DNP Select Income Fund Inc., et al.; Notice of Application, 45492-45495 [E9-21141]
Download as PDF
<![CDATA[
45492
Federal Register / Vol. 74, No. 169 / Wednesday, September 2, 2009 / Notices
9. Applicants submit that extending
the requested relief to encompass Future
Contracts and Other Accounts is
appropriate in the public interest
because it promotes competitiveness in
the variable annuity market by
eliminating the need to file redundant
exemptive applications prior to
introducing new variable annuity
contracts. Investors would receive no
benefit or additional protection by
requiring Applicants to repeatedly seek
exemptive relief that would present no
issues under the Act not already
addressed in the application.
10. Applicants submit, for the reasons
stated herein, that their exemptive
request meets the standards set out in
Section 6(c) of the Act, namely, that the
exemptions requested are 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 and that,
therefore, the Commission should grant
the requested order.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–21140 Filed 9–1–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–28891; File No. 812–13617]
DNP Select Income Fund Inc., et al.;
Notice of Application
August 27, 2009.
jlentini on DSKJ8SOYB1PROD with NOTICES
AGENCY: Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of application for an
order under section 6(c) of the
Investment Company Act of 1940
(‘‘Act’’) for an exemption from sections
18(a)(1)(A) and (B) of the Act.
Applicants: DNP Select Income Fund
Inc. (‘‘DNP’’) and Duff & Phelps Utility
and Corporate Bond Trust Inc. (‘‘DUC’’)
(each of DNP and DUC, a ‘‘Fund’’ and,
collectively, the ‘‘Funds’’).
Summary of Application: Applicants
request an order (‘‘Order’’) granting an
exemption from sections 18(a)(1)(A) and
(B) of the Act for a period from the date
of the Order until October 31, 2010. The
Order would permit each Fund to issue
or incur debt subject to asset coverage
of 200% that would be used to refinance
the Fund’s issued and outstanding
auction preferred shares (‘‘APS Shares’’)
and/or remarketed preferred stock (‘‘RP
Shares,’’ and, collectively with the APS
VerDate Nov<24>2008
16:56 Sep 01, 2009
Jkt 217001
Shares, the ‘‘Preferred Shares’’) issued
prior to February 1, 2008 that are
outstanding at the time such post-Order
debt is issued or incurred. The Order
also would permit each Fund to declare
dividends or any other distributions on,
or purchase, capital stock during the
term of the Order, provided that such
post-Order debt has asset coverage of at
least 200% after deducting the amount
of such transaction.
Filing Dates: The application was
filed on December 29, 2008, and
amended on June 3, 2009, June 24, 2009,
and August 26, 2009. Applicants have
agreed to file an amendment during the
notice period, the substance of which is
reflected in this 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
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 September 21, 2009,
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 who wish to be
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Secretary, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–1090.
Applicants: c/o Nathan I. Partain, Duff
& Phelps Investment Management Co.,
200 South Wacker Drive, Suite 500,
Chicago, IL 60606.
FOR FURTHER INFORMATION CONTACT: Jill
Ehrlich, Attorney Adviser, at (202) 551–
6819, or Mary Kay Frech, Branch Chief,
at (202) 551–6821 (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 via the Commission’s
Web site by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations:
1. Each of the Funds is organized as
a Maryland corporation and is a closedend management investment company
registered under the Act. Each Fund is
advised by Duff & Phelps Investment
Management Co. (‘‘Duff & Phelps’’).
DNP has outstanding a class of common
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
shares and two series each of APS
Shares and RP Shares, and DUC has
outstanding a class of common shares
and one series of APS Shares.
2. Applicants state that the Funds
issued their outstanding Preferred
Shares for purposes of investment
leverage to augment the amount of
investment capital available for use in
the pursuit of their investment
objectives. Applicants state that,
through the use of leverage, the Funds
seek to enhance the investment return
available to the holders of their common
shares by earning a rate of portfolio
return (which includes the return
obtained from securities that are
purchased from the proceeds of
Preferred Share offerings) that exceeds
the dividend rate that the Funds pay to
the holders of the Preferred Shares.
Applicants represent that holders of
APS Shares are entitled to receive a
stated liquidation preference amount of
$25,000 per share (plus any
accumulated but unpaid dividends,
whether or not declared) in any
liquidation, dissolution or winding up
of the relevant Fund, before any
distribution or payment to holders of
the Fund’s common shares. Applicants
also state that dividends declared and
payable on the APS Shares have a
similar priority over dividends declared
and payable on the Fund’s common
shares. In addition, applicants state that
APS Shares are ‘‘perpetual’’ securities
and are not subject to mandatory
redemption by a Fund so long as the
Fund meets certain asset coverage tests
specified in its charter. Further,
applicants state that the APS Shares are
redeemable at each Fund’s option.
3. Applicants represent that holders of
RP Shares are entitled to receive a stated
liquidation preference amount of
$100,000 per share (plus any
accumulated but unpaid dividends,
whether or not declared) in any
liquidation, dissolution or winding up
of DNP, before any distribution or
payment to holders of its common
shares. Applicants state that dividends
declared and payable on the RP Shares
have a similar priority over dividends
declared and payable on DNP’s common
shares. Applicants also state that the RP
Shares are subject to mandatory
redemption on a date certain and,
therefore, are classified as a liability on
the statement of assets and liabilities
and the related dividends as interest
expense on the statement of operations.1
In addition, the RP Shares are subject to
mandatory redemption if certain asset
1 The mandatory redemption dates are as follows:
Series D—December 22, 2021; and Series E—
December 11, 2024.
