[Federal Register Volume 61, Number 142 (Tuesday, July 23, 1996)]
[Notices]
[Pages 38232-38233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18561]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22078; 812-10220]
MFS Special Value Trust; Notice of Application
July 17, 1996.
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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APPLICANT: MFS Special Value Trust.
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: Applicant requests an order to make up to
twelve monthly distributions of long-term capital gains in any one
taxable year, so long as applicant maintains in effect a distribution
policy calling for monthly distributions of a fixed percentage of its
net asset value.
FILING DATES: The application was filed on June 24, 1996.
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 by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on August 12, 1996,
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.
Applicant, 500 Boylston Street, Boston, MA 02116.
FOR FURTHER INFORMATION CONTACT: Elaine M. Boggs, Staff Attorney, at
(202) 942-0572, or Alison E. Baur, 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.
Applicant's Representations
1. Applicant is closed-end management investment company organized
as a Massachusetts business trust. Applicant's investment objective is
to maintain an annual distribution rate of 11%, based on the original
offering price of $15 per share, while seeking capital appreciation.
2. Applicant has a distribution policy calling for twelve monthly
distributions to shareholders of an amount equal to 0.916% of its
initial public offering price of $15 per share (11% on an annualized
basis) (``Monthly Distribution Policy''). If, for any monthly
distribution, net investment income and net realized short-term capital
gains are less than the amount of the distribution, the difference is
distributed from other assets. Applicant's final distribution for each
calendar year includes any remaining net investment income and net
realized short-term capital gains deemed, for federal income tax
purposes, undistributed during the year, as well as any net long-term
capital gains realized during the year. If, for any fiscal year, the
total distributions exceed net investment income and net realized
capital gains, the excess, distributed from other assets, is treated as
a return of capital. If applicant's net investment income, net short-
term realized gains, net long-term realized gains, and returns of
capital for any one year exceed the amount to be distributed under the
Monthly Distribution Policy, applicant may in its discretion retain net
long-term capital gains to the extent of such excess. Applicant
requests relief to permit it to make up to twelve distributions of net
long-term capital gains in any one taxable year, so long as it
maintains in effect the Monthly Distribution Policy.
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, (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
[[Page 38233]]
exceeding 10% of the total amount distributed for year, plus one
additional long-term capital gains distribution made to avoid the
excise tax under section 4982 of the Code.
2. Rule 19b-1, by limiting the number of net long-term capital gain
distributions that applicant may make with respect to any one year,
prevents the normal operation of the Monthly Distribution Policy
whenever applicants realized net long-term capital gains in any year
exceed the total of the fixed monthly distributions that under rule
19b-1 may include such capital gains. In that situation, the rule
effectively forces the fixed monthly distributions, that under the rule
may not include such capital gains, to be funded with 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 long-term
capital gains in excess of the fixed monthly distributions permitted by
the rule then must either be added as an ``extra'' on one of the
permitted capital gains distributions, thus exceeding the total annual
amount called for by the Monthly Distribution Policy, or be retained by
applicant (with applicant paying taxes thereon). d
3. Applicant believes that granting the requested relief would
limit applicant's return of capital distributions to that amount
necessary to make up any shortfall between applicant's guaranteed
distribution and the total of its investment income and capital gains.
The likelihood that applicant's shareholders would be subject to
additional tax return complexities involved when applicant retains and
pays taxes on long-term capital gains would therefore be avoided.
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
frequent distributions of capital gains from investment income. In
accordance with rule 19a-1, a separate statement showing the source of
the distribution (net investment income, net realized capital gains, or
returns 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 distributions received during the year will be included with
applicant'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 will also be included in
applicant's annual report to shareholders. Through these disclosures
and other communications with shareholders, applicant states that its
shareholders will understand that applicant's 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 gains distributions could
facilitate improper fund distribution practices, including 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. Applicant believes
that this concern does not apply to closed-end investment companies,
such as applicant, which do not continuously distribute shares.
6. Applicant states that another concern leading to the adoption of
section 19(b) and rule 19b-1, the increased administrative costs
associated with more frequent distributions, is not present because
applicant will continue to make monthly distributions regardless of
what portion thereof is composed of capital gains.
7. Section 6(c) of the Act provides that the SEC may exempt any
person, security, or transaction, or any class of 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, applicant believes that the requested
exemption meets the standards set forth in section 6(c).
Applicant's Condition
Applicant agrees that the order granting the exemption shall
terminate upon the effective date of a registration statement under the
Securities Act of 1933 for any future public offering by applicant of
shares of applicant other than: (i) a non-transferable rights offering
to shareholders of applicant, provided that such offering does not
include solicitation by brokers or the payment of any commissions or
underwriting fee; and (ii) an offering in connection with a merger,
consolidation, acquisition, or reorganization.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18561 Filed 7-22-96; 8:45 am]
BILLING CODE 8010-01M