exemption from section 19(b) of the Act and
rule 19b-1 thereunder.
SUMMARY OF APPLICATION: Applicants request an order to permit the Funds
to make periodic distributions of long-term capital gains in any one
taxable year, so long as they maintain in effect distribution policies
with respect to their preferred stock calling for periodic dividends of
a specified percentage of the liquidation preference of a Fund's
preferred stock or distribution policies with respect to their common
stock calling for periodic distributions of an amount equal to a fixed
percentage of a Fund's net asset value or the market price per share of
common stock or a fixed dollar amount.
FILING DATES: The application was filed on December 6, 1996, and
amended on May 9, 1997.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or my mail. Hearing
requests should be received by the SEC by 5:30 p.m. on June 10, 1997,
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 may request
notification of a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street N.W., Washington, D.C. 20549.
Applicants, 1414 Avenue of the Americas, New York, New York 10019.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Senior Counsel, at
(202) 942-0572, or Mary Kay Frech, 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
SEC's Public Reference Branch.
Applicants' Representations
1. Each Fund is a closed-end management investment company
organized as a Maryland corporation. Each Fund issues common stock and,
in addition, RVT has outstanding one class of preferred stock. Each
Fund's investment objective is to seek long-term capital appreciation
by investing in a portfolio of equity securities. Quest is the
investment adviser of the Funds.
2. The Funds wish to institute dividend payment policies
(``specified periodic payments'') with respect to the RVT preferred
stock an any other preferred stock that may be issued by the Funds
calling for periodic dividends in an amount equal to a specified
percentage of the liquidation preference of such Funds's preferred
stock. The specified percentage may be determined at the time the
preferred stock is initially issued, pursuant to periodic remarketings
or auctions, or otherwise. The specified periodic payments may include
long-term capital gains so long as a Fund maintains in effect the
specified periodic payments.
3. The Funds also wish to institute distribution policies
(``periodic pay-out policies'') with respect to their common stock
calling for periodic (but in no event, more frequently than
quarterly)\1\ distributions of an amount equal to a fixed percentage of
such Funds's net asset value or market price per share of common stock
at the time of the declaration or payment or of a fixed dollar amount.
Such payments may include long-term capital gains so long as a Fund
maintains in effect the periodic pay-out policies.
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\1\ The frequency of the specific periodic payments with respect
to preferred stock of the Funds and the periodic pay-out policies
with respect to common stock of the Funds will not be related to one
another in any way.
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4. The periodic pay-out policy will be initially established and
reviewed at least annually in light of the Fund's performance by each
Fund's board of directors and will be changeable at the discretion of
the Fund's board of directors. The annual distribution rate under the
periodic pay-out policy generally will be independent of the Fund's
performance in any of the first three quarters of the Fund's fiscal
year. The rate may be adjusted in a Fund's fourth fiscal quarter in
light of such Fund's performance for the fiscal year to enable the Fund
to comply with the requirements of the Internal Revenue Code of 1986,
as amended (the ``Code''), for the year.
5. Applicants request that relief be extended to the Funds and to
each registered closed-end investment company to be advised in the
future by Quest or an entity controlling, controlled by, or under
common control (within the meaning of section 2(a)(9) of the Act) with
Quest. (Such investment companies are also the ``Funds.'')
Applicant's Legal Analysis
1. Section 19(b) provides that registered investment companies may
not, in contravention of such rules, regulations, or orders as the SEC
may prescribe, distribute long-term capital gains more often than once
every twelve months. Rule 19b-1 limits the number of capital gains
distributions, as defined in section 852 (b)(3)(C) of the Internal
Revenue Code of 1986, as amended, that the Funds may make with respect
to any one taxable year to one, plus a supplemental distribution made
pursuant to section 855 of the Code not exceeding 10% of the total
amount distributed for the year, plus one additional long-term capital
gains distribution made to avoid the excise tax under section 4982 of
the Code. In addition, 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 years as consisting
of more than such class's proportionate share of particular types of
income, such as capital gains.
[[Page 28078]]
2. Rule 19b-1, by limiting the number of net long-term capital gain
distributions that the Funds may make with respect to any one year,
prevents the operation of the specified periodic payments for the
preferred stock and the periodic pay-out policies for the common stock
whenever the Fund's realized net long-term capital gains in any year
exceed the total of the periodic distributions that under rule 19b-1
may include such capital gains. In that situation, the rule effectively
forces the periodic dividends and distributions, that under the rule
may not include such capital gains, to be treated as returns of capital
(to the extent net investment income and realized short-term capital
gains are insufficient), even though net realized long-term capital
gains would otherwise be available therefor. The net long-term capital
gains in excess of the periodic distributions permitted by the rule
then must either be added as an ``extra'' on one of the permitted
capital gains distributions on the common stock, thus exceeding the
total annual amount called for by the periodic pay-out policy or be
retained by the Funds (with the Funds paying taxes thereon).
