SEC Division of Investment Management staff letter: Dessauer Global Equity Fund

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CHIEF COUNSEL, DIVISION OF The Dessauer Global Equity Fund INVSTMNT MAAGEMNT File Nos. 811-7691: 333-7543 Your letter dated April 3, 1997, requests our assurance that we would not recommend enforcement action to the Commssion under
Section 13 (a) (1) of the Investment Comany Act of 1940 (the "1940 Act-i against Guinness Flight Investment Magement Limted of .
London, England and Pasadena, California ("Guinness Flight"), Dessauer Asset Management Company ("DAMCO"), or The Dessauer Global Equity Fud (the "Fund") if, upon the occurrence of certain events described in the Fund's prospectus, the Fund

converts from a closed-end to an open-end investment company

without seeking and obtaining authorization of the holders of a

majority of the Fund's outstanding voting securities.

Facts
The Fund is a closed-end investment company that has filed a

registration statement on Form N-2 with the Commission. The Fund

will be managed jointly by Guinness Flight and DAMCO, both

registered investment advisers. The Fund's investment objective

is to seek capital growth through investments in companies

organized in countries 'around the world.

You state that the Fund's Declaration of Trust includes a

provision that requires the Fund to convert. automatically from a

closed-end to an open-end fund upon the occurrence of certain

events (the "Automatic Conversion Provision") . 11 Specifically,

the Automatic Conversion Provision provides that the Fund will

convert to an open-end fund if, at any time after the Fund has

been in operation for 18 months, the Fund's shares trade at more

than a specified discount to net asset value as calculated on the

last business day of any week and for each of the next 14

business days thereafter. The Automatic Conversion Provision

does not require that the Fud seek and obtain the authorization' of the Fund's shareholders. ál . ' .

You represent that, if and when the events specified by the

Automatic Conversion Provision occur, the Fund's officers and

trustees promptly will take all necessary steps to conve~t, the

1.1 You represent that the Automatic Conversion Provision is
consistent with business trust law in the state in which the Fund is organized. \ 2J You also represent that the Fund's Declaration of Trust 'provides that the Automatic Conversion Provision may be

amended only upon approval of 80l or more of the Fund's

outstanding voting securities.

,
)
Fund to an open-end investment company.~1 The disclosure in

the Fund's registration statement on Form N-1A relating to the

Fund's investment objective and policies will be substantially

identical to the disclosure in the Fund's registration statement

on Form N - 2 . You further represent that conversion of the Fund

into an open-end investment company will not disadvatage the

Fund or its shareholders because the Fund's investment operations

prior to the conversion will be entirely consistent with the

operations of an open-end investment company.~1

Analysis .
Section 5 (a) of the 1940 Act classifies all management

investment companies as either "open-end" or "closed-end"

companies. Section 5 (a) (1) defines an "open-end company" as "a

management company which is offering for sale or has outstanding

any redeemale security of which it is the issuer." Section

5 (a) (2) defines a "closed-end company" as "any management company other than an open-end company." Section 13 (a) (1) of the 1940 Act prohibits a management investment company from changing its subclassification as defined in Section 5 (a) (1) or 5 (a) (2) of the 1940 Act unless authorized by a vote of a maj ority of its

outstanding voting securities.

Section 8 (b) of the 1940 Act provides,' in relevant part:

Every registered investment company shall tile with the

Commission . . . a registratio~ statement . . .

containing . . . (1) a recital of, the policy of the

registrant . . . consisting of a statement whether the

registrant reserves freedom of action to engage in

activities of such type, and if such freedom of action

"JI You represent that the conversion will be effected even if the Fund ceases to trade at a discount before the date the conversion is completed. Promptly after the Automatic Conversion Provision is triggered, a press release will be issued to announce that the Fund will convert as soon as reasonably possible to an open-end investment company, and to disclose the proj ected conversion date. You represent that the Fund promptly will take all steps necessary to convert to an open-end investment company, including the filing of a registration statement on Form N-1A. 41 For exaple, in accordance with the Commission's position on illiquid investments by open-end investment companies, you represent that the Fund's registration statement will state that the Fund may not invest more than 15l of its net assets (at the time of investment) in illiquid assets. Revisions

of Guidelines to Form N-IA, Investment Company Act Release

No. 18612 (Mar. 12, 1992); Guide 4 to Form N-1A.

2 I

is reserved, a statement briefly indicating, insofar as is practicable i. the extent to which the registrant intends to engage therein: (A) the classification and

subclassifications, as defined in sections 4 and 5,

wi thin which the registrant proposes to operate ....