E:\FR\FM\02SEN1.SGM
02SEN1
jlentini on DSKJ8SOYB1PROD with NOTICES
Federal Register / Vol. 74, No. 169 / Wednesday, September 2, 2009 / Notices
coverage tests are not met as specified
in DNP’s charter. Further, applicants
state that the RP Shares are redeemable
at DNP’s option.
4. Applicants state that, prior to
February 2008, dividend rates on the
Preferred Shares for each dividend
period were set at the market clearing
rate determined through an auction
process or a remarketing mechanism, in
the case of APS Shares or RP Shares,
respectively, that brought together
bidders, who sought to buy Preferred
Shares, and holders of Preferred Shares,
who sought to sell their Preferred
Shares. Applicants explain that, if an
auction fails to clear for a series of APS
Shares or a remarketing fails for a series
of RP Shares (because of an imbalance
of sell orders over bids), the dividend
payment rate for that series over the
next dividend period is set at a specified
maximum applicable rate (the
‘‘Maximum Rate’’) defined in the
relevant Fund’s charter, determined by
reference to a short-term market interest
rate. Applicants state that a failed
auction or remarketing is not an event
of default; the relevant Fund continues
to pay dividends to all holders of
Preferred Shares, but at the specified
Maximum Rate rather than a market
clearing rate. Applicants state that they
experienced no unsuccessful auctions or
remarketings prior to February 2008.
5. Applicants state that, prior to
February 2008, if investors did not
purchase all of the APS Shares tendered
for sale at an auction or all of the RP
Shares tendered for sale in a
remarketing, dealers would enter into
such auction or remarketing and
purchase any excess APS Shares or RP
Shares to prevent the auction or
remarketing from failing. Applicants
represent that, for approximately twenty
years, auction rate securities traded
successfully in the auction market with,
so far as applicants are aware, very few
exceptions.2 Applicants state that they
understand that Preferred Shares were
bought by many retail investors
believing that they were safe short-term
liquid investments and, in many
situations, the equivalent of cash.
6. Applicants state that, in February
2008, the financial institutions that
historically provided ‘‘back stop’’
liquidity to APS Share auctions and RP
Share remarketings stopped
participating in them. Applicants state
that, since February 2008, all closed-end
2 For purposes of the requested Order, applicants
use the term ‘‘auction market’’ to refer generically
to the auction and remarketing mechanisms that
serve as a method of providing liquidity for holders
of APS Shares and RP Shares, respectively, and the
term ‘‘auction rate securities’’ to refer generically to
the two types of preferred shares.
VerDate Nov<24>2008
16:56 Sep 01, 2009
Jkt 217001
funds advised by Duff & Phelps that had
Preferred Shares outstanding, including
the Funds, have experienced
unsuccessful auctions and remarketings
due to an imbalance between buy and
sell orders. Applicants also state that
they believe an established secondary
market for Preferred Shares does not
exist today that would assure that
holders of APS Shares would receive
the liquidation preference of $25,000
per share and that holders of RP Shares
would receive the liquidation
preference of $100,000 per share.
Applicants state that, on March 6, 2009,
each Fund entered into a committed
borrowing facility (each a ‘‘Committed
Facility’’) under a prime brokerage
arrangement that permits such Fund to
borrow money to redeem their
outstanding Preferred Shares. As
described more fully in the application,
applicants state that, as of June 24, 2009,
the Funds have redeemed seven series
of Preferred Shares with an aggregate
liquidation preference of $695 million.
Applicants state, however, that neither
Fund can borrow enough money under
its respective Committed Facility to
redeem all of its remaining series of
Preferred Shares without violating the
300% asset coverage requirements of
section 18(a)(1)(A) of the Act. As a
result, applicants state that there is
currently no reliable mechanism for
holders of auction rate securities,
including the Funds’ Preferred Shares,
to obtain liquidity and believe that,
industry-wide, the current lack of
liquidity is causing distress for a
substantial number of holders of auction
rate securities and creating severe
hardship for many investors.
7. Applicants seek relief for a
temporary period from the date on
which the Order is granted until
October 31, 2010 (‘‘Exemption Period’’).
The proposed replacement of the
Preferred Shares with debt would
provide liquidity for the holders of
applicants’ Preferred Shares, while
applicants continue their diligent efforts
to obtain a more permanent form of
financing (such as a new type of senior
security that is equity) that fully
complies with the asset coverage
requirements of section 18.3 Applicants
state that it is uncertain when, or if, the
securities and capital markets will
return to conditions that would enable
the Funds to achieve compliance with
the asset coverage requirements that
would apply in the absence of the
3 See, e.g., Eaton Vance Management, SEC NoAction Letter (June 13, 2008) (permitting the
issuance of ‘‘liquidity protected preferred shares’’ to
supplement or replace Eaton Vance funds’ auction
rate preferred stock).
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
45493
Order. In particular, applicants believe
that the development of a robust market
for alternative forms of equity-based
leverage could take up to a year, or
longer. Applicants further state that,
once such a market has developed, the
negotiation, execution and closing of an
issuance of replacement equity-based
securities for each Fund might require
an additional several months to
consummate. Given the uncertainty and
the current and continuing unsettled
state of the securities and capital
markets, applicants believe that the
Exemption Period is reasonable and
appropriate. Each Fund’s refinancing of
Preferred Shares is subject to approval
of such arrangements by the Fund’s
board (‘‘Board’’).