Furthermore, because of Revenue Ruling 89-81, any ``extra'' payments of
long-term capital gains to holders of common stock require
proportionate allocations of such ``extra'' long-term capital gains to
the preferred stock, which applicants state can be extremely difficult
to do.
3. Applicants believe that granting the requested relief would
limit the Funds' return of capital distributions to that amount
necessary to make up any shortfall between the Funds' targeted annual
distribution and the total of its investment income and capital gains.
Applicants state that the likelihood that the Funds' shareholders would
be subject to additional tax return complexities involved when the
Funds retain and pay taxes on long-term capital gains would also be
avoided. In addition, with respect to the common stock, applicants
state that the discount at which each Fund's shares of common stock
trade will be reduced if the Funds are permitted to pay dividends with
respect to their common stock more frequently than annually.
4. One of the concerns leading to the adoption of section 19(b) and
rule 19b-1 was that shareholders might be unable to distinguish between
frequent distributions of capital gain and dividends from investment
income. In the case of preferred stock, applicants state that there is
little chance for investor confusion since all an investor expects to
receive is the specified dividend distribution for any particular
dividend period, and no more. Applicants argue that as a further
protection against investor confusion, in accordance with rule 19a-1, a
separate statement showing the net investment income component of the
distribution would accompany each 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 that was
made on the preferred stock during the year. In the case of common
stock, applicants argue that in accordance with rule 19a-1 under the
Act, a separate statement showing the source of the distribution (net
investment income, net realized capital gains, or returns of capital)
will accompany each common stock distribution (or the confirmation of
the reinvestment thereof under the Funds' dividend reinvestment plan).
In addition, for both the common and the preferred stock, the amount
and source or sources of distributions received during the year will be
included on each Fund's IRS Form 1099-DIV reports sent to each
shareholder who received distributions during the year (including
shareholders who sold shares during the year). This information on an
aggregate basis will also be included in the Funds' annual report to
shareholders. Through these disclosures and other communications with
shareholders, applicants state that the Funds' shareholders will
understand that the Funds' fixed distributions are not tied to its
investment income and realized capital gains and will not represent
yield or investment return.
5. Another concern that led to the adoption of section 19(b) and
rule 19b-1 was that frequent capital gain distributions could
facilitate improper fund 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 is in effect a return of the investor's capital.
Applicants believe that this concern does not apply to closed-end
investment companies, such as the Funds, which do not continuously
distribute common stock. Although, to date, RMC and RVT have completed
rights offerings of additional shares of common stock to shareholders,
each of the offerings were short in duration and involved a relatively
small number of new shares. The rights were non-transferable and
offered only by means of a statutory prospectus.
6. In addition, applicants state that a solicitation fee payment to
broker-dealers in rights offerings of up to 3% may be required in order
for the broker-dealers to promptly forward materials to shareholders
and respond to investor inquiries. Applicants state that without such
solicitation fee, adequate attention by broker-dealers to the rights
offering of Fund shares of common stock could not be assured. Further,
applicants state that they will limit the magnitude of the discount
between the subscription price for the rights offering and the pricing
date market or bid price to not more than $.50 in order to minimize the
dilution of existing investor investments and to avoid any appearance
of ``selling the dividend.''
7. Furthermore, applicants state that the concern of selling the
dividend 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 plus
an amount equal to any accumulated dividends.
8. Applicants state that another concern leading to the adoption of
section 19(b) and rule 19b-1, increase in administrative costs, is not
present because the Funds will continue to make periodic distributions
regardless of what portion thereof is composed of capital gains.
9. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction, or any class or classes of persons,
securities, or transactions, from any provisions of the Act, if and to
the extent 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).
Applicants' Condition
Applicants agree that the order granting the requested relief for
each Fund's periodic pay-out policies with respect to its common stock
shall terminate with respect to such 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 such Fund other than:
(i) a rights offering of common stock to shareholders of such Fund,
provided that (a) such offering does not include the payment of
solicitation fees to brokers in excess of 3% of the subscription price
per share or the payment of any other commissions or underwriting fees
in connection with the offering or exercise of the rights, (b) the
rights will not be
[[Page 28079]]
exercisable between the date a dividend to such Fund's common
stockholders is declared and the record date of such dividend, (c) such
Fund has not engaged in more than one rights offering during any given
calendar year, and (d) the subscription price for a share of common
stock in such Fund's rights offering is not more than $0.50 per share
below the closing market or bid price, as the case may be, for the
common stock on the pricing date for the rights offering; or (ii) an
offering in connection with a merger, consolidation, acquisition, or
reorganization; 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. 97-13454 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-M