The legislative history of the 1940 Act suggests that

Congress intended Sections 8 and 13 to require a fund to make

adequate disclosure of its fundamental policies, and not change

those policies without the approval of a majority of the fund's

shareholders.ll Section 8 (b) was intended "to apprise the

prospective purchaser of the investment company's security of

(sic) the nature of its activities. w~i The language of Section 8 (b) (1) (A) indicates that Congress intended to permit funds to retain a degree of flexibility with respect to their .

subclassifications, so long as the fund discloses all material

facts with respect to its proposed activities, and the

circumtances under which the flexibility will be exercised. 71

Congress enacted Section 13 (a) to prevent an investment company

from changing fundamental investment or management policies

~i S. Rep. No. 1775, 76th Cong., 3d Sess. 13 (1940).

~i Investment Trusts and Investment Companies: Hearings on S.
3580' before the Senate Subcomi. on. Baning and Currency, 76th Cong., 3d Sess., Part I, 188 '(1940) ("Hearings on S.

3580") -(statement of David Schenker of the Securitie's and

,Exchange Commission). Mr. Schenker's testimony also referred to the requirements of Sections 5, 8 (b) (1) and 13 as "integrally interrelated n so as to meet the - "problem of

disclosure to stockholders." Id. See also PaineWebber

Series Trust (pub. avail. Nov. 12, 1987).

1.1 Cf. American Research and Dev. Corp. ("AR"), 23 S.E.C. 481
(1946). AR involved a closed-end fund that disclosed its intention to operate as a nondiversified company; pending

the full investment of its assets, however, the fund would

in fact be a diversified company. Once fully invested, the fund would automatically convert to the status 'of a nondiversified company. The Commssion found that despite

the requirement in Section 13 (a) that shareholders approve

changes to a fund's subclassification, such approval would

not be necessary because the fund would be operating within the subclassification "which the registrant propose (d) , to operate," as required by Section 8 (b) (1). AR at 490, quoting Section 8 (b) (1). The Commssion determned that apprising investors as to how the registrant intended to

operate met the statutory purposes of Section 13 (a) (1) of the 1940 Act because, if fully disclosed, there would be no

substantial injury to the fund's shareholders.
) 3
\

without the knowledge and authorization of its shareholders .~I

You represent that, in accordance with Section 8 (b) (1) (A) of the 1940 Act, the Fund will disclose prominently in ,its prospectus the existence, term and implications of the Automatic

Conversion Provision. The Fud's prospectus also will explain clearly the differences between an open-end company and a closed-

end company, including the differences in methods of distributing

and redeeming shares of the Fund, and will disclose prominently

any new fees that may be imposed on the Fund or its shareholders

after the Conversion Date.

You acknowledge that, upon the occurrence of certain

specified events, the Fund's subclassification under Section 5 (a) would ch~nge without shareholder approval. You maintain,

however " that this change would not occur in violation of

Section 13 (a) (1), but rather would be in accordance with the
Fund's policy on its subclassification, as disclosed in the

prospectus. You therefore maintain that, because the Fud is not

changing its disclosed policies regarding its subclassification,

no shareholder vote should be required. You also state that,

because no material change in the investment operations of the

Fund will occur as a result of or in connection with a conversion to open-end status, the concerns underlying Section 13 (a) are not implicated. We would not recommend enforcement action to the Commission

under Section 13 (a) (1) of the 1940 Act if the Fund converts from a closed-end to an open-end company upon the occurrence of the

events specified in the Automatic Conversion Provision without

the authorization of the majority of the Fund's outstanding

voting securities. This response is based on the representations

made in your letter, particularly the following:

(1) the Fund's investment operations will not be changed in

any material. respect as a result of or in connection with

the conversion;

(2) the events that will trigger the conversion are entirely

objective and readily verifiable;

~I See, e.g., Hearings on S. 3580 at 234 and 421. Prior to the

enactment of the 1940 Act, there was no legal requirement

for a management investment company to adhere to any

announced investment policies or purposes. Such 'policies

frequently were changed radically without shareholder

approval and even without their knowledge. The shareholders

of the company had no assurance of the stability of any

announced investment policies and no vote in management's

determination to change the company's existing policies.

S. Rep. No. 1775, 76th Congo 3d Sess. 7-8 (1940).
4

(3) the Automatic Conversion Provision will be included in

the Fund's initial governing documents;

(4) the Fund's prospectus prominently will describe the

Automatic Conversion Provision and the events that will

trigger a conversion;

(5) the Automatic Conversion Provision may be amended only

as specified in the Fund's prospectus; and

(6) the Fund's advertisements and sales, literature,

including dealer- only sales material, used to market shares

of the Fund will discuss the
Automatic Conversion Provision

and the events that will trigger a conversion.

