[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