Applicants’ Legal Analysis:
1. Section 18(a)(1)(A) of the Act
provides that it is unlawful for any
registered closed-end investment
company to issue any class of senior
security representing indebtedness, or to
sell such security of which it is the
issuer, unless such class of senior
security will have an asset coverage of
at least 300% immediately after
issuance or sale. Section 18(a)(2)(A) of
the Act provides that it is unlawful for
any registered closed-end investment
company to issue any class of senior
security that is a stock, or to sell any
such security of which it is the issuer,
unless such class of senior security will
have an asset coverage of at least 200%
immediately after such issuance or
sale.4
2. Section 18(a)(1)(B) prohibits a
closed-end fund from declaring a
dividend or other distribution on, or
purchasing, its own capital stock unless
its outstanding indebtedness will have
an asset coverage of at least 300%
immediately after deducting the amount
of such dividend, distribution or
purchase price.5 Section 18(a)(2)(B)
4 Section 18(h) of the Act defines asset coverage
of a senior security representing indebtedness of an
issuer as the ratio which the value of the total assets
of the issuer, less all liabilities and indebtedness
not represented by senior securities, bears to the
aggregate amount of senior securities representing
indebtedness of the issuer. The section defines asset
coverage of the preferred stock of an issuer as the
ratio which the value of the total assets of the
issuer, less all liabilities and indebtedness not
represented by senior securities, bears to the
aggregate amount of senior securities representing
indebtedness of the issuer plus the amount the class
of senior security would be entitled to on
involuntary liquidation.
5 An exception is made for the declaration of a
dividend on a class of preferred stock if the senior
security representing indebtedness has an asset
coverage of at least 200% at the time of declaration
after deduction of the amount of such dividend. See
section 18(a)(1)(B) of the Act. Further, section 18(g)
of the Act provides, among other things, that
‘‘senior security,’’ for purposes of section
E:\FR\FM\02SEN1.SGM
Continued
02SEN1
jlentini on DSKJ8SOYB1PROD with NOTICES
45494
Federal Register / Vol. 74, No. 169 / Wednesday, September 2, 2009 / Notices
prohibits a closed-end fund from
declaring a dividend or other
distribution on, or purchasing, its own
common stock unless its outstanding
preferred stock will have an asset
coverage of at least 200% immediately
after deducting the amount of such
dividend, distribution or purchase
price.
3. Section 6(c) of the Act provides, in
relevant part, that the Commission, by
order upon application, may
conditionally or unconditionally
exempt any person, security, or
transaction from any provision of the
Act if and to the extent 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.
4. Applicants request that the
Commission issue an Order under
section 6(c) of the Act to exempt each
Fund from the 300% asset coverage
requirements set forth in sections
18(a)(1)(A) and (B) of the Act.
Specifically, the Funds seek relief from
the section 18 asset coverage
requirements for senior securities
representing indebtedness for the
Exemption Period to permit the Funds
to refinance any Preferred Shares issued
prior to February 1, 2008 that are
outstanding at the time of the Order
with debt issued or incurred after the
issuance of the Order subject to the
200% asset coverage requirement that
applies to each Fund’s existing
Preferred Shares, rather than the 300%
asset coverage that would ordinarily
apply under section 18 to senior
securities representing indebtedness, (a)
when they incur that debt, and (b) when
they declare dividends or any other
distributions on, or purchase, their
capital stock, after deduction of the
amount of such dividend, distribution
or purchase price. Applicants state that,
except as permitted under the requested
Order, if issued, the Funds would meet
all of the asset coverage requirements of
section 18(a) of the Act. In addition,
applicants state that each Fund that
borrows in reliance on the Order will
either pay down or refinance the debt
within the Exemption Period so that,
upon expiration of the Exemption
Period, it will have asset coverage of at
least 300% for each class of senior
security representing indebtedness.
5. Applicants state that section 18
reflects congressional concerns
18(a)(1)(B), does not include any promissory note
or other evidence of indebtedness issued in
consideration of any loan, extension or renewal
thereof, made by a bank or other person and
privately arranged, and not intended to be publicly
distributed.
VerDate Nov<24>2008
16:56 Sep 01, 2009
Jkt 217001
regarding preferential treatment for
certain classes of shareholders, complex
capital structures, and the use of
excessive leverage. Applicants submit
that another concern was that senior
securities gave the misleading
impression of safety from risk.
Applicants believe that the request for
temporary relief is necessary,
appropriate and in the public interest
and that such relief is consistent with
the protection of investors and the
purposes intended by the policy and
provisions of the Act.
6. Applicants note that the illiquidity
of Preferred Shares is a unique, exigent
situation that is posing urgent, and in
some cases devastating, hardships on
their holders. Applicants represent that
the proposed replacement of the
Preferred Shares with debt would
provide liquidity for the holders of
applicants’ Preferred Shares, while
applicants continue their diligent efforts
to obtain a more permanent form of
financing (such as a new type of senior
security that is equity) that fully
complies with the asset coverage
requirements of section 18.6
7. Applicants represent that the Order
would help avoid the potential harm to
common shareholders that could result
if the Funds were to deleverage their
portfolios in the current difficult market
environment or that could result if a
reduction in investment return reduced
the market price of common shares.
Applicants also state that the requested
Order would permit the Funds to
continue to provide the holders of their
common shares with the enhanced
returns that leverage may provide.
