[Federal Register: December 19, 2002 (Volume 67, Number 244)]
[Notices]
[Page 77819-77821]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19de02-112]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 25847; 812-12678]
Cohen & Steers Advantage Income Realty Fund, Inc., et al.; Notice
of Application
December 12, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').
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 the Application: Applicants request an order to permit
certain registered closed-end management investment companies to make
long-term capital gains distributions to holders of shares of their
preferred stock.
Applicants: Cohen & Steers Advantage Income Realty Fund, Inc.
(``RLF''), Cohen & Steers Quality Income Realty Fund, Inc. (``RQI''),
Cohen & Steers Premium Income Realty Fund, Inc. (``RPF''; each of RPF,
RQI and RLF, an ``Existing Fund'' and collectively, the ``Existing
Funds''), Cohen & Steers Capital Management, Inc. (including any
successor in interest\1\, the ``Adviser'') and each registered closed-
end management investment company to be advised in the future by the
Adviser or by an entity controlling, controlled by, or under common
control (within the meaning of section 2(a)(9) of the Act) with the
Adviser (such
[[Page 77820]]
investment companies, the ``Future Funds'' and together with the
Existing Funds, the ``Funds'').\2\
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\1\ A successor in interest is limited to entities that result
from a reorganization into another jurisdiction or a change in the
type of business organization.
\2\ All existing registered closed-end management investment
companies that currently intend to rely on the requested order are
named as applicants and any Future Fund that may rely on the order
in the future will comply with the terms of the application.
Filing Dates: The application was filed on October 31, 2001 and amended
on December 11, 2002. Applicants have agreed to file an amendment
during the notice period, the substance of which is reflected in this
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notice.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving the applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on January 6, 2003 and should be accompanied by proof of service
on the 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 who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC
20549-0609. Applicants, c/o Laurence B. Stoller, 757 Third Avenue, New
York, New York 10017.
FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, at (202) 942-0567, or
Todd F. Kuehl, 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 from
the Commission's Public Reference Branch, 450 Fifth Street, NW.,
Washington, DC 20549-0102 (telephone (202) 942-8090).
Applicants' Representations
1. The Existing Funds are organized as Maryland corporations and
registered under the Act as non-diversified, closed-end management
investment companies. The primary objective of each Existing Fund is
high current income through investment in real estate securities. The
Adviser, an investment adviser registered under the Investment Advisers
Act of 1940, serves as the investment adviser to the Existing Funds.
2. Each Fund has or will have two classes of stock: a single class
of common stock and a single class of auction rate cumulative preferred
stock issued in one or more series. The common stock of each Existing
Fund is listed and traded on the New York Stock Exchange. Shares of
preferred stock of each Fund are, or will be, subject to purchase and
sale at auctions that are generally held at seven or twenty-eight day
intervals or at such other interval as specified in the articles
supplementary or other corporate organizational documents creating such
auction rate preferred stock (each of the foregoing, an ``Auction
Interval'').
3. Each Fund has paid or will pay dividends on its preferred stock
at an Auction Interval. The Board of Directors of each Fund (each, a
``Board'') has set or will set the initial dividend rate on each series
of the Fund's preferred stock as a specified percentage of the
liquidation preference of the series of the preferred stock.\3\
Thereafter, each Fund pays or will pay an amount of dividend based on
rates determined by auction or, under certain circumstances, by a
predetermined formula. All investment income remaining after the
payment of each Fund's preferred stock dividends and expenses will be
paid monthly to holders of common stock at a specified amount.
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\3\ The respective Board of each of RLF, RQI and RPF set the
initial dividend rate on each series of the respective Fund's
preferred stock on July 20, 2001, April 1, 2002 and October 10,
2002.
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4. Each Fund also will make annual distributions of realized long-
term capital gains, if any, to both holders of common and preferred
stock. Distributions of long-term capital gains are designed to comply
with IRS Revenue Ruling 89-81, 1989-1 C.B. 226 (``Revenue Ruling 89-
81''). Depending upon the amount of long-term capital gains realized in
a fiscal year, the period of time between auctions, and the amount of
the dividend as set by auction, each Fund may be required to distribute
a greater number of long-term capital gains distributions to its
preferred stockholders than is permitted by section 19(b) of the Act
and rule 19b-1 under the Act to comply with Revenue Ruling 89-81.
Holders of common stock in each Fund will receive long-term capital
gains distributions in compliance with section 19(b) and rule 19b-1.
