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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20S49
DIVISION OF
INVESTMENT MANAGEMENT
June 18, 2013
Philippe M. Salomon, Esq.
Blank Rome LLP
405 Lexington Avenue
NewYork,NY 10174-0208
Re:
Letter, Dated AprilS, 2013, from the Staff of the Securities and Exchange Commission
("Commission"), Declining the Request of Copley Fund, Inc. ("Copley") for Assurance
that the Staff Would Not Recommend Enforcement Action to the Commission against
Copley ("Staff Response")
Dear Mr. Salomon:
Thank you for your letter, dated April12, 2013, concerning Copley's request for Staff
no-action assurance. In that letter, you requested that the Commission review the Division of
Investment Management's Staff Response and that "a final written order be issued by the
Commission, over-ruling the Staff Response and granting no-action assurance."
The Staff Response was issued under Rule 202.l(d) ofthe Commission's Rules of
Informal and Other Procedures (17 C.F.R. 202.1(d)). Therefore, we are interpreting your request
as being made pursuant to that Rule. Under Rule 202.1 (d), the Division may present a request
for Commission review of a Division no-action response if it concludes that the request involves
a matter "of substantial importance and where the issues are novel or highly complex." The
Staff has carefully considered your request against this standard. After such careful
consideration, we have determined not to present your request to the Commission.
Please note that copies of all of the correspondence on which this response is based will
be made available on our website at http://www.sec.gov/divisions/investment/im-noaction.shtml.
Thank you again for your letter.
Very truly yours,
~~
~u~lat1scheidt
Associate Director and Chief Counsel
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Pflone:
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Email:
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April 12, 2013
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APR 15 2013
Chairwoman Mary Jo White
Commissioners of the Securities
and Exchange Commission
U.S. Securities and Exchange Commission
c/o Office of the Secretary, Elizabeth M. Murphy
100 F. Street, N.E., Mail Stop 1090
Washington, D.C. 20549-4720
OFFICEOFTHE SECRETARY
Re: Copley Fund, Inc.: Application for Full Commission Review of the Staff's
Denial of No-Action Assurance; Rule 22c-1 promulgated under the
Investment Company Act of 1940 and Rule 4-0l(a)(l) of Regulation S-X
Dear Commissioners:
This Firm represents Copley Fund, Inc. ("Copley" or the "Fund") and, on its behalf,
submits this application to the Commissioners of the Securities and Exchange Commission (the
"Commission" or "SEC") for a full de novo review of the Division oflnvestment Management's
April 5, 2013 denial (the "Staff Response," annexed hereto as Exhibit 1) ofthe Fund's March 28,
2012 request for No-Action relief (the "March Request," annexed hereto as Exhibit 2). As
demonstrated more fully in the March Request, the Fund, which has a unique structure and
unusual tax issues, seeks the right to alter the current manner in which it has been mandated by
the SEC to account for deferred Federal tax liability for unrealized gains by establishing a tax
reserve based on a management developed pre-set formula. This approach, which it employed
with SEC approval from 1992 to 2007, will result in a fair and more accurate disclosure of its
current and ongoing financial operations, together with its net asset value.
The Staff Response did not address Copley's principal argument. As detailed in the
annexed March Request, the Commission's refusal since 2007 to permit Copley's management
to exercise any discretion with respect to deferred tax accounting differs from its treatment of
other similarly situated companies. The Weyerhaeuser Corp. and American Tower Corp. are two
examples. Apparently, both companies have been permitted to depart from a literal reading of a
required tax accounting provision under analogous circumstances.
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California
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Pennsylvania
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Chairwoman Mary Jo White
Aprill2, 2013
Page2
Accordingly, Copley requests that a final written order be issued by the Commission,
over-ruling the Staff Response and granting no-action assurance. In support, ,Copley offers this
summary and incorporates by reference, as if fully set forth herein, the arguments and proposals
made in the March Request, as well as in its prior submissions annexed thereto.
Background
Since 1992, Copley has maintained that the accrual for unrealized capital gains taxes is
best represented by a "reserve" established by its Board, rather than the use of a full liquidation
value accrual to calculate the Fund's NAY. For fifteen years (i) this method withstood scrutiny,
(ii) the SEC did not require that it be changed and (iii) the reserve was never used. (See March
Request at 7.)
In August of2007, the Stafftook issue with Copley's accounting for, and disclosure of,
tax reserves for unrealized appreciation in its financial statements filed for the year ended
February 28, 2007. It is not clear from the Staffs correspondence what caused it to alter its view
in 2007 and suddenly require Copley to change its methodology. Nonetheless, Copley's Board
approved an adjustment of the Fund's NAY using the Commission's preferred full liquidation
value methodology.
On AprilS, 2013, the Staff responded to the March Request. It concluded that Copley's
proposal would not "comply with GAAP as it would result in Copley recognizing only a portion
of the deferred tax liability required by ASC 740." (See StaffResponse at 3.) It also noted that,
for purposes of Rule 2a-4(a)(4), an appropriate provision for Federal income taxes should not be
made in any manner other than one that is consistent with GAAP. !d.
Basis for de Novo Review
The Fund's use of the Staffs mandated methodology, under which it records the entire
deferred tax liability, has led to a materially misleading reported NAY since 2007. This result
derives from the facts that the Staffs method (i) does not accurately reflect Copley's investment
policy and practice of long-term holdings of its positions; (ii) understates the amount of invested
assets actually under management on which gains or losses are actually realized; and (iii)
overstates the Fund's operating expense ratio (by including as expenses deferred taxes, which are
not actual or realized operating expenses). (See March Request at 6-7.) It is in the best interest
of the Fund's shareholders to reserve for deferred tax liability in a manner that allows the per
share NAY to reflect more accurately the true value of the Fund's shares.
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COUNSELOR S AT LAW
Chairwoman Mary Jo White
April12, 2013
Page 3
The Fund's proposed alternative methodologies will calculate the reserve using a pre-set
formula that it believes will be acceptable to the Commission and should allay any of its
concerns. (See March Request, discussion of proposed methodologies at 11-15.) The Fund
would also consider any other alternative methodologies that the Commission feels would result
in more accurate disclosures.
