
[Federal Register: September 2, 2009 (Volume 74, Number 169)]
[Notices]               
[Page 45492-45495]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02se09-91]                         

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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.

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    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 http://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.
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    \1\ The mandatory redemption dates are as follows: Series D--
December 22, 2021; and Series E--December 11, 2024.
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    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.
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    \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.
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    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'').
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    \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).
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    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\
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    \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.
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    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.
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    \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.
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    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\
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    \6\ See supra note 1.
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    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.
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    \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.
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    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