5. Applicants request relief to permit each Fund to make long-term
capital gains distributions to its preferred stockholders in any one
taxable year to the extent necessary to comply with Revenue Ruling 89-
81, provided that, the Fund maintains in effect a distribution policy
calling for distributions to its preferred stockholders at each Auction
Interval at rates determined by the Board of the Fund at the time a
series of such preferred stock is initially issued, and thereafter
pursuant to auction, or under certain circumstances, by a predetermined
formula.
Applicants' 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 Commission may prescribe, distribute long-term capital gains
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 distribution, as defined in
section 852(b)(3)(c) of the Internal Revenue Code of 1986, as amended
(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. Revenue Ruling 89-81 requires that a regulated investment
company that has two or more classes of stock make designations of
various types of income in the same proportion as the total dividends
distributed to each class for the taxable year. To satisfy the
proportionate designation requirements of Revenue Ruling 89-81,
whenever a Fund has realized a long-term capital gain with respect to a
given tax year, the Fund designates the required proportionate share of
such capital gain to be included in common and preferred stock
dividends. The Fund calculates the ratio by dividing the total
dividends paid to preferred stockholders during a taxable year by the
total dividends paid to all classes during that year. The Fund then
declares and distributes designated long-term capital gains dividends
to the common and preferred stockholders in proportion to this ratio.
3. Applicants state that under certain circumstances, a Fund will
be able to comply with both Revenue Ruling 89-81 and rule 19b-1. For
example, if the entire dividend payment set at auction distributes in a
single dividend the full amount of long-term capital gains required to
be distributed by Revenue Ruling 89-81, the Fund will comply with both
Revenue Ruling 89-81 and rule 19b-1. Applicants assert, however, that
circumstances may arise when a
[[Page 77821]]
Fund must make additional long-term capital gains distributions to
comply with Revenue Ruling 89-81 that conflict with rule 19b-1.
Applicants note that while rule 19b-1 does give a Fund some flexibility
with respect to capital gains distributions, a Fund could have used all
of the exceptions provided by rule 19b-1 and, in need of making further
distributions to its preferred stockholders, be unable to comply with
Revenue Ruling 89-81, section 19(b) and rule 19b-1.
4. Applicants submit that one of the concerns leading to the
enactment of section 19(b) and the adoption of rule 19b-1 was that
investors might be unable to distinguish between regular distributions
of capital gains and distributions of investment income. In the case of
preferred stock, applicants state there is little chance for investor
confusion since all an investor expects to receive is the cash amount
representing the specified dividend distribution for any particular
dividend period and no more. Applicants state that in accordance with
rule 19a-1 under the Act, a separate statement showing the net
investment income component of the distribution will accompany each
Fund's 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 (i.e., net investment income (including
short-term capital gains), net long-term capital gains and/or returns
of capital) that was made on preferred stock during the year.
Applicants also state that in each Fund's annual reports and other
communications with stockholders, the Fund will regularly inform its
stockholders that the Fund's dividends and distributions may not be
tied to its investment income and capital gains and could represent a
return of the Fund's capital, and that any return of the Fund's capital
would not represent yield or investment on the Fund's investment
portfolio. In addition, applicants state that, for its preferred stock,
each Fund will include the amount and sources of distributions received
during the year on the Fund's IRS Form 1099-DIV report of distributions
and send that report to each stockholder who received distributions
during the year (including stockholders who sold shares during the
year). Applicants state that this information on an aggregate basis
also will be included in each Fund's annual report to stockholders.
5. Another concern underlying section 19(b) and rule 19b-1 is that
frequent long-term capital gains distributions could facilitate
improper 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 would
be, in effect, a return of the investor's capital. Applicants submit
that this concern does not apply to closed-end investment companies,
such as the Funds, which do not continuously distribute their shares.
Applicants also state that the ``selling the dividend'' concern 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, credit quality,
dividend rate and frequency of payment.
6. Applicants state that another concern leading to the adoption of
section 19 and rule 19b-1, increase in administrative costs, is not
present because the Funds will make periodic distributions with respect
to their preferred stock regardless of what portion is composed of
long-term capital gains.
7. Section 6(c) of the Act provides that the Commission may exempt
any person, security or transaction or class or classes of any persons,
securities, or transactions 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, applicants believe that the requested
exemption meets the standards set forth in section 6(c).
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31932 Filed 12-18-02; 8:45 am]
BILLING CODE 8010-01-P