[Federal Register Volume 75, Number 138 (Tuesday, July 20, 2010)]
[Notices]
[Pages 42177-42181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17637]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 29341; File No. 812-13743]
Federated Enhanced Treasury Income Fund, et al.; Notice of
Application
July 14, 2010.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application under section 6(c) of the Investment
Company Act of 1940 (``Act'') for an exemption from section 19(b) of
the Act and rule 19b-1 under the Act.
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SUMMARY: Summary of Application: Applicants request an order
(``Order'') to permit certain registered closed-end management
investment companies to make periodic distributions of long-term
capital gains with respect to their outstanding common stock as
frequently as monthly in any taxable year, and as frequently as
distributions are specified by or in accordance with the terms of any
outstanding preferred stock that such investment companies may issue.
Applicants: Federated Enhanced Treasury Income Fund, Federated
Premier Intermediate Municipal Income Fund, Federated Premier Municipal
Income Fund (collectively, the ``Current Funds'') and Federated
Investment Management Company (``Federated'' or the ``Adviser'').
DATES: Filing Dates: The application was filed on January 15, 2010 and
amended on May 18, 2010, and July 9, 2010.
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 August 9, 2010, 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.
[[Page 42178]]
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090; Applicants, c/o Gregory Dulski,
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222-3779.
FOR FURTHER INFORMATION CONTACT: Barbara T. Heussler, Senior Counsel,
at (202) 551-6990, or Jennifer L. Sawin, 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 http://www.sec.gov/search/search.htm or
by calling (202) 551-8090.
Applicants' Representations
1. Each Current Fund is a registered closed-end management
investment company organized as a Delaware statutory trust.\1\ The
common shares of the Current Funds are listed on the New York Stock
Exchange. The Premier Intermediate Municipal Income Fund and Premier
Municipal Income Fund have also issued preferred shares. Applicants
believe that investors in the common shares of the Current Funds may
prefer an investment vehicle that provides regular/monthly
distributions and a steady cash flow.
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\1\ Applicants request that any Order issued granting the relief
requested in the application also apply to any registered closed-end
investment company currently advised or to be advised in the future
by Federated (including any successor in interest) or by an entity
controlling, controlled by or under common control (within the
meaning of section 2(a)(9) of the Act) with Federated (such
entities, together with Federated, the ``Investment Advisers'') that
decides in the future to rely on the requested relief. Any closed-
end investment company that relies on the Order in the future will
comply with the terms and conditions of the application (such
investment companies together with the Current Funds, the ``Funds,''
and with the Investment Advisers, the ``Applicants''). All existing
Funds currently intending to rely on the Order have been named as
Applicants. 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.
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2. Federated, a registered investment adviser under the Investment
Advisers Act of 1940, as amended (``Advisers Act''), acts as the
Current Funds' investment adviser and administrator. Federated is a
wholly-owned subsidiary of Federated Investors, Inc. Each future
Investment Adviser to a Fund will be registered under the Advisers Act.
3. Applicants state that, prior to a Fund's implementing a
distribution plan in reliance on the Order, the Board of Trustees (the
``Board'') of the Fund, including a majority of the trustees who are
not ``interested persons,'' of such Fund as defined in section 2(a)(19)
of the Act (the ``Independent Trustees''), shall have requested, and
the Adviser shall have provided, such information as is reasonably
necessary to make an informed determination on whether the Board should
adopt a proposed distribution policy. In particular, the Board and the
Independent Trustees shall have reviewed information regarding the
purpose and terms of a proposed distribution policy, the likely effects
of such policy on such Fund's long-term total return (in relation to
market price and its net asset value per common share (``NAV'')) and
the relationship between such Fund's distribution rate on its common
shares under the policy and such Fund's total return (in relation to
NAV); whether the rate of distribution would exceed such Fund's
expected total return in relation to its NAV; and any foreseeable
material effects of such policy on such Fund's long-term total return
(in relation to market price and NAV). The Independent Trustees shall
also have considered what conflicts of interest the Adviser and the
affiliated persons of the Adviser and each such Fund might have with
respect to the adoption or implementation of such policy. Applicants
state that, only after considering such information shall the Board,
including the Independent Trustees, of a Fund approve a distribution
policy with respect to such Fund's common shares (the ``Plan'') and in
connection with such approval shall have determined that such Plan is
consistent with a Fund's investment objectives and in the best
interests of a Fund's common shareholders.