8. Applicants believe that the interests
of all classes of the Funds’ current
investors would be well served by the
requested Order—the holders of
Preferred Shares because they would
achieve the liquidity that the market
currently cannot provide, as well as full
recovery of the liquidation value of their
shares, and the holders of common
shares because the cost of the new form
of leverage would, over time, be lower
than that of the total cost of the
Preferred Shares based on their
Maximum Rates and the adverse
consequences of deleveraging would be
avoided.
9. Applicants represent that the
proposed borrowing would be obtained
from banks, insurance companies or
qualified institutional buyers (as
defined in Rule 144A(a)(1) under the
Securities Act of 1933), who would be
capable of assessing the risk associated
with the transaction. Applicants also
state that, to the extent the Act’s asset
6 See
PO 00000
supra note 1.
Frm 00083
Fmt 4703
Sfmt 4703
coverage requirements were aimed at
limiting leverage because of its potential
to magnify losses as well as gains, they
believe that the proposal would not
unduly increase the speculative nature
of the Funds’ common shares because
the relief is temporary and the Funds
would be no more highly leveraged if
they replace the existing Preferred
Shares with borrowing.7 Applicants also
state that the proposed liquidity
solution would not make the Funds’
capital structure more complex, opaque,
or hard to understand or result in
pyramiding or inequitable distribution
of control.
10. Applicants submit that the current
state of the credit markets, which has
affected auction rate securities of all
types, including applicants’ Preferred
Shares, is a historic event of unusual
severity and requires a creative and
flexible response on the part of both the
private and public sectors. Applicants
believe that these issues have created an
urgent need for limited, prompt,
thoughtful and responsive solutions.
Applicants believe that the request
meets the standards for exemption
under section 6(c) of the Act.
Applicants’ Conditions:
Applicants agree that any order
granting the requested relief shall be
subject to the following conditions:
1. Each Fund that borrows subject to
200% asset coverage under the Order
will do so only if such Fund’s Board,
including a majority of the members of
the Board who are not ‘‘interested
persons’’ (as defined in section 2(a)(19)
of the Act) (‘‘Independent Board
Members’’), shall have determined that
such borrowing is in the best interests
of such Fund, the holders of its common
shares and the holders of its Preferred
Shares. Each Fund shall make and
preserve for a period of not less than six
years from the date of such
determination, the first two years in an
easily accessible place, minutes
specifically describing the deliberations
by the Board and the information and
documents supporting those
deliberations, the factors considered by
the Board in connection with such
7 Applicants acknowledge that managing any
portfolio that relies on borrowing for leverage
entails the risk that, when the borrowing matures
and must be repaid or refinanced, an economically
attractive form of replacement leverage may not be
available in the capital markets. For that reason, any
portfolio that relies on borrowing for leverage is
subject to the risk that it may have to forcibly
deleverage, which could be disadvantageous to the
portfolio’s common shareholders. Applicants
therefore state that they regard leveraging through
borrowing as potentially a temporary, interim step,
with the issuance of new preferred stock as a
possible longer-term replacement source of
portfolio leverage.
E:\FR\FM\02SEN1.SGM
02SEN1
Federal Register / Vol. 74, No. 169 / Wednesday, September 2, 2009 / Notices
determination, and the basis of such
determination.
2. Upon expiration of the Exemption
Period, each Fund will have asset
coverage of at least 300% for each class
of senior security representing
indebtedness.
3. The Board of any Fund that has
borrowed in reliance on the Order shall
receive and review, no less frequently
than quarterly during the Exemption
Period, detailed progress reports
prepared by management (or other
parties selected by the Independent
Board Members) regarding and assessing
the efforts that the Fund has
undertaken, and the progress that the
Fund has made, towards achieving
compliance with the appropriate asset
coverage requirements under section 18
by the expiration of the Exemption
Period. The Board, including a majority
of the Independent Board Members, will
make such adjustments as it deems
necessary or appropriate to ensure that
the Fund comes into compliance with
section 18 of the Act within a
reasonable period of time, not to exceed
the expiration of the Exemption Period.
Each Fund will make and preserve
minutes describing these reports and the
Board’s review, including copies of such
reports and all other information
provided to or relied upon by the Board,
for a period of not less than six years,
the first two years in an easily accessible
place.
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9–21141 Filed 9–1–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
28889; File No. 812–13610]
Rafferty Asset Management, LLC, et
al.; Notice of Application
jlentini on DSKJ8SOYB1PROD with NOTICES
August 27, 2009.
AGENCY: Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application to
amend a prior order under section 6(c)
of the Investment Company Act of 1940
(‘‘Act’’) granting an exemption from
sections 2(a)(32), 5(a)(1), 22(d), 22(e)
and 24(d) of the Act and rule 22c–1
under the Act, and under sections 6(c)
and 17(b) of the Act for an exemption
from sections 17(a)(1) and 17(a)(2) of the
Act.
VerDate Nov<24>2008
16:56 Sep 01, 2009
Jkt 217001
Applicants: Rafferty Asset
Management, LLC (‘‘Adviser’’) and
Direxion Shares ETF Trust (‘‘Trust’’).
