
[Federal Register: August 7, 2008 (Volume 73, Number 153)]
[Notices]               
[Page 46058-46062]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au08-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28348; 812-13377]

 
DNP Select Income Fund Inc., et al.; Notice of Application

July 31, 2008.
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 of Application:  Applicants request an order to permit a 
closed-end investment company to make periodic distributions of long-
term capital gains with respect to its outstanding common stock as 
frequently as twelve times each year, and as frequently as 
distributions are specified by or in accordance with the terms of any 
outstanding preferred stock that such investment company may issue.

Applicants:  DNP Select Income Fund Inc. (the ``Fund'') and Duff & 
Phelps Investment Management Co. (the ``Adviser'').

Filing Dates:  April 11, 2007 and July 24, 2008.

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 25, 2008, 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, 55 East Monroe Street, 
Suite 3600, Chicago, IL 60603, Attention: Nathan I. Partain.

FOR FURTHER INFORMATION CONTACT: Wendy Friedlander, Senior Counsel, at 
(202) 551-6837, or James M. Curtis, Branch Chief, at (202) 551-6825 
(Division of Investment Management, Office of Chief Counsel).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549-1520 (telephone (202) 551-5850).

Applicants' Representations

    1. The Fund is a registered closed-end management investment 
company organized as a Maryland corporation. The Fund's primary 
investment objectives are current income and long-term growth of 
income, with a secondary objective of capital appreciation.\1\ The 
Fund's common stock is listed on the New York Stock Exchange, and the 
Fund's preferred stock is not listed on any exchange. Applicants 
believe that the Fund's shareholders are generally conservative, 
income-sensitive investors who desire steady distributions of income 
and who will favor a distribution policy with respect to its common 
stock.
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    \1\ Applicants request that any order issued granting the relief 
requested in the application also apply to any closed-end investment 
company that in the future: (a) is advised by the Adviser (including 
any successor in interest) or by any entity controlling, controlled 
by, or under common control (within the meaning of section 2(a)(9) 
of the Act) with the Adviser; and (b) complies with the terms and 
conditions of the requested order. 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. The Adviser is registered under the Investment Advisers Act of 
1940 and is responsible for the overall management of the Fund and 
other registered investment companies and institutional accounts.
    3. Applicants represent that on February 21, 2007, the Board of 
Directors (the ``Board'') of the Fund, including a majority of the 
directors who are not ``interested persons'' of the Fund as defined in 
section 2(a)(19) of the Act (the ``Independent Directors''), reviewed 
information regarding the purpose and terms of a proposed distribution 
policy, the likely effects of such policy on the Fund's long-term total 
return (in relation to market price and net asset value (``NAV'') per 
common share) and the relationship between the Fund's distribution rate 
on its common shares under the policy and the Fund's total return on 
NAV per share. Applicants state that the

[[Page 46059]]

Independent Directors also considered what conflicts of interest the 
Adviser and the affiliated persons of the Adviser and the Fund might 
have with respect to the adoption or implementation of the policy. 
Applicants further state that after considering such information the 
Board, including the Independent Directors, of the Fund approved a 
managed distribution policy and related plan with respect to the Fund's 
common shares (the ``Plan'') and determined that such policy and Plan 
are consistent with the Fund's investment objectives and in the best 
interests of the Fund's common stockholders.
    4. Applicants state that the purpose of the Plan is to provide to 
the Fund's common stockholders a regular, monthly distribution that is 
not dependent on the timing or amount of investment income earned or 
capital gains realized by the Fund. Applicants represent that, under 
the Plan, the Fund will distribute all available investment income to 
common stockholders, consistent with the Fund's primary investment 
objective of current income and long-term growth of income. Applicants 
state that, if and when sufficient investment income is not available 
on a monthly basis, the Fund will distribute long-term capital gains 
and/or return of capital to its stockholders to maintain the level 
distribution rate that has been approved by the Board. Applicants state 
that the minimum annual distribution rate will be independent of the 
Fund's performance during any particular period but is expected to 
correlate with the Fund's performance over time. Applicants note that 
the amount and frequency of distributions may be amended at any time by 
the Board without prior notice to the Fund's shareholders. Applicants 
explain that if the Fund's net investment income and net realized 
capital gains for any year exceed the amount required to be distributed 
under the Plan, the Fund will, at a minimum, make distributions 
necessary to comply with the distribution requirements of subchapter M 
of the Internal Revenue Code of 1986 (the ``Code''). Applicants state 
that the Plan provides that it can be amended, suspended or terminated 
at any time by the Board without prior notice to the Fund's 
shareholders.
    5. Applicants state that at the February 21, 2007 meeting, the 
Board also adopted policies and procedures under rule 38a-1 under the 
Act that are reasonably designed to ensure that all notices sent to the 
Fund's stockholders with distributions under the Plan (``Notices'') 
comply with condition II below, and that all other written 
communications by the Fund or its agents regarding distributions under 
the Plan include the disclosure required by condition III below. 
Applicants state that the Board also adopted policies and procedures at 
that meeting that require the Fund to keep records that demonstrate the 
Fund's compliance with all of the conditions of the requested order and 
that are necessary for the Fund to form the basis for, or demonstrate 
the calculation of, the amounts disclosed in its Notices.