You should note that different facts or representations may

require a different conclusion.~1

tJu441;f//¿
Wendy Finck Friedlander

Senior Counsel

~I This response is limited to the conversion of a fund from closed-end to open-end status, and expressly does not address any other instances in which shareholder approval is required by the 1940 Act. 5

KRAMER, LEVIN, NAFTALIS & FRANKEL

919 THIRD AVENUE
NEW YORK. N.Y. 10022 - 3852 FAX
(2121715 - 9100 12121715-80
WRTER'S DIRECT NUMBER

(2121715,7514
Apri 3, 1997

Wendy Friedlander, Esq.

Division of Investment Mangement

U. S. Securities and Exchage Commssion
450 Fift Street, N. W.

Washigton, DC 20549
Dear Wendy:
On behalf of our client, Guinss Flight Investment Mangement Limited of London, England and Pasadena, Californa ("Guiness Flight"), and Dessauer Asset Management Company ("DAMCO"), each a registere investment adviser, and The Dessauer Global Equity Fund, a closed-end investment company organ as a Delaware Business Trust (the "Fund"), we request tht the staff tae a no-action position on the issue herein discussed, which pertin to Sections 13(a)(I), 8(b)(1) and 5(a)(I) and (2) of the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund med a registrtion statement on Form N-2 with the Securities and Exchage Commission ("SEC") on July'3, 1996 (a copy of which is attched hereto). The Fund's investment objective is to seek loiìg-term capita appreiation. The Fund wil seek to achieve its investment objective by investing priy in the seurties of issuers tht it believes are positioned to benefit from growt in the global economy. Generally, the companies in which the Fund intends to invest wil be trded in the markets of, or wil derive a substatial portion of their revenues from, business activities with Nort America (the U.S. and Canda), Western Euope, Asia and Japan. Under norml maket conditions, the Fund wil invest at-least 65% of its tota assets _in a portolio of eqity seurities of

companes locate in at least th different countres. The Fund wil be maged jointly by DAMCO and Guiness Flight. Although the Fund is classified as a close-end investment company, its Declaration of Trust includes a provision tht reuirs the Fun to convert under certin

circumstaces to an open-end investment company ("Automatic Conversion Provision"). The Declaration of Trust (including the above-mentioned provision) wil be approved by the Board of Trustes at the Fund's organtiona meetig. Delaware statutory law does not

require approval by shaeholders of a chage of an investment company's status. Thus, at the time of conversion the Fund's curent shaeholders wil not be asked to vote on the Fund's change from a closed-end to an open-end investment company. KL:13740,S

Wendy Friedlander, Esq.
April 3, 1997

The Declaration of Trot provides tht beging aftr 18 month from the date of the intial public offerig, the Fun wil automaticaly convert into an open-end investment company if its shares close at a 5 % or grter discunt from the net asset value of

the Fund as calculate on the last business day of any week an for each of the next 14 business days thereafter. A business day is any day tht the New York Stock Exchage is opeii. Ths provision may be amended only by the affirmative vote of at least 80% of the Fund's outstading voting seurities. On the Automatic Conversion Provision is trggered,

the Fund may not continue as a closed-end investment company even if the Fund cees to trade at a discount. With one week thereaftr, the Fund wil me a registration statement on Form N-IA. The disclosure concern the Fund's investment policies contained in the registration statement on Form N-IA wil be substatially identical to the disclosure contained in the current registration statement on Form N-2. The purpose of ths letter is to request tht the staff agree to tae no enforcement action if the Fund reserves the from of action pursuat to Section 8(b)(1) of

the 1940 Act to convert from a closed-end investment company to an open-end investment company under the above describe cirumtaces.

BacklZround .
Generally, shaes of open-end investment comp~es are redeemed by the issuer at net asset value, Shaes of closed-end investment companes, on the other had, are traded in secondary markets either on exchages or over-the-counter and are not redeemed by the issuer. The market price of closed-end investment company shaes can be significantly discounted from the net asset value of the shaes. Accordingly, shaeholders of closed-end investment companes who sell their shaes in a seonda maket may find tht the price of their shares does not reflect the net asset value of the investment company. To entice. investors to purchase shas, may close-end investment companes , disclose in their prospetus tht certin actions may be taen to min the discount of the. shaes, including, but not limte to, convertg to an open-end investment company.