Summary of Application: Applicants
request an order to amend a prior order
that permits: (a) Series of an open-end
management investment company to
issue shares (‘‘ETS’’) redeemable in
large aggregations only (‘‘Creation
Units’’); (b) secondary market
transactions in ETS to occur at
negotiated prices; (c) dealers to sell ETS
to purchasers in the secondary market
unaccompanied by a prospectus, when
prospectus delivery is not required by
the Securities Act of 1933; (d) certain
series to pay redemption proceeds,
under certain circumstances, more than
seven days after the tender of ETS for
redemption; and (e) certain affiliated
persons of the series to deposit
securities into, and receive securities
from, the series in connection with the
purchase and redemption of Creation
Units (‘‘Prior Order’’).1 Applicants seek
to amend the Prior Order to: (a) Provide
greater operational flexibility to the
existing and future series of the Trust
(‘‘Funds’’); (b) expand the category of
Funds designed to correspond to the
return of an underlying securities index
(‘‘Underlying Index’’ and such Funds,
the ‘‘Conventional Funds’’) to include
Funds that seek to match the
performance of an Underlying Index
primarily focused on United States
equity securities that apply a strategy
referred to as 130/30 (‘‘130/30 Funds’’);
(c) supersede the definition of
Leveraged Funds and Inverse Funds in
the application on which the Prior
Order was issued (‘‘Prior Application’’);
(d) delete the relief granted in the Prior
Order from section 24(d) of the Act and
revise the Prior Application
accordingly; and (e) amend the terms
and conditions of the Prior Application
with respect to certain disclosure
requirements.
Filing Dates: The application was
filed on December 17, 2008, and
amended on February 13, 2009, June 3,
2009 and July 20, 2009.
Hearing or Notification of Hearing: An
order granting the requested relief will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
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 September 21, 2009,
and should be accompanied by proof of
service on applicants, in the form of an
1 Rafferty Asset Management, LLC, et al.,
Investment Company Act Release Nos. 28379 (Sep.
12, 2008) (notice) and 28434 (Oct. 6, 2008) (order).
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
45495
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, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–1090.
Applicants, 33 Whitehall Street, 10th
Floor, New York, New York 10004.
FOR FURTHER INFORMATION CONTACT:
Laura L. Solomon, Senior Counsel, at
(202) 551–6915, or Julia Kim Gilmer,
Branch Chief, at (202) 551–6821
(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 via the Commission’s
Web site by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Applicants’ Representations:
1. The Trust is an open-end
management investment company
registered under the Act and organized
as a Delaware statutory trust. The Trust
offers series that operate pursuant to the
Prior Order. The Adviser, which is
registered as an investment adviser
under the Investment Advisers Act of
1940 (‘‘Advisers Act’’), or an entity
controlled by or under common control
with the Adviser will serve as
investment adviser to each Fund.
2. Applicants request relief that
would provide greater operational
flexibility to the Funds by permitting:
(a) The Funds to enter into short
positions in the component securities
comprising the relevant Underlying
Index (‘‘Component Securities’’); (b)
each Conventional Fund to invest at
least 80% of its total assets (exclusive of
collateral held for purposes of securities
lending) in Component Securities and/
or investments that have economic
characteristics that are substantially
identical to the economic characteristics
of Component Securities; and (c)
Leveraged Funds (defined below) to
determine what percentage, if any, of its
total assets to invest in Component
Securities. Applicants state this greater
operational flexibility will provide the
Funds with the ability to pursue more
cost-effective techniques in seeking to
achieve their investment objectives.
‘‘Leveraged Funds’’ are Funds that seek
a specified multiple, up to 300%, of the
performance of an Underlying Index
E:\FR\FM\02SEN1.SGM
02SEN1
]]>Agencies
[Federal Register Volume 74, Number 169 (Wednesday, September 2, 2009)]
[Notices]
[Pages 45492-45495]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-21141]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-28891; File No. 812-13617]
DNP Select Income Fund Inc., et al.; Notice of Application
August 27, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from sections
18(a)(1)(A) and (B) of the Act.
-----------------------------------------------------------------------
Applicants: DNP Select Income Fund Inc. (``DNP'') and Duff & Phelps
Utility and Corporate Bond Trust Inc. (``DUC'') (each of DNP and DUC, a
``Fund'' and, collectively, the ``Funds'').
Summary of Application: Applicants request an order (``Order'')
granting an exemption from sections 18(a)(1)(A) and (B) of the Act for
a period from the date of the Order until October 31, 2010. The Order
would permit each Fund to issue or incur debt subject to asset coverage
of 200% that would be used to refinance the Fund's issued and
outstanding auction preferred shares (``APS Shares'') and/or remarketed
preferred stock (``RP Shares,'' and, collectively with the APS Shares,
the ``Preferred Shares'') issued prior to February 1, 2008 that are
outstanding at the time such post-Order debt is issued or incurred. The
Order also would permit each Fund to declare dividends or any other
distributions on, or purchase, capital stock during the term of the
Order, provided that such post-Order debt has asset coverage of at
least 200% after deducting the amount of such transaction.
Filing Dates: The application was filed on December 29, 2008, and
amended on June 3, 2009, June 24, 2009, and August 26, 2009. Applicants
have agreed to file an amendment during the notice period, the
substance of which is reflected in this 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 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 September 21, 2009, 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 who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-1090. Applicants: c/o Nathan I. Partain, Duff
& Phelps Investment Management Co., 200 South Wacker Drive, Suite 500,
Chicago, IL 60606.
FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Attorney Adviser, at
(202) 551-6819, or Mary Kay Frech, Branch Chief, at (202) 551-6821
(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 via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at https://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations:
1. Each of the Funds is organized as a Maryland corporation and is
a closed-end management investment company registered under the Act.