4. Applicants state that the purpose of a Plan would be to permit a
Fund to distribute over the course of each year, through periodic
distributions as nearly equal as practicable and any required special
distributions, an amount closely approximating the total taxable income
of such Fund during such year and, if so determined by its Board, all
or a portion of the return of capital paid by portfolio companies to
such Fund during such year. It is anticipated that under the Plan of a
Fund, such Fund would distribute to its respective common shareholders
a fixed monthly percentage of the market price of such Fund's common
shares at a particular point in time or a fixed monthly percentage of
NAV at a particular time or a fixed monthly amount, any of which may be
adjusted from time to time. It is anticipated that under a Plan, the
minimum annual distribution rate with respect to such Fund's common
shares would be independent of a Fund's performance during any
particular period but would be expected to correlate with a Fund's
performance over time. Except for extraordinary distributions and
potential increases or decreases in the final dividend periods in light
of a Fund's performance for an entire calendar year and to enable a
Fund to comply with the distribution requirements of Subchapter M of
the Internal Revenue Code (``Code'') for the fiscal year, it is
anticipated that each distribution on the common shares would be at the
stated rate then in effect.
5. Applicants state that prior to the implementation of a Plan for
a Fund, the Board shall have adopted policies and procedures under rule
38a-1 under the Act that: (i) Are reasonably designed to ensure that
all notices required to be sent to the Fund's shareholders pursuant to
section 19(a) of the Act, rule 19a-1 thereunder and condition 4 below
(each a ``19(a) Notice'') include the disclosure required by rule 19a-1
under the Act and by condition 2(a) below, and that all other written
communications by the Fund or its agents regarding distributions under
the Plan include the disclosure required by condition 3(a) below; and
(ii) require the Fund to keep records that demonstrate its compliance
with all of the conditions of the Order and that are necessary for such
Fund to form the basis for, or demonstrate the calculation of, the
amounts disclosed in its 19(a) Notices.
Applicants' Legal Analysis
1. Section 19(b) of the Act generally makes it unlawful for any
registered investment company to make long-term capital gains
distributions more than once every twelve months. Rule 19b-1 under the
Act limits the number of capital gains dividends, as defined in section
852(b)(3)C) of the Code (``distributions''), that a fund may make with
respect to any one taxable year to one, plus a supplemental ``clean
up'' distribution made pursuant to section 855 of the Code not
exceeding 10% of the total amount distributed for the year, plus one
additional capital gain dividend made in whole or in part to avoid the
excise tax under section 4982 of the Code.
2. Section 6(c) of the Act provides that the Commission may, by
order upon application, conditionally or unconditionally exempt any
person, security, or transaction, or any class or classes of persons,
securities or transactions, from any provision of the
[[Page 42179]]
Act, if and to the extent that the 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.
3. Applicants state that one of the concerns leading to the
enactment of section 19(b) and adoption of rule 19b-1 was that
shareholders might be unable to distinguish between frequent
distributions of capital gains and dividends from investment income.
Applicants state, however, that rule 19a-1 effectively addresses this
concern by requiring that distributions (or the confirmation of the
reinvestment thereof) estimated to be sourced in part from capital
gains or capital be accompanied by a separate statement showing the
sources of the distribution (e.g., estimated net income, net short-term
capital gains, net long-term capital gains, and/or return of capital).
Applicants state that similar information is included in the Funds'
annual reports to shareholders and on the Internal Revenue Service Form
1099 DIV, which is sent to each common and preferred shareholder who
received distributions during a particular year.