Applicants' Legal Analysis

    1. Section 19(b) generally makes it unlawful for any registered 
investment company to make long-term capital gains distributions more 
than once each year. Rule 19b-1 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) 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 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 underlying section 
19(b) and rule 19b-1 is that shareholders might be unable to 
differentiate between regular distributions of capital gains and 
distributions of investment income. Applicants state, however, that 
rule 19a-1 effectively addresses this concern by requiring that a 
separate statement showing the sources of a distribution (e.g., 
estimated net income, net short-term capital gains, net long-term 
capital gains and/or return of capital) accompany any distributions (or 
the confirmation of the reinvestment of distributions) estimated to be 
sourced in part from capital gains or capital. Applicants state that 
the same information also is included in the Fund's annual reports to 
shareholders and on its IRS Form 1099 DIV, which is sent to each common 
and preferred shareholder who received distributions during the year.
    4. Applicants further state that the Fund will make the additional 
disclosures required by the conditions set forth below, and has adopted 
compliance policies and procedures in accordance with rule 38a-1 to 
ensure that all required 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, the 
Fund would ensure that the Fund's stockholders are provided sufficient 
information to understand that their periodic distributions are not 
tied to the Fund's net investment income (which for this purpose is the 
Fund's taxable income other than from capital gains) and realized 
capital gains to date, and may not represent yield or investment 
return. Applicants also state that compliance with the Fund's 
compliance procedures and condition III set forth below will ensure 
that prospective shareholders and third parties are provided with the 
same information. Accordingly, Applicants assert that continuing to 
subject the Fund to section 19(b) and rule 19b-1 would afford 
stockholders no extra protection.
    5. Applicants note 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 Fund, which do not continuously distribute shares. 
According to 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 the Plan actually 
helps minimize the concern by avoiding, through periodic distributions, 
any buildup of large end-of-the-year distributions.
    6. Applicants also note that common stock of closed-end funds that 
invest primarily in equity securities often trade in the marketplace at 
a discount to their NAV. Applicants believe that the Fund's history of 
making regular, monthly distributions has had a significant positive 
effect on the market price of the Fund's common stock.
    7. Applicants assert that the application of rule 19b-1 to a Plan

[[Page 46060]]

actually could have an undesirable influence on portfolio management 
decisions. Applicants state that, in the absence of an exemption from 
rule 19b-1, the implementation of a 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 thus 
assert that the limitation on the number of capital gain distributions 
that a fund may make with respect to any one year imposed by rule 19b-
1, may prevent the efficient operation of a 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 under a Plan 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 realized net long-term capital gains otherwise could 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 Plan, or 
to retain and pay taxes on the excess amount. Applicants thus assert 
that the requested order would minimize these effects of rule 19b-1 by 
enabling 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 stock and preferred stock 
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 the tax year.\3\ 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 stock 
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 
the rule for a tax year and still need to distribute additional capital 
gains allocated to the preferred stock to comply with Revenue Ruling 
89-81.
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    \3\ The Internal Revenue Service has agreed, in Private Letter 
Rulings 8842048, 8850018, 200332005 and 200604008, that the Fund's 
remarketed preferred shares (but not its auction preferred shares) 
are entitled to the benefit of the ``grandfather clause'' of Revenue 
Ruling 89-81, in that the Fund is permitted to make a preferential 
allocation to the remarketed preferred shares of dividends eligible 
for the dividends received deduction in accordance with the 
registration statements for the remarketed preferred shares filed in 
July and August of 1988. In all other respects, Revenue Ruling 89-81 
is applicable to the Fund's common and preferred shares.
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    10. Applicants assert that the potential abuses addressed by 
section 19(b) and rule 19b-1 do not arise with respect to preferred 
stock issued by a closed-end fund. Applicants assert that such 
distributions are either fixed or are determined in periodic auctions 
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 the long-term 
capital gains.
    11. Applicants also submit that the ``selling the dividend'' 
concern is not applicable to preferred stock, 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 state 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.
    12. Applicants request an order under section 6(c) granting an 
exemption from the provisions of section 19(b) and rule 19b-1 to permit 
the Fund (and any future funds advised by the Adviser that have a 
similar distribution plan and make similar representations to those set 
forth in the application) to distribute periodic capital gains 
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 its preferred shares.\4\
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    \4\ Applicants state that a future fund that relies on the 
requested order will satisfy each of the representations in the 
application except that such representations will be made in respect 
of actions by the board of directors of such future fund and will be 
made at a future time.
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Applicants' Conditions