The Staff has argued that a management established reserve, rather than a deferred tax
liability reflecting the full liquidation, would violate GAAP, and specifically FAS 109 and re
codified ASC 740. The reserve methodology, however, is actually more consistent with the
assumptions, constraints and conventions underlying GAAP than the full liquidation value
methodology. Even assuming, arguendo, that the Fund's proposed reserve methodology would
depart from ASC 740, GAAP does allow for certain flexibility where, for instance, the strict
adherence to GAAP appears unreasonable under the circumstances and/or would produce
misleading results. The Commission has appropriately recognized this concept. (See March
Request at 8-9.) Here, the use of the full liquidation value method has produced a skewed and
unreasonable result - Copley's per share NAV does not reflect the realistic value of the Fund
and, therefore, such flexibility is warranted.
The Staff asserts that ASC 740 does not allow for any discretion or flexibility with
respect to accounting for deferred tax liability. There is, however, evidence to the contrary, as
the SEC has permitted certain flexibility to depart from a strict interpretation of GAAP or other
tax accounting provisions where doing so would lead to more accurate reporting.
We are aware of at least two entities- Weyerhaeuser and American Tower - that
converted from C Corporations into real estate investment trusts ("REITs") and, in doing so,
exercised discretion with respect to accounting for deferred tax liabilities. Neither Weyerhaeuser
nor American Tower have been required by the SEC to account for deferred tax liabilities
associated with "built-in gains" - presumably based on the conclusion that the likelihood of
disposing of such assets within the applicable 10-year recognition period is exceedingly remote.
(See March Request, discussion of Weyerhaeuser and American Tower at 9-1 0.) Copley submits
that the SEC's interpretation of ASC 740 as applied to the Fund is fundamentally inconsistent
with the deferred tax liability accounting of these two REITs.
In another instance, the SEC granted no-action relief permitting an investment company
registered by Fidelity Investments to present its financial statements in a manner that would Q.ave
been prohibited under a strict interpretation of GAAP. (See March Request, discussion of
Fidelity Investments at 10.). Copley, likewise, should be permitted flexibility to depart from a
strict interpretation of GAAP by formulating a reserve for deferred tax liability that leads to a per
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Chairwoman Mary J o White
April12, 2013
Page4
share NAV that better, and more accurately, reflects the true value of the Fund's shares to the
investing public.
Conclusion
For all of the foregoing reasons summarized here and the others more fully articulated in the
March Request, Copley requests that the Commission accept the Fund's proposal regarding its
accounting for its deferred tax liability for unrealized gains, that the Commissioners over-rule the
Staffs April 5, 20 13 Response, and that the Commissioners issue a final order on behalf of the
SEC granting the Fund the relief it has requested.
@52
PHILIPPE M. SALOMON
Enclosures
cc:
Mr. Douglas Scheidt
Associate Director and Chief Counsel
Division of Investment Management
Ms. Jaime Eichen
Chief Accountant
Division of Investment Management
David I. Faust, Esquire ( w/attachments)
Exhibit 1
~ 4 / 05 / 2013 13:19 FAX
2027729234
~ 002/004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
DIVISION OF
INVESTMENT MANAGEMENT
April 5, 2013
Mr. Philippe M. Salomon
Blank Rome LLP
405 Lexington A venue
New York, NY 10174-0208
Dear Mr. Salomon:
In your letter, dated March 28, 2012, you request assurance that we would not recommend
enforcement action to the Securities and Exchange Commission ("Commission") under Rule
22c-1 under the Investment Company Act of 1940 ("Act") or Regulation S-X against Copley
Fund, Inc. ("Copley"), a Nevada corporation registered under the Act as an open-end
management investment company, which has elected to operate as a C Corporation under the
Internal Revenue Code ("Code"), if Copley calculates its deferred Federal tax liability for
unrealized gains based on a management-developed estimate that is a pre-set formula. For the
reasons explained below, we are unable to provide such assurance.
Background
Rule 22c-1 under the Act states, in relevant part, that no registered investment company issuing
any redeemable security shall sell, redeem, or repurchase any such security except at a price
based on the current net asset value ("NA V") of such security which is next computed after
receipt of a tender of such security for redemption. Rule 2a-4(a)(4) under the Act provides, in
relevant part, that in computing the NA V of any redeemable security, "[ a]ppropriate provision
shall be made for Federal income taxes if required" by the registered investment company.'
Copley is offering for sale and has outstanding redeemable securities that are subject to Rules 2a
4 and 22c-l.
...... ~·
1
From 1970 until 1982, Rule 2a-4(a)(4) specifically required provision for Federal income taxes in
accordance with Regulation S-X. In 1982, the Commission removed the specific reference, a change
made to conform with amendments to Article 6 of Regulation S-X that were adopted at the same time,
and not as a substantive change to Rule 2a-4(a)( 4). Financial Statement Requirements for Registered
Investment Companies, Investment Company Act Release No. 12871 (Dec. 6, 1982).
04 / 05 / 2013 13:19 FAX
2027729234
141003 / 004
As an investment company registered under the Act, Copley is subject to Regulation S-X,
including Rule 4-0l(a)(l) of Regulation S-X, which states, in relevant part, that "[f]inancial
statements filed with the Commission which are not prepared in accordance with generally
accepted accounting principles [("GAAP")] will be presumed to be misleading or inaccurate,
despite footnote or other disclosures, unless the Commission has otherwise provided." As a C
Corporation under the Code, Copley must account for income taxes in accordance with the
Financial Accounting Standards Board's ("FASB's") Accounting Standards Codification Topic
740, Income Taxes ("ASC 740"). ASC 740 indicates that financial statements should reflect the
amount of deferred tax liabilities and assets for the future tax consequences of events that have
been recognized in an entity's financial statements or tax returns. 2 There is also an assumption
that all assets and liabilities of an entity will be recovered and settled, which may result in
temporary differences. 3
.
ASC 740 also provides several examples of items that result in differences between the
recognition of transactions or events for financial reporting purposes and tax purposes.