4. Applicants further state that each of the Funds will make the
additional disclosures required by the conditions set forth below, and
each of them has adopted compliance policies and procedures in
accordance with rule 38a-1 under the Act to ensure that all required
19(a) Notices and disclosures are sent to shareholders. Applicants
argue that by providing the information required by section 19(a) and
rule 19a-1, and by complying with the procedures adopted under the Plan
and the conditions listed below, each Fund's shareholders would be
provided sufficient information to understand that their periodic
distributions are not tied to a Fund's net investment income and
realized capital gains to date, and may not represent yield or
investment return. Accordingly, Applicants assert that continuing to
subject the Funds to section 19(b) and rule 19b-1 would afford
shareholders no extra protection.
5. Applicants assert that section 19(b) and rule 19b-1 also were
intended to prevent certain improper sales practices, including, in
particular, the practice of urging an investor to purchase shares of a
fund on the basis of an upcoming capital gains dividend (``selling the
dividend''), where the dividend would result in an immediate
corresponding reduction in NAV and would be in effect a taxable return
of the investor's capital. Applicants assert that the ``selling the
dividend'' concern should not apply to closed-end investment companies,
such as the Funds, which do not continuously distribute shares.
According to the Applicants, if the underlying concern extends to
secondary market purchases of shares of closed-end funds that are
subject to a large upcoming capital gains dividend, adoption of a
periodic distribution plan actually helps minimize the concern by
avoiding, through periodic distributions, any buildup of large end-of-
the-year distributions.
6. Applicants note that the common stock of closed-end funds
generally tends to trade in the marketplace at a discount to their
NAVs. Applicants believe that this discount may be reduced if the Funds
are permitted to pay relatively frequent dividends on their common
shares at a consistent rate, whether or not those dividends contain an
element of capital gain.
7. Applicants assert that the application of rule 19b-1 to a Plan
actually gives rise to one of the concerns that rule 19b-1 was intended
to avoid: Inappropriate influence on portfolio management decisions.
Applicants state that, in the absence of an exemption from rule 19b-1,
the adoption of a periodic distribution plan imposes pressure on
management: (i) Not to realize any net long-term capital gains until
the point in the year that the fund can pay all of its remaining
distributions in accordance with rule 19b-1; and (ii) not to realize
any long-term capital gains during any particular year in excess of the
amount of the aggregate pay-out for the year (since as a practical
matter excess gains must be distributed and accordingly would not be
available to satisfy pay-out requirements in following years),
notwithstanding that purely investment considerations might favor
realization of long-term gains at different times or in different
amounts. Applicants assert that by limiting the number of capital gain
distributions that a fund may make with respect to any one year, rule
19b-1 may prevent the normal and efficient operation of a periodic
distribution plan whenever that fund's realized net long-term capital
gains in any year exceed the total of the periodic distributions that
may include such capital gains under the rule.
8. In addition, Applicants assert that rule 19b-1 may cause fixed
regular periodic distributions to be funded with returns of capital \2\
(to the extent net investment income and realized short term capital
gains are insufficient to fund the distribution), even though
undistributed realized net long-term capital gains otherwise would be
available. To distribute all of a fund's long-term capital gains within
the limits in rule 19b-1, a fund may be required to make total
distributions in excess of the annual amount called for by its periodic
distribution plan or to retain and pay taxes on the excess amount.
Applicants thus assert that the requested Order would minimize these
anomalous effects of rule 19b-1 by enabling the Funds to realize long-
term capital gains as often as investment considerations dictate
without fear of violating rule 19b-1.
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\2\ Returns of capital as used in the application means return
of capital for financial accounting purposes and not for tax
accounting purposes.
