[Federal Register Volume 63, Number 149 (Tuesday, August 4, 1998)]
[Notices]
[Pages 41606-41607]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20690]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23363; 812-11084]
The First Australia Fund, Inc.; Notice of Application
July 28, 1998
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (the ``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: The First Australia Fund, Inc. (the ``Fund''),
a registered closed-end diversified management investment company,
requests an order to permit it 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 with respect to its common
stock calling for quarterly distributions of an annually adjusted
percentage of its net asset value (``NAV'').
FILING DATES: The application was filed on March 19, 1998 and amended
on May 29, 1998 and July 27, 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 August 21, 1998,
and should be accompanied by proof of service on the 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.
Fund, c/o Margaret A. Bancroft, Esq., Dechert Price & Rhoads, 30
Rockefeller Plaza, New York, NY 10112.
FOR FURTHER INFORMATION CONTACT:
John K. Forst, Attorney Advisor, at (202) 942-0569, 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, 450 Fifth Street, NW., Washington, DC
20549 (tel. 202-942-8090).
Applicant's Representations
1. The Fund is a closed-end diversified management investment
company organized as a Maryland corporation and registered under the
Act. The Fund's primary investment objective is long-term capital
appreciation through investment primarily in equity securities of
Australian companies listed on Australian stock exchanges. The Fund's
shares are listed on the American Stock Exchange. The Fund's shares
have traded at various times at a premium as well as at a discount to
the NAV.
2. On December 12, 1997, the Fund instituted a distribution policy
(the ``Distribution Policy'') that calls for regular quarterly
distributions at an annual rate, set once a year by the Fund's board of
directors (the ``Board''), which is a percentage of the rolling average
of the Fund's prior four quarter-end NAVs (``Rolling Distribution
Rate'').
[[Page 41607]]
The Fund states that, in adopting the Distribution Policy, the Board
considered that the Distribution Policy provides a steady return to the
Fund's shareholders and, during periods when its per share NAV is
increasing, a means for the shareholders to receive, on a periodic
basis, some of the appreciation in the value of their shares. The Board
also considered empirical evidence that, in many cases, market
discounts to NAVs have narrowed upon adoption of similar distribution
policies by other closed-end funds. The Board has set the annualized
Rolling Distribution Rate for fiscal year 1998 at 9%.
3. The Fund requests relief to permit it, so long as it maintains
in effect the Distribution Policy, to make up to four capital gains
distributions (as defined in section 852(b)(30(C) of the Internal
Revenue Code of 1986, as amended (the ``Code'')) in any one taxable
year.
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 grains more
often than once every 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 distributions, as defined in
section 852(b)(3)(C) of 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. The Fund asserts that the limitation on the number of net long-
term capital gains distributions in rule 19b-1 prohibits the Fund from
including available net long-term capital gains in certain of its fixed
quarterly distributions. As a result, the Fund states that it must fund
these quarterly distributions with returns of capital (to the extent
net investment income and net realized short-term capital gains are
insufficient to cover a quarterly distribution). The Fund further
asserts that, in order to distribute all of its long-term capital gains
within the limits permitted by rule 19b-1, the Fund may be required to
make certain of its quarterly distributions in excess of the total
annual amount called for by the Distribution Policy or retain and pay
taxes on the excess amount. The Fund asserts that the application of
rule 19b-1 to the Fund's Distribution Policy may create pressure on the
investment adviser to limit the realization of long-term capital grains
based on considerations unrelated to investment goals.
3. The Fund submits that the concerns underlying section 19(b) and
rule 19b-1 are not present in the Fund's situation. 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 gains and dividends from investment income.
The Fund states that its Distribution Policy has been fully and
repeatedly described in the Fund's periodic communications to its
shareholders. The Fund states that, in accordance with rule 19a-1 under
the Act, a separate statement showing the source of the distribution
accompanies each distribution (or the confirmation of reinvestment
under the Fund's dividend reinvestment plan). In addition, a statement
showing the amount and source of each quarterly distribution during the
year is included with Fund's IRS Form 1099-DIV report sent to each
shareholder who received distributions during the year (including
shareholders who have sold shares during the year).
4. Another concern underlying section 19(b) and rule 19b-1 is that
frequent capital gains distributions could facilitate improper
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''), when the dividend results in an
immediate corresponding reduction in NAV and is, in effect, a return of
the investor's capital. The Fund submits that this concern does not
arise with regard to closed-end management investment companies, such
as the Fund, which do not continuously distribute their shares.
Applicant further asserts that if the Fund makes a rights offering to
its shareholders, the rights offering will be timed so that issuable
upon exercise of the right will be issued only in the six week period
immediately following the record date for the declaration of a
dividend. Thus, the abuse of selling the dividend cannot occur as a
matter of timing.
5. The Fund states that increased administrative costs also are a
concern underlying section 19(b) and rule 19b-1. The Fund asserts,
however, that it will continue to make quarterly distributions
regardless of what portion of the distribution is composed of long-term
capital gains.
6. Section 6(c) of the Act provides that the SEC may exempt any
person or transaction from any provision of the Act or any rule
thereunder 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 Fund believes
that the requested relief satisfies this standard.
Applicant's Condition
The Fund agrees that the order granting the requested relief will
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
common stock to holders of the Fund's common stock, 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 the 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 SEC 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. 98-20690 Filed 8-3-98; 8:45 am]
BILLING CODE 8010-01-M