[Federal Register Volume 63, Number 99 (Friday, May 22, 1998)]
[Notices]
[Pages 28431-28432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13646]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23189; 812-10972]
General American Investors Company, Inc.; Notice of Application
May 15, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an exemption under section 6(c) of
the Investment Company Act of 1940 (the ``Act'') from section 19(b) of
the Act and rule 19b-1 under the Act.
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SUMMARY OF APPLICATION: Applicant, General American Investors Company,
Inc., requests an order to permit it to make periodic distributions of
net long-term capital gains in any one taxable year, so long as
applicant maintains in effect a distribution policy with respect to its
preferred stock calling for periodic dividends in an amount equal to a
specified percentage of the liquidation preference of the preferred
stock.
FILING DATES: The application was filed on January 16, 1998 and amended
on April 29, 1998.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on June 9, 1998,
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 who wish to be
notified of a hearing may request notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicant: General American Investors Company, Inc., 450 Lexington
Avenue, New York, New York 10017.
FOR FURTHER INFORMATION CONTACT:
Edward P. Macdonald, 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
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC
20549 (tel. 202-942-8090).
Applicant's Representations
1. Applicant is registered under the Act as an internally-managed
closed-end management investment company organized as a Delaware
corporation. Applicant's board of directors has authorized it to issue
and sell cumulative preferred stock. Applicant's investment objective
is long term capital appreciation.
2. Applicant wishes to institute a dividend payment policy with
respect to its cumulative preferred stock, and any future preferred
stock, to be issued by applicant calling for periodic dividends in an
amount equal to a specified percentage of the liquidation preference of
applicant's preferred stock (``Distribution Policy''). The specified
percentage may be determined at the time the preferred stock is
initially issued, pursuant to periodic remarketings or auctions, or
otherwise. Under the requested relief, the periodic payments may
include long-term capital gains so long as applicant 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 SEC may prescribe, distribute long-term capital gains more often
than once every twelve months. Rule 19b-1 under the Act limits the
number of capital gains distributions, as defined in section
851(b)(3)(C) of the Internal Revenue Code of 1986, as amended (the
``Code''), that applicant 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 net long-term capital gains distribution made
in whole or in part to avoid the excise tax under section 4982 of the
Code.
2. Applicant argues that rule 19b-1 may prevent the normal
operation of the Distribution Policy whenever applicant's realized net
long-term capital gains in any year exceed the total of the periodic
distributions that under rule 19b-1 may include capital gains. In that
situation, applicant asserts that rule 19b-1 effectively forces the
distributions that under rule 19b-1 may not include these capital gains
to be treated as a return of capital to stockholders, even though net
long-term capital gains would otherwise be available. Applicant further
states that federal tax rules require that current earnings and profits
be allocated proportionately among all distributions
[[Page 28432]]
made for that year. The net long-term capital gains in excess of the
periodic distributions permitted by rule 19b-1 then must either be
added to one of the permitted capital gains distributions resulting in
the total distributions for the year in excess of the amount required
to be paid, added to a permitted distribution of long-term capital
gains on the common stock, or retained by applicant (with applicant
paying taxes on those amounts). Accordingly, applicant states that the
requested relief would permit it to operate the Distribution Policy
with respect to the preferred stock without these unintended adverse
consequences.
3. Applicant asserts that its requested relief does not give rise
to the concerns underlying section 19(b) of the Act and rule 19b-1. One
of these concerns was that stockholders might not be able to
distinguish between frequent distributions of capital gains and
dividends from investment income. Applicant states that in the case of
preferred stock there is little chance for investor confusion since all
an investor expects to receive is the specified distribution for any
particular dividend period, and no more. Moreover, in accordance with
rule 19a-1 under the Act, a separate statement showing the sources of
the distribution will accompany each periodic dividend, with a
statement provided near the end of the last dividend period in a year
indicating the sources (i.e., net investment income and short-term
capital gains, net long-term capital gains and return of capital) of
each distribution that was made during the year. In addition, applicant
notes that the amount and sources of distributions received during the
year will be included on applicant's IRS Form 1099-DIV report sent to
stockholders who received distributions during the year. This
information will also be included in applicant's annual report to
stockholders.
4. Applicant submits that another concern underlying section 19(b)
and rule 19b-1, was that frequent capital gains distributions could
facilitate improper fund distribution practices, including the practice
of urging an investor to purchase 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. Applicant believes that this concern
does not apply 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. Applicant also states that
this concern does not arise with regard to closed-end investment
companies which do not continuously distribute their shares.
5. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction 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, applicant believes that the requested
exemption from section 19(b) of the Act and rule 19b-1, meets the
standards set forth in section 6(c) of the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-13646 Filed 5-21-98; 8:45 am]
BILLING CODE 8010-01-M