Each Fund is advised by Duff & Phelps Investment Management Co. (``Duff
& Phelps''). DNP has outstanding a class of common shares and two
series each of APS Shares and RP Shares, and DUC has outstanding a
class of common shares and one series of APS Shares.
2. Applicants state that the Funds issued their outstanding
Preferred Shares for purposes of investment leverage to augment the
amount of investment capital available for use in the pursuit of their
investment objectives. Applicants state that, through the use of
leverage, the Funds seek to enhance the investment return available to
the holders of their common shares by earning a rate of portfolio
return (which includes the return obtained from securities that are
purchased from the proceeds of Preferred Share offerings) that exceeds
the dividend rate that the Funds pay to the holders of the Preferred
Shares. Applicants represent that holders of APS Shares are entitled to
receive a stated liquidation preference amount of $25,000 per share
(plus any accumulated but unpaid dividends, whether or not declared) in
any liquidation, dissolution or winding up of the relevant Fund, before
any distribution or payment to holders of the Fund's common shares.
Applicants also state that dividends declared and payable on the APS
Shares have a similar priority over dividends declared and payable on
the Fund's common shares. In addition, applicants state that APS Shares
are ``perpetual'' securities and are not subject to mandatory
redemption by a Fund so long as the Fund meets certain asset coverage
tests specified in its charter. Further, applicants state that the APS
Shares are redeemable at each Fund's option.
3. Applicants represent that holders of RP Shares are entitled to
receive a stated liquidation preference amount of $100,000 per share
(plus any accumulated but unpaid dividends, whether or not declared) in
any liquidation, dissolution or winding up of DNP, before any
distribution or payment to holders of its common shares. Applicants
state that dividends declared and payable on the RP Shares have a
similar priority over dividends declared and payable on DNP's common
shares. Applicants also state that the RP Shares are subject to
mandatory redemption on a date certain and, therefore, are classified
as a liability on the statement of assets and liabilities and the
related dividends as interest expense on the statement of
operations.\1\ In addition, the RP Shares are subject to mandatory
redemption if certain asset
[[Page 45493]]
coverage tests are not met as specified in DNP's charter. Further,
applicants state that the RP Shares are redeemable at DNP's option.
---------------------------------------------------------------------------
\1\ The mandatory redemption dates are as follows: Series D--
December 22, 2021; and Series E--December 11, 2024.
---------------------------------------------------------------------------
4. Applicants state that, prior to February 2008, dividend rates on
the Preferred Shares for each dividend period were set at the market
clearing rate determined through an auction process or a remarketing
mechanism, in the case of APS Shares or RP Shares, respectively, that
brought together bidders, who sought to buy Preferred Shares, and
holders of Preferred Shares, who sought to sell their Preferred Shares.
Applicants explain that, if an auction fails to clear for a series of
APS Shares or a remarketing fails for a series of RP Shares (because of
an imbalance of sell orders over bids), the dividend payment rate for
that series over the next dividend period is set at a specified maximum
applicable rate (the ``Maximum Rate'') defined in the relevant Fund's
charter, determined by reference to a short-term market interest rate.
Applicants state that a failed auction or remarketing is not an event
of default; the relevant Fund continues to pay dividends to all holders
of Preferred Shares, but at the specified Maximum Rate rather than a
market clearing rate. Applicants state that they experienced no
unsuccessful auctions or remarketings prior to February 2008.
5. Applicants state that, prior to February 2008, if investors did
not purchase all of the APS Shares tendered for sale at an auction or
all of the RP Shares tendered for sale in a remarketing, dealers would
enter into such auction or remarketing and purchase any excess APS
Shares or RP Shares to prevent the auction or remarketing from failing.
Applicants represent that, for approximately twenty years, auction rate
securities traded successfully in the auction market with, so far as
applicants are aware, very few exceptions.\2\ Applicants state that
they understand that Preferred Shares were bought by many retail
investors believing that they were safe short-term liquid investments
and, in many situations, the equivalent of cash.
---------------------------------------------------------------------------
\2\ For purposes of the requested Order, applicants use the term
``auction market'' to refer generically to the auction and
remarketing mechanisms that serve as a method of providing liquidity
for holders of APS Shares and RP Shares, respectively, and the term
``auction rate securities'' to refer generically to the two types of
preferred shares.
---------------------------------------------------------------------------
6. Applicants state that, in February 2008, the financial
institutions that historically provided ``back stop'' liquidity to APS
Share auctions and RP Share remarketings stopped participating in them.
Applicants state that, since February 2008, all closed-end funds
advised by Duff & Phelps that had Preferred Shares outstanding,
including the Funds, have experienced unsuccessful auctions and
remarketings due to an imbalance between buy and sell orders.
Applicants also state that they believe an established secondary market
for Preferred Shares does not exist today that would assure that
holders of APS Shares would receive the liquidation preference of
$25,000 per share and that holders of RP Shares would receive the
liquidation preference of $100,000 per share. Applicants state that, on
March 6, 2009, each Fund entered into a committed borrowing facility
(each a ``Committed Facility'') under a prime brokerage arrangement
that permits such Fund to borrow money to redeem their outstanding
Preferred Shares. As described more fully in the application,
applicants state that, as of June 24, 2009, the Funds have redeemed
seven series of Preferred Shares with an aggregate liquidation
preference of $695 million. Applicants state, however, that neither
Fund can borrow enough money under its respective Committed Facility to
redeem all of its remaining series of Preferred Shares without
violating the 300% asset coverage requirements of section 18(a)(1)(A)
of the Act. As a result, applicants state that there is currently no
reliable mechanism for holders of auction rate securities, including
the Funds' Preferred Shares, to obtain liquidity and believe that,
industry-wide, the current lack of liquidity is causing distress for a
substantial number of holders of auction rate securities and creating
severe hardship for many investors.