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9. Applicants state that Revenue Ruling 89-81 under the Code
requires that a fund that has both common shares and preferred shares
outstanding designate the types of income, e.g., investment income and
capital gains, in the same proportion as the total distributions
distributed to each class for that tax 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 must designate the required proportionate
share of such capital gain to be included in common and preferred share
dividends. Applicants state that although rule 19b-1 allows a fund some
flexibility with respect to the frequency of capital gains
distributions, a fund might use all of the exceptions available under
rule 19b-1 for a tax year and still need to distribute additional
capital gains allocated to the preferred shares to comply with Revenue
Ruling 89-81.
10. Applicants assert the potential abuses addressed by section
19(b) and rule 19b-1 do not arise with respect to preferred shares
issued by a closed-end fund. Applicants assert that such distributions
are either fixed, determined in periodic auctions, or determined by
reference to short-term interest rates rather than by reference to
performance of the issuer, and Revenue Ruling 89-81 determines the
proportion of such distributions that are comprised of long-term
capital gains.
11. Applicants also submit that the ``selling the dividend''
concern is not applicable to preferred shares, which entitles a holder
to no more than a periodic dividend at a fixed rate or the rate
determined by the market, and like a debt security, is priced based
upon its liquidation value, dividend rate, credit quality, and
frequency of payment. Applicants assert that investors buy preferred
shares for the purpose of receiving payments at the frequency bargained
for and do not expect the liquidation value of their shares to change.
[[Page 42180]]
12. Applicants request an order pursuant to section 6(c) of the Act
granting an exemption from the provisions of section 19(b) of the Act
and rule 19b-1 thereunder to permit each Fund to make periodic capital
gain dividends (as defined in section 852(b)(3)(C) of the Code) as
often as monthly in any one taxable year in respect of its common
shares and as often as specified by or determined in accordance with
the terms thereof in respect of the Fund's preferred shares.
Applicants' Conditions
Applicants agree that, with respect to each Fund seeking to rely on
the Order, the Order will be subject to the following conditions.
1. Compliance Review and Reporting
The Fund's chief compliance officer will: (a) Report to the Fund's
Board, no less frequently than once every three months or at the next
regularly scheduled quarterly Board meeting, whether: (i) The Fund and
its Investment Adviser have complied with the conditions of the order;
and (ii) a material compliance matter (as defined in rule 38a-1(e)(2)
under the Act) has occurred with respect to such conditions; and (b)
review the adequacy of the policies and procedures adopted by the Board
no less frequently than annually.
2. Disclosures to Fund Shareholders
(a) Each 19(a) Notice disseminated to the holders of the Fund's
common shares, in addition to the information required by section 19(a)
and rule 19a-1:
(i) Will provide, in a tabular or graphical format:
(1) The amount of the distribution, on a per common share basis,
together with the amounts of such distribution amount, on a per common
share basis and as a percentage of such distribution amount, from
estimated: (A) Net investment income; (B) net realized short-term
capital gains; (C) net realized long-term capital gains; and (D) return
of capital or other capital source;
(2) The fiscal year-to-date cumulative amount of distributions, on
a per common share basis, together with the amounts of such cumulative
amount, on a per common share basis and as a percentage of such
cumulative amount of distributions, from estimated: (A) Net investment
income; (B) net realized short-term capital gains; (C) net realized
long-term capital gains; and (D) return of capital or other capital
source;
(3) The average annual total return in relation to the change in
NAV for the 5-year period (or, if the Fund's history of operations is
less than five years, the time period commencing immediately following
the Fund's first public offering) ending on the last day of the month
prior to the most recent distribution record date compared to the
current fiscal period's annualized distribution rate expressed as a
percentage of NAV as of the last day of the month prior to the most
recent distribution record date; and
(4) The cumulative total return in relation to the change in NAV
from the last completed fiscal year to the last day of the month prior
to the most recent distribution record date compared to the fiscal
year-to-date cumulative distribution rate expressed as a percentage of
NAV as of the last day of the month prior to the most recent
distribution record date. Such disclosure shall be made in a type size
at least as large and as prominent as the estimate of the sources of
the current distribution; and
(ii) Will include the following disclosure:
(1) ``You should not draw any conclusions about the Fund's
investment performance from the amount of this distribution or from the
terms of the Fund's Plan'';
(2) ``The Fund estimates that it has distributed more than its
income and net realized capital gains; therefore, a portion of your
distribution may be a return of capital. A return of capital may occur,
for example, when some or all of the money that you invested in the
Fund is paid back to you. A return of capital distribution does not
necessarily reflect the Fund's investment performance and should not be
confused with `yield' or `income' '';\3\ and
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\3\ The disclosure in this condition 2(a)(ii)(2) will be
included only if the current distribution or the fiscal year-to-date
cumulative distributions are estimated to include a return of
capital.