Revenues or gains that are taxable after they are recognized in financial income are included as
an example of a temporary difference. 4
Unrealized gains on investments, which are taxable after they are recognized in the financial
statements, represent a temporary difference on which a deferred tax liability must be
recognized. The recognized deferred tax liability is calculated by multiplying the temporary
5
difference (i.e., the unrealized gains) by the expected tax rate at the expected time ofreversal.
Copley's proposal to calculate the deferred tax liability based on a management-developed
estimate that is a pre-set formula would not comply with GAAP as it would result in Copley
recognizing on1y a portion of the deferred tax liability required by ASC 740.
Conclusion
We do not believe that Copley can comply with GAAP or with Rule 4-01 (a)(l) of RegulationS
X without complying with ASC 740. We also do not believe that Copley has demonstrated that,
for purposes of Rule 2a-4(a)(4) under the Act, an appropriate provision for Federal income taxes
should be made in any manner other than one that is consistent with GAAP. Therefore,, we are
unable to assure you that we would not recommend enforcement action to the Commission
against Copley under Rule 22c-1 or Regulation S-X if Copley does not comply with ASC 740.
2
FASB ASC 740-10-10-l(b).
3
See FASB ASC 740-10-25-20.
4
FASB ASC 740-10-25-20(a).
5
See generally FASB ASC 740-10-10-3 (indicating that the objective is to measure a deferred tax
liability using the enacted tax rate expected to apply to taxable income in the periods in which the
deferred tax liability is expected to be settled) .
04/05 1 2013 13:19 FAX
2027729234
If you have any further questions related to this matter, please contact Megan Monroe in the
Division of Investment Management at 202-551-6950.
Sincerely,
Douglas Scheidt
Associate Director and Chief Counsel
Division of Investment Management
~~c;:vL
Jaime Eichen
Chief Accountant
Division of Investment Management
~ 004/004
Exhibit 2
ROME UP
COUNSELORS AT LAW
(212) 185-U 55
(212) 18S-S002 ·
Email:
psalomon@bl an krome. com
March 28, 2012
Office of Chief Accountant
Division of Investment Management
U.S. Securities and Exchange Commission
100 F. Street, N.E., Mail Stop 4720
Washington, D.C. 20549-4720
Attn: Jaime Eichen
Re:
Copley Fund, Inc.: Request for Interpretive Opinion and No Action
Assurance; Rule 22c-1 promulgated under the Investment Company
Act of 1940 and Rule 4-0l{a)(l) of Regulation S-X
Dear Ms. Eichen:
This Firm represents Copley Fund, Inc. ("Copley" or the "Fund") and on its behalf,
submits this letter as a continuation of Copley's prior communication, through counsel, to the
Division oflnvestment Management (the "Division") on September 28, 2011 (the "September 28
Letter," annexed hereto as Exhibit A). Copley is hereby requesting a written opinion from the
Division permitting the Fund to alter the manner in which it has accounted for deferred tax
liability for unrealized gains since 2007. More specifically, Copley proposes to account for its
deferred tax liability for unrealized gains by establishing a tax reserve based on a pre-set formula
more fully set forth below at pages 11 through 14. Further, it seeks assurances that the Division
will not recommend that the Commission commence an enforcement action against Copley
should it follow this proposed approach. While Copley has submitted various proposals to the
Division regarding how the Fund could more fairly, reasonably and accurately account for its
deferred tax liability for unrealized gains, including the September 28 Letter, to date, the
Commission has failed to provide a final determination.
In the September 28 Letter, Copley sought no-action assurances from ~ .Division if the
Fund were to (i) prepare and issue financial statements using a reserve for taxes on unrealized
gains based on management's estimates, rather than on the assumption that all assets with
unrealized appreciation would be sold at current prices and/or (ii) issue and redeem shares based
on current net asset value as so determined, with an explanation of the calculation and a
comparison of the difference between such calculation of net asset value with a reserve for taxes
on all unrealized appreciation. After the submission of that letter, Copley had detailed
The Chrysler Building 405 Lexington Aven ue New York, NY 10174-0208
www.BiankRome.com
Delaware
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Florida
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New Jersey
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New York
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Ohio
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Washington, DC . o
Hong Kong
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COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28,2012
Page2
discussions of the issues with numerous representatives from the Staff on a conference call in the
Fall of2011. Thereafter, Copley had expected to receive a written response from the Staff, but
has not received any to date.
Requiring Copley to set a tax reserve for unrealized gains on the assumption of full
liquidation is inconsistent with Copley's investment philosophy of reinvesting dividends and
accumulating capital gains and misleading because it substantially understates the Fund's
invested assets and net asset value ("NAY"), while overstating its operating expenses. See infra,
at 7. To address these circumstances, Copley does not now simply seek approval for the
discretion by its management to establish an appropriate reserve. Rather, as discussed more fully
below at pages 11 through 12, Copley presents two alternatively defmed formulas for calculating
the reser\re and allowing pr~-set means to sell securities in its portfolio to satisfy extraordinary
redemptions if necessary. Finally, Copley is prepared to convert to a Regulated Investment
Company ("RIC") by a pre-arranged commitment, essentially triggered by the unforeseen event
of unusually high- redemptions.
Accordingly, Copley respectfully requests that a final written opinion or order be issued
granting the relief requested. In support, Copley offers this summary ofthe prior dialogue the
Fund has had with the SEC on this issue, incorporates by reference the arguments made in its
prior submissions annexed hereto, and submits a new proposal for the Division's consideration,
which the Fund believes would result in-a fairer and more accurate disclosure of its current and
ongoing financial operations.
A. Procedural History of this Matter
Since 1992, Copley has maintained that the accrual for unrealized capital gains taxes is
best represented by a "reserve" established by its Board, rather than the use of a full liquidation
value accrual to calculate the Fund's NAY. Until2007, the SEC had never required that Copley
change this methodology. It is this structure for which the Fund now seeks no-action relief.