7. Applicants seek relief for a temporary period from the date on
which the Order is granted until October 31, 2010 (``Exemption
Period''). The proposed replacement of the Preferred Shares with debt
would provide liquidity for the holders of applicants' Preferred
Shares, while applicants continue their diligent efforts to obtain a
more permanent form of financing (such as a new type of senior security
that is equity) that fully complies with the asset coverage
requirements of section 18.\3\ Applicants state that it is uncertain
when, or if, the securities and capital markets will return to
conditions that would enable the Funds to achieve compliance with the
asset coverage requirements that would apply in the absence of the
Order. In particular, applicants believe that the development of a
robust market for alternative forms of equity-based leverage could take
up to a year, or longer. Applicants further state that, once such a
market has developed, the negotiation, execution and closing of an
issuance of replacement equity-based securities for each Fund might
require an additional several months to consummate. Given the
uncertainty and the current and continuing unsettled state of the
securities and capital markets, applicants believe that the Exemption
Period is reasonable and appropriate. Each Fund's refinancing of
Preferred Shares is subject to approval of such arrangements by the
Fund's board (``Board'').
---------------------------------------------------------------------------
\3\ See, e.g., Eaton Vance Management, SEC No-Action Letter
(June 13, 2008) (permitting the issuance of ``liquidity protected
preferred shares'' to supplement or replace Eaton Vance funds'
auction rate preferred stock).
---------------------------------------------------------------------------
Applicants' Legal Analysis:
1. Section 18(a)(1)(A) of the Act provides that it is unlawful for
any registered closed-end investment company to issue any class of
senior security representing indebtedness, or to sell such security of
which it is the issuer, unless such class of senior security will have
an asset coverage of at least 300% immediately after issuance or sale.
Section 18(a)(2)(A) of the Act provides that it is unlawful for any
registered closed-end investment company to issue any class of senior
security that is a stock, or to sell any such security of which it is
the issuer, unless such class of senior security will have an asset
coverage of at least 200% immediately after such issuance or sale.\4\
---------------------------------------------------------------------------
\4\ Section 18(h) of the Act defines asset coverage of a senior
security representing indebtedness of an issuer as the ratio which
the value of the total assets of the issuer, less all liabilities
and indebtedness not represented by senior securities, bears to the
aggregate amount of senior securities representing indebtedness of
the issuer. The section defines asset coverage of the preferred
stock of an issuer as the ratio which the value of the total assets
of the issuer, less all liabilities and indebtedness not represented
by senior securities, bears to the aggregate amount of senior
securities representing indebtedness of the issuer plus the amount
the class of senior security would be entitled to on involuntary
liquidation.
---------------------------------------------------------------------------
2. Section 18(a)(1)(B) prohibits a closed-end fund from declaring a
dividend or other distribution on, or purchasing, its own capital stock
unless its outstanding indebtedness will have an asset coverage of at
least 300% immediately after deducting the amount of such dividend,
distribution or purchase price.\5\ Section 18(a)(2)(B)
[[Page 45494]]
prohibits a closed-end fund from declaring a dividend or other
distribution on, or purchasing, its own common stock unless its
outstanding preferred stock will have an asset coverage of at least
200% immediately after deducting the amount of such dividend,
distribution or purchase price.
---------------------------------------------------------------------------
\5\ An exception is made for the declaration of a dividend on a
class of preferred stock if the senior security representing
indebtedness has an asset coverage of at least 200% at the time of
declaration after deduction of the amount of such dividend. See
section 18(a)(1)(B) of the Act. Further, section 18(g) of the Act
provides, among other things, that ``senior security,'' for purposes
of section 18(a)(1)(B), does not include any promissory note or
other evidence of indebtedness issued in consideration of any loan,
extension or renewal thereof, made by a bank or other person and
privately arranged, and not intended to be publicly distributed.
---------------------------------------------------------------------------
3. Section 6(c) of the Act provides, in relevant part, that the
Commission, by order upon application, may conditionally or
unconditionally exempt any person, security, or transaction from any
provision of the Act if and to the extent 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.
4. Applicants request that the Commission issue an Order under
section 6(c) of the Act to exempt each Fund from the 300% asset
coverage requirements set forth in sections 18(a)(1)(A) and (B) of the
Act. Specifically, the Funds seek relief from the section 18 asset
coverage requirements for senior securities representing indebtedness
for the Exemption Period to permit the Funds to refinance any Preferred
Shares issued prior to February 1, 2008 that are outstanding at the
time of the Order with debt issued or incurred after the issuance of
the Order subject to the 200% asset coverage requirement that applies
to each Fund's existing Preferred Shares, rather than the 300% asset
coverage that would ordinarily apply under section 18 to senior
securities representing indebtedness, (a) when they incur that debt,
and (b) when they declare dividends or any other distributions on, or
purchase, their capital stock, after deduction of the amount of such
dividend, distribution or purchase price. Applicants state that, except
as permitted under the requested Order, if issued, the Funds would meet
all of the asset coverage requirements of section 18(a) of the Act. In
addition, applicants state that each Fund that borrows in reliance on
the Order will either pay down or refinance the debt within the
Exemption Period so that, upon expiration of the Exemption Period, it
will have asset coverage of at least 300% for each class of senior
security representing indebtedness.