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(3) ``The amounts and sources of distributions reported in this
19(a) Notice are only estimates and are not being provided for tax
reporting purposes. The actual amounts and sources of the amounts for
tax reporting purposes will depend upon the Fund's investment
experience during the remainder of its fiscal year and may be subject
to changes based on tax regulations. The Fund will send you a Form 1099
DIV for the calendar year that will tell you how to report these
distributions for federal income tax purposes.''
Such disclosure shall be made in a type size at least as large as
and as prominent as any other information in the 19(a) Notice and
placed on the same page in close proximity to the amount and the
sources of the distribution.
(b) On the inside front cover of each report to shareholders under
rule 30e-1 under the Act, the Fund will:
(i) Describe the terms of the Plan (including the fixed amount or
fixed percentage of the distributions and the frequency of the
distributions);
(ii) Include the disclosure required by condition 2(a)(ii)(1)
above;
(iii) State, if applicable, that the Plan provides that the Board
may amend or terminate the Plan at any time without prior notice to
Fund shareholders; and
(iv) Describe any reasonably foreseeable circumstances that might
cause the Fund to terminate the Plan and any reasonably foreseeable
consequences of such termination; and
(c) Each report provided to shareholders under rule 30e-1 under the
Act and each prospectus filed with the Commission on Form N-2 under the
Act, will provide the Fund's total return in relation to changes in NAV
in the financial highlights table and in any discussion about the
Fund's total return.
3. Disclosure to Shareholders, Prospective Shareholders and Third
Parties
(a) The Fund will include the information contained in the relevant
19(a) Notice, including the disclosure required by condition 2(a)(ii)
above, in any written communication (other than a communication on Form
1099) about the Plan or distributions under the Plan by the Fund, or
agents that the Fund has authorized to make such communication on the
Fund's behalf, to any Fund common shareholder, prospective common
shareholder or third-party information provider;
(b) The Fund will issue, contemporaneously with the issuance of any
19(a) Notice, a press release containing the information in the 19(a)
Notice and will file with the Commission the information contained in
such 19(a) Notice, including the disclosure required by condition
2(a)(ii) above, as an exhibit to its next filed Form N-CSR; and
(c) The Fund will post prominently a statement on its (or the
Investment Adviser's) Web site containing the information in each 19(a)
Notice, including the disclosure required by condition 2(a)(ii) above,
and will maintain such information on such Web site for at least 24
months.
4. Delivery of 19(a) Notices to Beneficial Owners
If a broker, dealer, bank or other person (``financial
intermediary'') holds common shares issued by the Fund in nominee name,
or otherwise, on behalf of a beneficial owner, the Fund: (a) Will
[[Page 42181]]
request that the financial intermediary, or its agent, forward the
19(a) Notice to all beneficial owners of the Fund's shares held through
such financial intermediary; (b) will provide, in a timely manner, to
the financial intermediary, or its agent, enough copies of the 19(a)
Notice assembled in the form and at the place that the financial
intermediary, or its agent, reasonably requests to facilitate the
financial intermediary's sending of the 19(a) Notice to each beneficial
owner of the Fund's shares; and (c) upon the request of any financial
intermediary, or its agent, that receives copies of the 19(a) Notice,
will pay the financial intermediary, or its agent, the reasonable
expenses of sending the 19(a) Notice to such beneficial owners.
