[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Notices]
[Pages 24967-24968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12465]



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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-21956; 812-9920]


Blue Chip Value Fund, Inc.; Notice of Application

May 14, 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: Blue Chip Value Fund, 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 applicant maintains in effect a distribution policy calling for 
quarterly distributions of a fixed percentage of its net asset value.

FILING DATES: The application was filed on January 2, 1996, and amended 
on April 18, 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 June 10, 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, 1225 Seventeenth Street, 26th Floor, Denver, Colorado 80202.

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 closed-end management investment company organized 
as a Maryland corporation. Applicant's investment objective is to seek 
a high level of total investment return, comprised of capital 
appreciation and current income, through investment primarily in a 
diversified portfolio of equity securities.
    2. From 1989 to April 1994, applicant had a fixed distribution 
policy calling for four quarterly distributions of an amount equal to 
2.5% of its net asset value at the time of the declaration, for a total 
of approximately 10% of its net asset value per year. Any realized 
capital gains from 1989 through 1993 were offset by capital loss 
carryforwards. On April 4, 1994, applicant announced a change in its 
distribution policy to three quarterly distributions of net investment 
income, followed by a fourth distribution of an amount equal to the 
greater of 10% of net asset value less the prior three distributions or 
the sum of applicant's net investment income and net capital gains.
    3. Applicant requests relief 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 calling for 
quarterly distributions of a fixed percentage of its net asset value 
(the ``Pay-Out Policy'').

[[Page 24968]]

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, has 
prevented the operation of the Pay-Out Policy because applicant's 
realized net long-term capital gains in any year may 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 
Pay-Out Policy, or be retained by applicant (with applicant paying 
taxes thereon).
    3. Applicant believes that granting the required 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 therefore 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 gains and dividends from investment 
income. In accordance with rule 19a-1, 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 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. 
Although, to date, applicant has completed one rights offering of 
additional shares to shareholders, the rights offering was short in 
duration and involved a relatively small number of new shares. The 
rights in the rights offering were non-transferable and offered only to 
existing shareholders. The rights were offered only by means of the 
statutory prospectus, without solicitation by brokers and without 
payment of any commission or other underwriting fee.
    6. 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.
    7. 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 exemption 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 non-transferable rights offering to 
shareholders of applicant, provided that such offering does not include 
solicitation by brokers or the payment of any commissions or 
underwriting fee; and (ii) an offering in connection with a merger, 
consolidation, acquisition, or reorganization.
    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12465 Filed 5-16-96; 8:45 am]
BILLING CODE 8010-01-M