5. Applicants state that section 18 reflects congressional concerns
regarding preferential treatment for certain classes of shareholders,
complex capital structures, and the use of excessive leverage.
Applicants submit that another concern was that senior securities gave
the misleading impression of safety from risk. Applicants believe that
the request for temporary relief is necessary, appropriate and in the
public interest and that such relief is consistent with the protection
of investors and the purposes intended by the policy and provisions of
the Act.
6. Applicants note that the illiquidity of Preferred Shares is a
unique, exigent situation that is posing urgent, and in some cases
devastating, hardships on their holders. Applicants represent that the
proposed replacement of the Preferred Shares with debt would provide
liquidity for the holders of applicants' Preferred Shares, while
applicants continue their diligent efforts to obtain a more permanent
form of financing (such as a new type of senior security that is
equity) that fully complies with the asset coverage requirements of
section 18.\6\
---------------------------------------------------------------------------
\6\ See supra note 1.
---------------------------------------------------------------------------
7. Applicants represent that the Order would help avoid the
potential harm to common shareholders that could result if the Funds
were to deleverage their portfolios in the current difficult market
environment or that could result if a reduction in investment return
reduced the market price of common shares. Applicants also state that
the requested Order would permit the Funds to continue to provide the
holders of their common shares with the enhanced returns that leverage
may provide.
8. Applicants believe that the interests of all classes of the
Funds' current investors would be well served by the requested Order--
the holders of Preferred Shares because they would achieve the
liquidity that the market currently cannot provide, as well as full
recovery of the liquidation value of their shares, and the holders of
common shares because the cost of the new form of leverage would, over
time, be lower than that of the total cost of the Preferred Shares
based on their Maximum Rates and the adverse consequences of
deleveraging would be avoided.
9. Applicants represent that the proposed borrowing would be
obtained from banks, insurance companies or qualified institutional
buyers (as defined in Rule 144A(a)(1) under the Securities Act of
1933), who would be capable of assessing the risk associated with the
transaction. Applicants also state that, to the extent the Act's asset
coverage requirements were aimed at limiting leverage because of its
potential to magnify losses as well as gains, they believe that the
proposal would not unduly increase the speculative nature of the Funds'
common shares because the relief is temporary and the Funds would be no
more highly leveraged if they replace the existing Preferred Shares
with borrowing.\7\ Applicants also state that the proposed liquidity
solution would not make the Funds' capital structure more complex,
opaque, or hard to understand or result in pyramiding or inequitable
distribution of control.
---------------------------------------------------------------------------
\7\ Applicants acknowledge that managing any portfolio that
relies on borrowing for leverage entails the risk that, when the
borrowing matures and must be repaid or refinanced, an economically
attractive form of replacement leverage may not be available in the
capital markets. For that reason, any portfolio that relies on
borrowing for leverage is subject to the risk that it may have to
forcibly deleverage, which could be disadvantageous to the
portfolio's common shareholders. Applicants therefore state that
they regard leveraging through borrowing as potentially a temporary,
interim step, with the issuance of new preferred stock as a possible
longer-term replacement source of portfolio leverage.
---------------------------------------------------------------------------
10. Applicants submit that the current state of the credit markets,
which has affected auction rate securities of all types, including
applicants' Preferred Shares, is a historic event of unusual severity
and requires a creative and flexible response on the part of both the
private and public sectors. Applicants believe that these issues have
created an urgent need for limited, prompt, thoughtful and responsive
solutions. Applicants believe that the request meets the standards for
exemption under section 6(c) of the Act.
Applicants' Conditions:
Applicants agree that any order granting the requested relief shall
be subject to the following conditions:
1. Each Fund that borrows subject to 200% asset coverage under the
Order will do so only if such Fund's Board, including a majority of the
members of the Board who are not ``interested persons'' (as defined in
section 2(a)(19) of the Act) (``Independent Board Members''), shall
have determined that such borrowing is in the best interests of such
Fund, the holders of its common shares and the holders of its Preferred
Shares. Each Fund shall make and preserve for a period of not less than
six years from the date of such determination, the first two years in
an easily accessible place, minutes specifically describing the
deliberations by the Board and the information and documents supporting
those deliberations, the factors considered by the Board in connection
with such
[[Page 45495]]
determination, and the basis of such determination.
2. Upon expiration of the Exemption Period, each Fund will have
asset coverage of at least 300% for each class of senior security
representing indebtedness.
3. The Board of any Fund that has borrowed in reliance on the Order
shall receive and review, no less frequently than quarterly during the
Exemption Period, detailed progress reports prepared by management (or
other parties selected by the Independent Board Members) regarding and
assessing the efforts that the Fund has undertaken, and the progress
that the Fund has made, towards achieving compliance with the
appropriate asset coverage requirements under section 18 by the
expiration of the Exemption Period. The Board, including a majority of
the Independent Board Members, will make such adjustments as it deems
necessary or appropriate to ensure that the Fund comes into compliance
with section 18 of the Act within a reasonable period of time, not to
exceed the expiration of the Exemption Period. Each Fund will make and
preserve minutes describing these reports and the Board's review,
including copies of such reports and all other information provided to
or relied upon by the Board, for a period of not less than six years,
the first two years in an easily accessible place.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-21141 Filed 9-1-09; 8:45 am]
BILLING CODE 8010-01-P