In August of2007, the Staff took issue with Copley's accounting for, and-disclosure of,
tax reserves for unrealized appreciation in its financial statements filed for the year ended
February 28,2007. In a comment letter dated September 26, 2007 (the "Comment Letter''), the
Staff asserted that Copley had failed to account properly for deferred tax liabilities and assets for
the future tax consequences of events recognized in its fmancial statements, as required by FAS
109 and in violation of Rule 4-01(a)(1) of Regulation S-X, which provides that "financial
statements filed with the Commission which are not prepared in accordance with generally
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COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 2012
Page3
accepted accounting principles will be presumed to be misleading or inaccurate, despite footnote
of other disclosures, unless the Commission has otherwise provided." (A copy of the Comment
Letter is annexed hereto as Exhibit B.) It is not clear from the Staffs correspondence what
cam;ed it to change its view in 2007 and suddenly to require Copley to change its methodology.
In the Comment Letter, the Staff noted that Copley has elected to operate as a subchapter
C Corporation, and not a RIC, and that it was unaware of any other investment company that
chose not to qualify as a RIC that did not accrue a deferred tax liability associated with its
unrealized appreciation. (Ex. B at 3-4.) The Staff explicitly acknowledged Copley's willingness
to convert to RIC status in the event unforeseen circumstances caused gains to be realized that
· consumed the entire amount of accumulated deferred income taxes that Copley had recognized.
(Id. at 5-6.) It did not, however, address- and, to date, still has not addressed -whether
conversion would satisfy the SEC's concerns regarding the Fund's tax accounting.
By letter dated November 30, 2007, the Division of Enforcement's Boston Regional
Office expressed to Copley its intent to seek immediate injunctive relief against the Fund if it did
not adjust its per share NAV to account for the full liquidation liability for tax on unrealized
capital gains. (A copy of the November 30,2007 Letter is annexed hereto as Exhibit C.) To
avoid such injunctive litigation with the Commission, Copley's Board approved shortly
thereafter an adjustment of the Fund's NAV using the SEC's preferred full liquidation value
methodology.
On March 21, 2008, the Division of Enforcement informed Copley that it was conducting
an informal investigation of the Fund into possible violations of the securities laws, and
requested that the Fund provide certain information on a voluntary basis. The Commission
apparently later converted the proceeding into a formal investigation against Copley and its CEO ~
Irving Levine for potential violations of certain antifraud provisions, namely, Section 34(b) of
the Investment Company Act of 1940 (the "ICA"), Rule 22c-l(a), promulgated under Section
22(c) thereunder, Section 17(a) of the Securities Act, and Section lO(b) of the Exchange Act and
Ru1e 1Ob-5 promu1gated thereunder; as well as a books and records violation under Section 204
of the Investment Advisors Act of 1940 and Rule 204-2 promulgated thereunder:J Copley fully
cooperated with the investigation.
1
The SEC's request for infonnation and its Fonnal Order of investigation ar.e not being annexed hereto beeause they
are non-public documents. Copley presumes that the Division has access to those records.
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COUNSElORS AT LAW
Jaime Eichen ·
Chief Accountant, Division of Investment Management
March 28,2012
Page4
On July 18, 2008, Copley was required to restate its historical fmancial statements to
account for the full liquidation value methodology required by the SEC and filed an amended
Form N-CSRJA containing a Restated Annual Report to its shareholders. (A copy of that filing
is annexed hereto as Exhibit D.)
On or about November 19, 2008, in an effort to resolve the investigation, Thomas Henry,
Esq., Copley's counsel, sent a letter to James S. Goldman, Esq., of the SEC's Boston Regional
Office, enclosing a memorandum that described in detail the negative impact of the change in
methodology and the reasons Copley's original reserve methodology was in the best interests of
the shareholders (the "November 2008 Memo"). (A copy of the November 19, 2008letter, with
its enclosures, is annexed hereto as Exhibit E.) Among other things, the letter explained that
Copley's change in methodology to a full liquidation value accrual in calculating the Fund's per
share NAV had resulted in misleading and inconsistent financial statements that did not reflect
the fair or accurate value of the Fund's shares. The letter also enclosed a proposed Prospectus
Supplement that would provide disclosures to the shareholders necessary for their consideration
of the risks associated with this methodology. We understand that correspondence was shared
with the Division.
Copley has not received a substantive response to the November 19, 2008letter to Mr.
Goldman. In February of2009, Copley was informed by Mr. Goldman that the investigation of
the Fund had been reassigned to Lawrence Pisto, Esq., also of the Boston Regional Office.
Thereafter, the Staff took testimony of, among others, Irving Levine and Copley's outside
accountant, Roy Hale.
On October 5, 2009, Mr. Henry sent a letter to Mr. Pisto to follow up on a prior telephone
conversation to inquire about the status of the investigation. With that letter, Mr. Henry re
submitted the November 2008 Memo and proposed Prospectus Supple~ent. (A copy of Mr.
Henry's October 5, 2009letter, with its enclosures, is annexed hereto as Exhibit F.) As detailed
therein, Mr. Henry argued that a certain degree of flexibility is appropriate under GAAP and
FAS accounting standards and under the SEC rules, and that such flexibility was warranted here.
Further, Mr. Henry reiterated Copley's willingness to provide transparent dischrnrres to its
investors and requested a meeting with the Staff.
Our understanding is that the requested meeting did not take place. Instead, in a
December 2, 2009letter, the Division responded to Mr. Henry's October 5 letter and asserted
that Copley had provided neither any new arguments not previously considered by the Staff, nor
· any "changes in the Company's circumstances that might cause reconsideration of [the St:aff's]
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COUNSELORS AT lAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28,2012
Page 5
original position." (A copy of the December 2, 2009letter is annexed hereto as Exhibit G.) In
that letter, the Division informed Copley that it would again recommend immediate enforcement
action if Copley were to submit financial statements that did not comply with ASC 740 (which
codified F AS 109) by using the methodology required by the Staff.
On March 5, 2010, Kevin Kelcourse, Esq., Assistant Regional Director from the Boston
Regional Office, informed Mr. Henry by letter that the investigation of Copley and Mr. Levine
was officially completed and that the Staff would not recommend enforcement action. Thus, the
investigation closed without any penalties. Nonetheless, Mr. Kelcourse's letter reiterated that if
Copley did not comply with the requirements ofFAS 109 and/or re-codified ASC 740, the
Division of Enforcement would recommend enforcement action by the Commission. (See
Exhibit H.)