However, may of these fuds which mae ths claim never do convert to open-end status. Recently the staff of the Division of Investment Mangement ha recived complaints from investors who allege tht they have ben miled in connection with the

disclosure by closed-end investment companes which imply tht they wil convert to open￾end status under certin circumtaces. In a lettr to the Investment Company Institute dated

February 15, 1996, the staff state tht it believes tht "vague references to the conditional

or discretiona nature of the actions to be taen (to minimi7.. a discount) may be misleading

to investors." In ths regard, the staff has underten to conduct an exaintion of the disclosure practices of closed-end investment companes regarding steps tht may be taen to reduce unwieldy trading discounts. KL:137408.5

Wendy Friedlander, Esq.
April 3, 1997

In light - of these curnt developments, the Fund has propose an Automatic Conversion Provision which would be trggere by the ocUrence of certin events. The

Automatic Conversion Provision does not provide either Guinss Flight or DAMCO with the discretion to determe whether the Fund should convert to an open-end investment company and is not subject to chage by vote of curnt shaeholders (except by an amendment to the Declaration of Trost upon approval of 80% or more of the Fund's outstanding voting seurties).

Legal Anlysis
Section 8(b)(1) of the 1940 Act requires the registrtion statement of an

investment company to recite its policy with respet to classification as a closed-end or open￾end investment company. Ths recital should consist of a statement whether the investment company reserves the freedom of action to engage in certin activitiçs, and if such freedom of action is reserved, a statement briefly indicating the extent to which the investment company intends to engage therein. Section 13(a)(1) of the 1940 Act prohibits a registered investment company from changing its subclassification as an open-end or closed-end majority of its outstading voting securities. These sections were promulgated to protect shaeholders by preventing mangement from makg changes in the basic character of an investment company which are contr to the reasonable' expectations of shaeholders. (3 Franel, Regulation of Monev Managers § 26.1 investment company without a vote of a

at 217-218)
The concern addressed by Congress in promulgating Sections 8(b)( 1) and 13(a) of the 1940 Act wil not be subvert by the Automatic Conversion Provision.

Guiness Flight and DAMCO wil promiently disclose in the Fund's Prospetus and in its marketing material that it is a closed-end investment company with the possibilty of becoming an open-end investment company, thereby avoiding any surises to shaeholders

of the Fund in converting to an open-end investment company. The Fund's prosptus wil prominently disclose the details of the Automatic Conversion Provision and wil explain the differences between an open-end investment - company an a close-end investment company including a discussion concerng the reemption of shaes. Shaholders wil be assured tht the Fund's investment objectives, policies and tehnques wil not be chaged. Any new fees (such as Rule 12b-1 distrbution fees) tht may be incur by shaeholders of an open￾end investment company wil be disclose.

The Fund's advertisements and sales literatu (including dealer-only sales material) wil also describe the Automatic Conversion Provision, thereby providing potential investors (including those tht purchase shaes in a seonda maket) with inonnation concerng the mechansm for open-ending the Fund. Brokers selling shaes of the Fund wil be inonned of and encouraged to discuss the Automatic Conversion Provision with their KL:137408,5

Wendy Friedlander, Esq.
April 3, 1997

clients. In addition, once the Automatic Conversion Provision is trggered, a press release wil be issued that inorms the public tht, in fact, the Fund wil shorty convert to an open￾end investment company. We believe that the shaholders' best interests wil be protete by permtting the Fund to automatically convert to an open-end investment company when a spcified discount is reached and maintained for a' speified number of trding days. Investors who purchase shaes of a closed-end investment company in its intial public ,offerig are exposed to a market risk because the shaes of close-end investment company tyically trade at a discount to the net asset value of their portfolios. . A conversion of a closed-end investment company to an open-end investment company would elimte ths discount. In addition, a shareholder of an open-end investment company can reeem at any time at net asset value. Based on the above, it is. our view tht the spirt of Sections 8(b)(1) and

13(a)(1) wil not be violated by the Fund's automatic conversion to an open-end investment company. Shareholders wil be fully inormed tht the Fund is a closed-end investment company tht wil convert to an open-end investment company if certin spcifed events

occur. The existing investment objective and policies of the Fund wil contiue aftr conversion to' open-end status. The Fund wil be maged by the same persons and in substantially the same maner. Any differences in the distrbution methods of the Fund wil be fully. disclose~ in the prospetus. ' In conclusion, the Automatic Conversion Provision would be meangless if an intervenig event, were required prior to the Fund's conversion to an open-end investment

company. Shareholders' interests are best protete by prohibiting any taperig by

mangement or other shaeholders. We believe the interests of shaeholders and the concern of the staff wil be addressed by the Automatic Conversion Provision of the Fund

and ask that the staff concur in our anlysis.
If you have any questions or reir any additiona inormtion pleas do not

hesitate to call the undersigned at (212) 715-7514 or Louis Citron at (212) 715-751L. Very tnly your,

Ox t_ ~VtW1
A viva L. Grossma
KL:13740.S