    Applicants agree that, with respect to the Fund and each future 
fund seeking to rely on the order, the order will be subject to the 
following conditions:
    I. Compliance Review and Reporting. The fund's chief compliance 
officer will: (a) report to the fund Board, no less frequently than 
once every three months or at the next regularly scheduled quarterly 
board meeting, whether (i) the fund and the fund adviser have complied 
with the conditions to the requested order, and (ii) a Material 
Compliance Matter, as defined in rule 38a-1(e)(2), has occurred with 
respect to compliance with such conditions; and (b) review the adequacy 
of the policies and procedures adopted by the fund no less frequently 
than annually.
    II. Disclosures to Fund Shareholders:
    A. Each Notice to the holders of the fund's common shares, in 
addition to the information required by section 19(a) and rule 19a-1:
    1. Will provide, in a tabular or graphical format:
    (a) The amount of the distribution, on a per share basis, together 
with the amounts of such distribution amount, on a per 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;
    (b) The fiscal year-to-date cumulative amount of distributions, on 
a per share basis, together with the amounts of such cumulative amount, 
on a per 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;
    (c) 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 declaration date compared to the 
current fiscal period's annualized distribution rate expressed as a 
percentage of NAV as of the last day of

[[Page 46061]]

the month prior to the most recent distribution declaration date; and
    (d) 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 declaration 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 declaration 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
    2. Will include the following disclosure:
    (a) ``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'';
    (b) ``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' ''; and
    (c) ``The amounts and sources of distributions reported in this 
Notice are only estimates and are not being provided for tax reporting 
purposes. The actual amounts and sources of the amounts for [accounting 
and] 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 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:
    1. Describe the terms of the Plan (including the fixed amount or 
fixed percentage of the distributions and the frequency of the 
distributions);
    2. Include the disclosure required by condition II.A.2(a) above;
    3. 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
    4. Describe any reasonably foreseeable circumstances that might 
cause the fund to terminate the Plan and any reasonably foreseeable 
consequences of such termination.
    C. Each report provided to shareholders under rule 30e-1 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.
    III. Disclosure to Shareholders, Prospective Shareholders and Third 
Parties:
    A. The fund will include the information contained in the relevant 
Notice, including the disclosure required by condition II.A.2 above, in 
any written communication (other than a 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 
shareholder, prospective shareholder or third-party information 
provider;
    B. The fund will issue, contemporaneously with the issuance of any 
Notice, a press release containing the information in the Notice and 
will file with the Commission the information contained in such Notice, 
including the disclosure required by condition II.A.2 above, as an 
exhibit to its next filed Form N-CSR; and
    C. The fund will post prominently a statement on its (or its 
adviser's) Web site containing the information in each Notice, 
including the disclosure required by condition II.A.2 above, and will 
maintain such information on such web site for at least 24 months.
    IV. Delivery of 19(a) Notices to Beneficial Owners: If a broker, 
dealer, bank or other person (``financial intermediary'') holds common 
stock issued by the fund in nominee name, or otherwise, on behalf of a 
beneficial owner, the fund: (a) Will request that the financial 
intermediary, or its agent, forward the 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 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 
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 Notice, will pay the financial intermediary, or its 
agent, the reasonable expenses of sending the Notice to such beneficial 
owners.
    V. Additional Board Determinations for Funds Whose Shares Trade at 
a Premium: If:
    A. The fund's common shares have traded on the 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:
    1. 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 Directors:
    (a) Will request and evaluate, and the fund's 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;
    (b) 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 V.B.1.a 
above; including, without limitation:
    (1) Whether the Plan is accomplishing its purpose(s);
    (2) The reasonably foreseeable 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
    (3) The fund's current distribution rate, as described in condition 
V.B above, compared with the fund's average annual taxable income or 
total return over the 2-year period, as described in condition V.B, or 
such longer period as the Board deems appropriate; and
    (c) Based upon that determination, will approve or disapprove the 
continuation, or continuation after amendment, of the Plan; and
    2. The Board will record the information considered by it and the 
basis for its approval or disapproval of

[[Page 46062]]

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.
    VI. 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 
stock;
    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 VI.A 
and VI.B above, unless, with respect to such other offering:
    1. The fund's average annual distribution rate for the six months 
ending on the last day of the month ended immediately prior to the most 
recent distribution declaration date,\5\ expressed as a percentage of 
NAV per share 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; \6\ and
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    \5\ If the fund has been in operation fewer than two years, the 
measured period will begin immediately following the fund's first 
public offering.
    \6\ 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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    2. 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 stock 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 stock that such 
fund may issue.
    VII. Amendments to Rule 19b-1: The requested order will expire on 
the effective date of any amendments to rule 19b-1 that provide relief 
permitting certain closed-end investment companies to make periodic 
distributions of long-term capital gains with respect to their 
outstanding common stock as frequently as twelve times each year.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-18150 Filed 8-6-08; 8:45 am]

BILLING CODE 8010-01-P