Following the closing of the investigation, Copley and its counsel engaged in further
·communications with the Staff in an effort to reach a mutually acceptable resolution of this issue.
For example, on July 15,2010, Mr. Henry exchanged e-mails with Kevin Rupert of the
Division's Staff concerning proposed modifications to Copley's financial statements. In that
exchange, Mr. Rupert acknowledged the unique structure ofthe Fund, stating that, "While we
have been firm on not permitting footnotes, this fund has really unusual tax issues, and for this
reason an explanatory footnote might be permitted- but I make no proi1Pses." (Exhibit I
(emphasis added)i
.
·
·
Finally, on September 28, 2011, Copley, through its counsel, David Faust, Esq., sent the
Division the request for no-action assurance referenced earlier. The September 28 Letter
explained in detail why the use ofthe Staff's full liquidation value methodology is inappropriate
given the unique nature of the Fund, is inconsistent with its investment philosophy, policy and
practice, has led to misleading fmancial statements and reporting that understates the amount of
assets under management and does not represent the true value of the Fund's shares. (See Ex.
A.) Moreover, Mr. Faust explained that the Corrunission's refusal since 2007 to permit Copley's
management to exercise any discretion with respect to deferred tax accounting differed from its
treatment of Weyerhaeuser Corporation, which apparently had been permitted tu'·depart from a
literal reading of a required tax accounting provision. Indeed, as more fully explained below, the
Co~ssion's position with respect to Weyerhaeuser and other similarly situated companies
contradicts its position with respect to Copley.
2
The Staffapparent1y did deviate from its nonnal practice of not pennitting footnotes, as Copley's semi-annual
shareholder report for the period ended August 31, 2010, includes footnotes to its fmancial statements clarifying the
nature of the deferred tax liability. (See Ex. J.)
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COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 2012
Page 6·
B. Summary of Copley's Arguments
Copley believes it would be useful to summarize briefly the arguments the Fund has
previously presented to the Staff and which it believes continue to support its position.
1. The Fund is unique.
Copley is a C Corporation, and not a RIC. Although the Fund has some of the
characteristics of a R1 C, unlike one, up to 70% of the dividend income received, or 70% of the
taxable income of the Fund, whichever is less, is exempt from federal taxation under the Internal
Revenue Code. The remaining 30% of the Fund's income is taxable. Unlike most funds, the
taxable income generated by the Fund is not passed on to the shareholders. Furthermore,
contrary to most other funds, Copley has maintained a strategy of not distributing dividends and
capital gains to shareholders, but rather, accumulating them within the Fund and then adding
them to the value of each share on a daily basis. Shareholders, therefore, are able to defer
dividend and capital gains taxes until redemption.
To the knowledge of Copley's management, it is the only U.S. open-end mutual fund that
operates in this manner. The Division has, in fact, acknowledged the unique tax structure of the
Fund. (See supra at 5 and Ex. I.)3 As a .result of this method of ope~ation, the risk of Copley
incurring a tax liability in excess ofthe reserve established by the Board is exceedingly remote.
Concomitantly, a strict application ofFAS 109 to require a fuU liquidation value deferred tax
liability affects the Fund disproportionately because, unlike a typical C Corporation whose
shares are valued by the market, Copley is required to calculate its price daily with respect to its
redeemable shares.
Thus, the Division's methodology puts Copley at a decisive disadvantage relative to its
peer funds because it artificially deflates the Fund's NAV and thereby unfairly makes it appear
to the investing public to be a less attractive investment opportunity compared to its competitor
funds.
3
Although in its 2007 Comment Letter (see Ex. B), the Staff referred to two other investment companies that have
not elected RIC status but record a deferred tax liability, Tortoise Energy Capital Corp. and Kayne Anderson MLP
Investment Company, as Copley explained in the November 2008 Memo, both. are easily distinguishable from
Copley because, among other things, they are closed-end funds. (See November 2008 Memo at Ex. E, p. 11, n. 4.)
"·
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COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 2012
Page7
2. The Staff's mandated methodology leads to misleading financial accounting.
Beginning in 1992, Copley implemented a policy of regularly monitoring the Fund's
potential income tax liability on unrealized gains and accruing a reserve that corresponded with
the anticipated actual liability. The estimate of the Fund's future liability was based on factors
that included anticipated redemptions beyond the ability of the Fund to cover, the Fund's
investment strategy and track record of holding dividend paying stocks for the long term, and the
fact that the entire deferred liability would be due only in the unlikely event the entire portfolio
were liquidated. (See November 2008 Memo, at Ex. E, for a more detailed explanation of the
reserve methodology.) During the entire period in which the Bo~d employed this methodology,
the reserve was never used. (See November 2008 Memo at 5.)
The Fund's use of the Staff's mandated methodology, under which it records the entire
deferred tax liability, has led to a materially misleading reported NAV since 2007. This result
derives from the facts that it (i) does not accurately reflect Copley's investment policy and
practice of long-term holdings of its positions; (ii) understates the amount of invested assets
actually under management on which gains or losses are actually realized; and (iii) overstates the
Fund's operating expense ratio (by including as expenses deferred taxes, which are not actual or
realized operating expenses).' (See Ex. A at 2-4.)
Copley submits that it is in the best interests of the Fund's shareholders to reserve for
deferred tax liability in a manner that allows the per share NAV to reflect better the true value of
the Fund's shares. As 9opley has always assured the Staff, if permitted to do so, it will provide
full transparency to investors by, for example, including in its prospectus a clear explanation of
the differing effects in pricing, as calculated using the reserve method and the full liquidation ·
value methods." (See, e.g., Ex. E; Ex. F.)
Copley recognizes that the SEC may be reluctant to permit its management unfettered
discretion to calculate the appropriate reserve and that it may have concerns that Copley, through
its prior methodology, may have overstated the value of its shares. Without conceding the
validity of those concerns, the Fund is prepared to address this issue and to propose an
acceptable resolution. Accordingly, in Section C, below, Copley sets forth a new methodology,
whereby the Fund will calculate the reserv-e using a pre-set formula that it believes will be
acceptable to the Commission and should allay any of its concerns.