5. Additional Board Determinations for Funds Whose Shares Trade at a
Premium
If:
(a) The Fund's common shares have traded on the stock exchange that
they primarily trade on at the time in question at an average premium
to NAV equal to or greater than 10%, as determined on the basis of the
average of the discount or premium to NAV of the Fund's common shares
as of the close of each trading day over a 12-week rolling period (each
such 12-week rolling period ending on the last trading day of each
week); and
(b) The Fund's annualized distribution rate for such 12-week
rolling period, expressed as a percentage of NAV as of the ending date
of such 12-week rolling period, is greater than the Fund's average
annual total return in relation to the change in NAV over the 2-year
period ending on the last day of such 12-week rolling period; then:
(i) At the earlier of the next regularly scheduled meeting or
within four months of the last day of such 12-week rolling period, the
Board, including a majority of the Independent Trustees:
(1) Will request and evaluate, and the Fund's Investment Adviser
will furnish, such information as may be reasonably necessary to make
an informed determination of whether the Plan should be continued or
continued after amendment;
(2) Will determine whether continuation, or continuation after
amendment, of the Plan is consistent with the Fund's investment
objective(s) and policies and in the best interests of the Fund and its
shareholders, after considering the information in condition 5(b)(i)(1)
above, including, without limitation:
(A) Whether the Plan is accomplishing its purpose(s);
(B) The reasonably foreseeable material effects of the Plan on the
Fund's long-term total return in relation to the market price and NAV
of the Fund's common shares; and
(C) The Fund's current distribution rate, as described in condition
5(b) above, compared with the Fund's average annual taxable income or
total return over the 2-year period, as described in condition 5(b), or
such longer period as the Board deems appropriate; and
(3) Based upon that determination, will approve or disapprove the
continuation, or continuation after amendment, of the Plan; and
(ii) The Board will record the information considered by it,
including its consideration of the factors listed in condition
5(b)(i)(2) above, and the basis for its approval or disapproval of the
continuation, or continuation after amendment, of the Plan in its
meeting minutes, which must be made and preserved for a period of not
less than six years from the date of such meeting, the first two years
in an easily accessible place.
6. Public Offerings
The Fund will not make a public offering of the Fund's common
shares other than:
(a) A rights offering below NAV to holders of the Fund's common
shares;
(b) An offering in connection with a dividend reinvestment plan,
merger, consolidation, acquisition, spin-off or reorganization of the
Fund; or
(c) An offering other than an offering described in conditions 6(a)
and 6(b) above, provided that, with respect to such other offering:
(i) The Fund's annualized distribution rate for the six months
ending on the last day of the month ended immediately prior to the most
recent distribution record date,\4\ expressed as a percentage of NAV as
of such date, is no more than 1 percentage point greater than the
Fund's average annual total return for the 5-year period ending on such
date,\5\ and
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\4\ If the Fund has been in operation fewer than six months, the
measured period will begin immediately following the Fund's first
public offering.
\5\ If the Fund has been in operation fewer than five years, the
measured period will begin immediately following the Fund's first
public offering.
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(ii) The transmittal letter accompanying any registration statement
filed with the Commission in connection with such offering discloses
that the Fund has received an order under section 19(b) to permit it to
make periodic distributions of long-term capital gains with respect to
its common shares as frequently as twelve times each year, and as
frequently as distributions are specified by or determined in
accordance with the terms of any outstanding preferred shares as such
Fund may issue.
7. Amendments to Rule 19b-1
The requested order will expire on the effective date of any
amendment to rule 19b-1 that provides relief permitting certain closed-
end investment companies to make periodic distributions of long-term
capital gains with respect to their outstanding common shares as
frequently as twelve times each year.
For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17637 Filed 7-19-10; 8:45 am]
BILLING CODE 8010-01-P