[Federal Register Volume 61, Number 184 (Friday, September 20, 1996)]
[Notices]
[Pages 49503-49505]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24171]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22223; 812-9930]
The Gabelli Equity Trust Inc.; Notice of Application
September 16, 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: Gabelli Equity Trust Inc.
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 four
distributions of 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 or fixed amount of its
net asset value.
FILING DATE: The application was filed on December 29, 1995, and
amended on June 4, 1996, and August 23, 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 October 11,
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, One Corporate Center, Rye, New York 10580.
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 a closed-end management investment company
organized as a Maryland corporation. Applicant's investment objective
is to seek long-term growth of capital by investing in a portfolio of
equity securities.
2. Applicant currently has a ``10% Distribution Policy'' in which
it makes quarterly distributions of $0.25 per share for each of the
first three calendar quarters of each year. Applicant's distribution in
December for each calendar year is an adjusting distribution (equal to
the sum of 2.5% of the net asset value of applicant as of the last day
of the four preceding calendar quarters less aggregate distributions of
$0.75 per share made for the most recent three calendar quarters) in
order to meet applicant's 10% pay-out goal. If, for any calendar year,
the total distributions required by its 10% Distribution Policy exceed
applicant's net investment income and net realized capital gains, the
excess will generally be 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 year exceed the amount
required to be distributed under its 10%
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Distribution Policy, applicant may retain and not distribute net long-
term capital gains to the extent of such excess.
3. Applicant requests relief to permit it to modify the 10%
Distribution Policy 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 calling for quarterly distributions of a
fixed percentage or fixed amount (with a fourth quarter adjusting
distribution) of its net asset value.
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 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.
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 operation of the 10% Distribution Policy whenever
applicant's realized net long-term capital gains in any year exceed the
total of the fixed quarterly distributions that under rule 19b-1 may
include such capital gains. In that situation, the rule effectively
forces the fixed quarterly 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 quarterly 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 10% Distribution Policy, be made as an adjusting distribution in
the fourth quarter that in effect combines the third and fourth quarter
distributions (the method applicant used in 1995), or be retained by
applicant (with applicant paying taxes thereon).
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 also 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 between
frequent distributions of capital gain and dividends from investment
income. 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 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 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.
Applicant believes that this concern does not apply to closed-end
investment companies, such as applicant, which do not continuously
distribute shares.
6. Although, to date, applicant has completed four rights offerings
of additional shares to shareholders, each of the offerings were short
in duration and involved a relatively small number of new shares. The
rights were offered without payment of solicitation fees to brokers and
without payment of any other commission or underwriting fees. Holders
of rights in the 1995 offering who did not wish to exercise their
rights were able to instruct applicant's subscription agent to sell any
unexercised rights and paid a brokerage commission rate of $.01 per
right. Most rights were sold by the subscription agent on the New York
Stock Exchange. Applicant states that extensive disclosure regarding
the terms and conditions of each rights offering and the 10%
Distribution Policy is included in a statutory prospectus available
upon the commencement of that offering. Further, applicant states that
shares in its rights offerings are generally offered during a one-month
interval prior to the declaration of a quarterly dividend and,
therefore, the specific abuse of ``selling the dividend'' cannot occur
as a matter of timing.
7. Applicant states that another concern leading to the adoption of
section 19(b) and rule 19b-1, increase in administrative costs, is not
present because applicant will continue to make quarterly distributions
regardless of what portion thereof is composed of capital gains.
8. 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, 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 requested relief 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 such offering does not include
the payment of solicitation fees to brokers or the payment of any other
commissions \1\ or underwriting fees in connection with the offering or
exercise of the rights, (b) the rights will not be exercisable
[[Page 49505]]
between the date a dividend to applicant's shareholders is declared and
the record date of such dividend, and (c) applicant 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; unless applicant has received from the
staff of the Commission written assurance that the order will remain in
effect.
\1\ Holders of rights who do not wish to exercise any or all of
their rights may instruct applicant's subscription agent to sell
their unexercised rights. These shareholders are responsible for
paying all brokerage commissions incurred by the subscription agent
in selling the unexercised rights. Such sales may be effected by the
subscription agent through Gabelli & Company, Inc., a registered
broker-dealer, for up to $.03 per right, if the subscription agent
is unable to negotiate a lower brokerage commission with an
independent broker.
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For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-24171 Filed 9-19-96; 8:45 am]
BILLING CODE 8010-01-M