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ROMELLP
COUNSElORS AT lAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 2012
Page8
3. Copley is willing to convert to a RIC.
As explained in more detail in the ·memorandum initially provided to the Staff in
November of 2008, Copley has advised the Staff of its willingness to convert to RIC status in the
event unforeseen circumstances caused gains to be realized that consumed the entire amount of
accumulated deferred income taxes it has recognized. (See Ex. Bat 5-6; November 2008 Memo
at Ex. E, pp. 6-8.) As discussed more fully, infra, at 14, conversion to a RIC would be analogous
to the restructure and tax treatment sanctioned by the SEC with respect to other entities.
4. Copley's "reserve" methodology is consistent with the ICA Rules.
Rule 22c-l promulgated under the ICA requires open-end funds to issue and redeem
shares "at a price based on the current net asset value of such security ...." In turn, the nues
define "current net asset value" as the "amount which reflects calculations, whether or not
recorded in the books of account, made substantially in accordance with the following, with
estimates used where necessary or appropriate." ICA Rule 2a-4 (emphasis added). As set forth
in more detail in the September 28 Letter, these rules, when read together, do not require the
price of the Fund's shares to be exactly the same as its NAY. (Ex. A at 2.) Copley's issuance
and redemption of shares based on aNAV that reflects a management determined tax reserve,
therefore, does not violate the ICA Rules.
5. Copley's "reserve" methodology is permissible under GAAP.
The Staff has argued that a management established reserve, rather than a deferred tax
liability reflecting the full liquidation, would violate GAAP, and specifically FAS 109 andre
codified ASC 740. The reserve methodology, however, is actually more consistent with the
assumptions, constraints and conventions underlying GAAP than the full liquidation value
methodology. For example, under GAAP, there is an assumption that a business will continue to
operate as a going concern. (See, e.g., Accounting Research Bulletin 43, Chapter 3: Working
Capital, Section A, stating "It should be emphasized that financial statements of a going concern
are prepared on the assumption that the company will continue in business."). The Staffs
liquidation value me,thod, by contrast, assumes the Fund will close, be sold or entirely liquidated
en masse. The use of the liquidation value method also contradicts the principles of
realization/revenue recognition and matching by effectively transforming a contingent liability
into a full, current, realized liability and failing to match current revenue and assets with correct,
actual liabilities. Lastly, the use of the liquidation value method is contrary to the principle of
adequate disclosure underlying GAAP, in that it presents financial statements that are effectively
.,
BLANK . . ROME UP
COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 2012 ·
Page 9
misleading because they do not accurately convey the true value of Copley's shares. (See
November 2008 Memo, at Ex. E, p. 10.)
Even assuming, arguendo, that the Fund's proposed reserve methodology would depart
from ASC 740, GAAP does allow for certain flexibility where, for instance, the strict adherence
to GAAP appears unreasonable under the circumstances and/or would produce unreasonable
results. The Commission has appropriately recognized this concept. (See November 2008
Memo at Ex. E, p. 11, n.5, citing the Commission's issuance of rules even for the use of non
GAAP financials, Release No. 33-8176, 34-17226 (January 22, 2003).) Further, as discussed in
Copley's October 5, 2009 letter to Mr. Pisto (Ex. F), the Commission submitted to Congress in
2008 a report on mark to market accounting in which it presented recommendations that
suggested the appropriateness of discretion and flexibility, including the application of
'judgment" in making market price decisions. Here, the use ofthe full liquidation value method
has produced a skewed and unreasonable result- Copley's per share NAV does not reflect the
realistic value of the Fund- and, therefore, such flexibility is warranted.
6. The Commission has permitted management discretion with respect to GAAP and tax
accounting provisions.
We understand from prior correspondence that the Staff apparently has adopted the
position that ASC 740 does not allow for any discretion or flexibility with respect to accounting
for deferred tax liability. There is, however, evidence to the contrary, as the SEC has permitted
certain flexibility to depart from a strict interpretation of GAAP or other tax accounting
provisions where doing so would lead to more accurate reporting.
First, we are aware of at least two entities - Weyerhaeuser .and American Tower Corp.
that recently converted from C Corporations into real estate investment trusts ("REITs") and, in
doing so, have exercised discretion with respect to accounting for deferred tax liabilities. Upon
conversion to REIT status, those entities would be subject to a tax on any "built-in gains" that
had accrued as of the conversion date if they recognized gains on the disposition of any assets
owned at the time of the conversion during the 10-year period following the conversion.
Nonetheless, both Weyerhaeuser and American Tower have not accounted for deferred tax
liabilities associated with such "built-in gains" -presumably concluding that their likelihood of
disposing of such assets within the 10-year recognition period is exceedingly remote. (See also
discussion of Weyerhaeuser in the September 28 Letter at Ex. A, pp. 7-8.)
' ,.'
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ROMEtJJ
COUNSElORS AT lAW
Jaime Eichen
ChiefAccountant, Division of Investment Management
March 28,2012
Page 10
To our knowledge, the SEC has not challenged the approaches of either Weyerhaeuser or
American Tower. Notably, the conversions to REITs by Weyerhaeuser and American Tower
took place in 2010 and 2012, respectively- years after the Conunission mandated that Copley
not exercise any management discretion with respect to its deferred tax liability accounting.
Although the Fund's situation is not entirely equivalent to that of Weyerhaeuser ahd American
Tower, it is sufficiently analogous because like those entities, Copley is seeking to exercise
discretion not to account for the full amount of liabilities that are contingent and exceedingly
remote. Copley does not understand the SEC's justification for prohibiting it from exercising
similar management discretion, but later permitting Weyerhaeuser and American Tower to do so.
Put differently, Copley submits that the SEC's interpretation of ASC 740 as applied to the Fund
is fundamentally inconsistent with the deferred tax liability accounting of these two REITs.
Second, in at least one instance, the SEC has granted no-action relief permitting an
investment company to present its financial statements in a manner that would have been
prohibited under a strict interpretation ofGAAP. In April of2008, the Division assured Fidelity
Investments that it would not reconunend enforcement action against a Fidelity registered
investment company called the Gold Portfolio if it consolidated its financial statements with
those of its subsidiary, Fidelity Select Gold Cayman Ltd. See Response of the Office of Chief
Accountant of the Division dflnvestment Management to Fidelity Investments, 2008 SEC No
Act. LEXIS 459 (Apr. 29, 2008).
