Securities and Exchange Commission (“Commission”).
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.
Summary of the Application:
TCW Convertible Securities Fund, Inc. (“Applicant”) requests an order to permit it to make up to four long-term capital gains distributions in any one taxable year, so long as it maintains in effect a distribution policy calling for quarterly distributions of a fixed dollar amount or a fixed percentage of net asset value.
The application was filed on October 12, 2000 and amended on August 29, 2002.
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 Applicant with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on October 7, 2002, 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 Start Printed Page 59083reason 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.
Secretary, Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Applicant, c/o Philip K. Holl, TCW Investment Management Corporation, 865 South Figueroa Street, Suite 1800, Los Angeles, CA 90017.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Emerson S. Davis, Sr., Senior Counsel, at (202) 942-0714, or Janet M. Grossnickle, Branch Chief, at (202) 942-0564 (Division of Investment Management, Office of Investment Company Regulation).End Further Info End Preamble Start Supplemental 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).
1. Applicant is organized as a Maryland corporation and is registered under the Act as a closed-end diversified management investment company. Applicant's investment objective is to seek total investment return, composed of current income and capital appreciation, through investment principally in convertible securities. TCW Investment Management Company (“Investment Adviser”), an investment adviser registered under the Investment Advisers Act of 1940, serves as investment adviser to Applicant. Applicant's shares are listed and traded on the New York Stock Exchange.
2. On June 15, 1988, Applicant's board of directors (“Board”), including a majority of the members who are not “interested persons,” as defined in section 2(a)(19) of the Act (“Independent Directors”), adopted a managed distribution policy with respect to Applicant's common stock (“Distribution Policy”) that calls for distributions, on a quarterly basis, of $0.21 per share. In adopting the Distribution Policy, the Board, including a majority of the Independent Directors, concluded that a policy to provide steady, predictable cash distributions to shareholders would be in the best interest of the shareholders. Applicant states that in continuing the Distribution Policy, the Board has considered empirical evidence that, in some cases, discounts to net asset value of other closed-end funds have narrowed or have been eliminated with managed distribution policies.
3. Applicant requests relief to permit it, so long as it maintains in effect the Distribution Policy calling for quarterly distributions at a fixed dollar amount or fixed percentage of net asset value, to make up to four long-term capital gains distributions 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 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 gain dividend, 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. Applicant submits that rule 19b-1, by limiting the number of net long-term capital gains distributions that Applicant may make in any one year, prevents the routine inclusion over the course of Applicant's taxable year of realized long-term capital gains in quarterly distributions made under the Distribution Policy. Applicant states that rule 19b-1 thus may force the fixed quarterly distributions to be funded with returns of capital to the extent net investment income and realized net short-term capital gains are insufficient to fund the distribution, even though realized net long-term capital gains would otherwise be available. Applicant also submits that the tax rules require the total annual return of capital to be distributed so that the amounts constitute the same proportion of each of the four distributions. This results in having long-term capital gains in excess of the fixed quarterly distribution either added to one of the permitted capital gains distributions, thus exceeding the total annual amount called for by the Distribution Policy, or retained by Applicant (with Applicant paying taxes thereon). Applicant believes that the application of rule 19b-1 to its Distribution Policy may create pressure to limit the realization of long-term capital gains to the total amount of the fixed quarterly distributions that under the rule may include long-term capital gains.
3. Applicant also submits that one of the concerns leading to the adoption of rule 19b-1 was that shareholders might be unable to distinguish between frequent distributions of capital gains and dividends from investment income. Applicant states that its Distribution Policy, including the fact that the distributions called for by the Distribution Policy may include returns of capital to the extent that Applicant's net investment income and net long-term realized capital gains are insufficient to satisfy its distribution obligation, is and will continue to be described in periodic communications. Applicant further states that in accordance with rule 19a-1 under the Act a separate statement showing the source of the distribution (i.e., net investment income, net realized capital gains or return of capital) will continue to accompany each distribution that Applicant makes to its shareholders (or the confirmation of the reinvestment thereof under Applicant's dividend reinvestment plan) that is not from Applicant's net investment income. In addition, a statement showing the amount and source of each distribution during each calendar year will be included with the Applicant's IRS Form 1099-DIV reports of distributions for that year and sent to shareholders of record who received distributions during the year (including shareholders who have sold shares during the year).
4. Applicant states that another concern that led to the adoption of Section 19(b) of the Act and rule 19b-1 was that frequent capital gains 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 states that this concern does not apply to closed-end investment companies, such as Applicant, which do not continuously distribute shares. Applicant also states that the condition to the requested relief would further assure that the concern about selling the dividend would not arise in connection with a rights offering by the Applicant. Applicant further states that any transferable rights offering by Applicant will comply with all Commission and staff guidelines. Applicant states that in determining compliance with these guidelines, the Board will consider, among other things, the brokerage commissions that would be paid in connection with the offering. Applicant Start Printed Page 59084states that any such offering by Applicant of transferable rights will also comply with any applicable rules of the National Association of Securities Dealers, Inc. regarding the fairness of compensation.
5. Applicant states that increased administrative costs also is a concern underlying section 19(b) and rule 19b-1. Applicant asserts that the anticipated benefits to its shareholders are such that Applicant will continue to make quarterly distributions regardless of what portion thereof is composed of long-term capital gains.
6. Section 6(c) of the Act provides that the Commission may exempt any person or transaction from any provision of the Act or from any rule under the Act 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, Applicant believes that the requested relief satisfies this standard and would be in the best interests of Applicant and its shareholders.
Applicant agrees that any 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 its shares other than:
(i) A rights offering to holders of Applicant'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 rights will not be entitled to receive 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 of Applicant; unless Applicant has received from the staff of the Commission written assurance that the order will remain in effect.Start Signature
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland,
[FR Doc. 02-23815 Filed 9-18-02; 8:45 am]
BILLING CODE 8010-01-P