Under a technical reading of the ICA, the subsidiary might not 4ave been considered an
investment company because it was only invested in conunodities, which are not considered
"securities." Id. at * 10. Therefore, the Gold Portfolio technically was not permitted to
consolidate its fmancial statements with the subsidiary, pursuant to GAAP and Rule 6-03(c)(l)
of Regulation S-X, whlch preclude consolidation by a registered investment company with an
entity that is not an investment company. Jd. at *4-*5. The Division, however, accepted
Fidelity's argument that notwithstanding those regulations, it would be appropriate to consolidate
the financial statements of the subsidiary into the Gold Portfolio because it would give
shareholders a "more accurate picture" of the portfolio and its structure. Specifically, the
subsidiary was authorized to invest in securities, would operate as an investmenTcompany for all
relevant purposes, and was established to act as an investment vehicle for the Gold Portfolio. ld.
at *5, * 15. Copley, likewise, should be permitted flexibility to depart from a strict interpretation
of GAAP by formulating a reserve for deferred tax liability that leads to per share NAV that
better, and more accurately, reflects the true value of the Fund's shares to the investing public.
a
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 2012
Page 11
For all of the reasons summarized here (and others more fully articulated in the attached
Exhibits) Copley requests that the Division accept the Fund's proposal regarding its accounting
for its deferred tax liability f-or unrealized gains and issue a final· order granting such relief.
C. Copley's New Proposal
In addition to the arguments which Copley has previously advocated, Copley now
submits the following two new proposals that, given Copley's circumstances, would result in a
fairer and more accurate disclosure to the investing public, together with a more equitable
outcome.
·
1. Reserve Formula
The Fund proposes to accrue a deferred tax liability that fairly and accurately reflects a
realistic tax liability, and which addresses the issues regarding the ability to meet redemptions at
a NAV that does not include a tax reserve that assumes full liquidation. Accordingly, the Fund
proposes to accrue a defined tax liability using one of the following two formulas, each of which
is fully transparent.
(a) Alternative 1
•
At the end of each calendar quarter, the Fund will calculate its average historical
turnover rate over the previous five, or even ten, years. In calculating its NA V on
a daily basis, Copley will u.Se a·tax reserve calculated at a tax rate equal to a
percentage of the statutory corporate tax rate determined at four times the average
historical turnover rate. The historic, average five-year turnover rate of the Fund
for the period from February 29, 2008 through February 29, 2012 was 2.31 %; the
average ten-year turnover rate is 2.28%. (See Portfolio Turnover Rate chart
annexed hereto as Exhibit K.) Thus, for example, if the unrealized gain at the
close of business is $50,000,000, the deferred tax liability under the full·
liquidation value approach would be $17,500,000. Under either the historical,
five-year rate of 2.31% or the historical ten-year rate of 2.28% (both rounded to
2.5%), Copley would set a reserve at four times that 2.5%, or 10%, of the
$17,500,000, i.e., $1,7 50,000. Based on these actual average historical rates,
Copley respectfully submits that any multiple ·of four times allows for a
reasonable and adequate tax reserve.
BLANK
ROMELLP
COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 20 12
Page 12
•
This formula obviously would be independent of any unfettered discretion of the
Fund's management. Rather, it would reflect, in a most conservative manner, the
average historical turnover rate of the Fund and, ~erefore, the lack of need for"""
or propriety of- a "full" or "liquidation based" tax reserve.
•
Under this scenario, the Fund would ensure that even if it receives requests on any
given day which would require sales of investment assets at a rate four times in
excess of its historical rates - a high number based on a 20-year historical track
record - it will be able to accommodate such requests.
(b) Alternative 2
•
At the end of each trading day, the Fund will determine the highest daily
redemption of its shares (as a percentage of shares outstanding) during the
previous five years. In calculating its NAV on a daily basis, Copley will use a tax
reserve calculated at a tax rate equal to a percentage of the statutory corporate tax
rate determined at four times the highest daily redemptive rate. For example, if
the unrealized gain at the close of business is $50,000,000, the deferred tax
liability under the full liquidation value approach would be $17,500,000. If the
historically highest daily redemptive rate of the Fund were 2%, Copley would set
a reserve at four times that 2%, or 8%, of the $17,500,000, i.e., $1,400,000. This
formula, likewise, would be totally independent of the unfettered discretion of the
Fund's management. It would reflect, in a most conservative manner, the
his:torically low redemptive rate of the Fund and, therefore, the lack of need for
or propriety of- a "full" or "liquidation based" tax reserve.
•
To put this alternative into perspective, the highest daily redemption in the history
of the Fund since inception was $1,000,000, which represented approximately
23',260 shares or approximately 1.6% of the total outstanding shares on the date of
redemption. The redemptions were effected with no problem.
•
Under this scenario as well, the Fund would insure that even if it receives
redemption requests on any given day that are four times greater than its
historically highest redemption - an inconceivably high number based on a 20
year historical track record- it will be able to accommodate such redemptions.
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COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28, 20 12
Page 13
Either alternative will assure investors in the Fund the ability to redeem their shares at the
stated, accurate NAY, thus addressing any concerns that the SEC may have previously harbored.
(c) Further Safety Valve
'
In any event, under Section 22(e) of the ICA, the Fund need not redeem all such shares
on the day such requests are received, but instead has seven days to redeem them. The ·Fund has
never failed to redeem on the day requests are made. Although the Fund expects to continue to
honor all redemption requests on the day requested, it notes that Section 22(e) provides an
additional safety valve.
Copley does not believe it is a cogent objection to its proposal to say that if more than 8%
of the shares are redeemed on one day, then the NAY will somehow be overstated due to an
insufficient deferred tax liability. In such case, the Fund would seek relief from the Staff and/or
could postpone some redemptions to the next day, or for several more days, or for an
appropriately longer period, in which case the NAV on those later days would be adjusted to
reflect any updated deferred tax liability. Again, the Fund would be following traditional and
accepted industry practice, since hundreds or thousands of funds would in fact defer some
redemptions if these requests reached 8%. Ifthey· did not, they would have to dispose of assets
at a material discount, resulting in an apparently overstated NAY. As discussed above, a fund is
presumed under GAAP to be a going concern that will continue in business. (See ARB 43.) In
other words, the regulatory framework of the fund industry, which promises investors liquidity at
a stated NAY, is founded on the premise that there will be an orderly process for large
redemptions all at once.
For example, if all the investors.in Vanguard's S&P 500 Index requested redemptions at
the same time, they would, even vvith a wait of seven days, receive a fraction of their expected
NAV, if a distressed liquidation were mandated. Of course, either Vanguard would implement
gating procedures or the SEC would be expected to provide relief by allowing for a more orderly
liquidation in such instance; the core point regarding the assumptions of the regulatory scheme
still holds.
Copley believes that such a sophisticated approach is appropriate given the unique status
and history of the Fund and, in particular, given the treatment apparently afforded to
Weyerhaeuser and American Tower, both of which have excluded deferred tax liabilities relating
to assets whose sale is considered remote. Copley's alternative rational formulas similarly take
into account the fact·that the accrual of the full deferred tax liability under the liquidation value
BLANK
ROMELLP
COUNSELORS .AT LAW
Jaime EiChen
Chief Accountant, Division of Investment Management
March 28,2012
Page 14
methodology would be exceedingly remote. The Fund believes that the Commission has a
regulatory obligation to provide Copley with equal treatment.
The Division simply has not addressed the issue of this disparate treatment. If the
Division's response to the Fund in its September 26, 2007 letter were applied to Weyerhaeuser
and American Tower, those companies would have to accrue a deferred tax liability calculated
by assuming a liquidation of all their assets. These companies are not special purpose vehicles
restricted by covenants designed to limit borrowings ("bankruptcy remote vehicles"). Thus, for
example, they may borrow, become overleveraged and have to sell assets. Additionally, they
may encounter environmental or other operating liabilities, be subject to large legal claims and
be forced to sell assets. Nonetheless, the Commission apparently has taken the position that the
prospect of such a disposition of assets is sufficiently remote to warrant a deferred tax liability
that assumes there will be no such sale. The Fund respectfully submits that it is likewise entitled
to such treatment.
2. Board Resolution to Convert to RIC Status
As discussed above, the Fund has long contemplated conversion to a RIC in the event
unforeseen circumstances caused gains to be realized that consumed the entire amount of
accumulated deferred incomes taxes it has recognized. To ensure that this occurs as first
contemplated by the Board years ago, the Fund has recently enacted new Board resolutions
confirming its intent and detailing how and when this RIC conversion shall occur. A redacted
copy of the Board minutes adopting the Resolutions, on March 23, 2012, is annexed hereto as
Exhibit L.
Th~ resolutions (Ex. L) provide that if the deferred tax liability, as computed under the
proposal described above, reaches an an1ount equal to 10% of Pre-Tax NAV, defined as the
NAV of the Fund plus an amount equal to Copley's deferred tax liability as of the end of such
trading day, the Fund will convert to a RIC for tax purposes. Upon such conversion, there would
be a further parallel with Weyerhaeuser and American Tower, since those companies have
converted from C Corporation to REIT status and have assumed they will not sell assets so as to
recognize built-in gain for 10 years, and the Fund will be making the same (or a parallel)
conversion and assumption. The Fund, however, will continue to accrue a deferred tax liability
in excess of the assumptions employed by Weyerhaeuser and American Tower; as certain asset
sales sufficient to support redemptions ofthe Fund's shares will be assumed. The Fund, unlike
Weyerhaeuser and American Tower, does have explicit restrictions on its permitted leverage
under the ICA, and is, for all practical purposes, a bankruptcy remote vehicle. Thus, if anything,
BLANK
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COUNSELORS AT LAW
Jaime Eichen
Chief Accountant, Division of Investment Management
March 28,2012
Page 15
the Fund's tax accrual proposal is far more conservative than the practices of Weyerhaeuser and
American Tower that are currently sanctioned by the Commission.
*
*
*
*
*
Based on the foregoing law, facts and arguments, and those set forth in the Exhibits
annexed hereto, Copley' submits that its use of a formulai~ reserve in accounting for deferred tax
liability, and the Fund's new proposals, will satisfy any concerns the Division and/or the
Commission may have-. Additionally, the alternative formulas presented herein would
substantially mitigate the misleading effects of the full liquidation tax reserve calculations
currently being employed, as more fully set forth at pages 6 to 9, supra.- As the Staff previously
has recognized, the Fund, like Weyerhaeuser and American Tower, has a unique investment
philosophy and operation and, therefore, requires novel, but equal, treatment.
Literally for years, Copley has presented multiple legitimate arguments in support of its
position that the Fund and its investors have been treated unfairly given the acknowledged,
unique circumstances. And while the Staff has been receptive to a courteous dialogue on these
points- including a lengthy conference call with numerous Division personnel last Fall- it has
yet to provide any written explanation regarding the Fund's multiple proposals and the
conclusion that they would not result in a more reasonable, accurate and equitable result for both
Copley and the investing public. Nor has the SEC explained its apparently disparate treatment of
Weyerhaeuser and American Tower, and Copley, with respectto permitting certain management
discretion under ASC 740. As a result, Copley respectfully requests that the Division address its
prior arguments, as well as -the new proposals set forth in this letter, in a final order. .
We look forward to your favorable response. If you have any questions, or if we can be
of further assistance, we would welcome the opportunity to discuss these issues further with you
and/or your Staff.
Enclosures
cc:
David I. Faust, Esquire (w/attachments)
Exhibit A
FAUST OPPENHEIM LLP
ATTORNEYS AT LAW
488 MADISON AVENUE
NEW YORK, NEW YORK 10022
TELEPHONE (212) 751·7700
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WRITER'S DIRECT E·MAIL
davidfaust@frolaw.com
September 28, 2011
VIA CERTIFIED MAIL
Division of Investment Management
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-0504
Re:
The Copley Fund, Inc.
Request for No-Action Assurance
Ladies and Gentlemen:
We write on behalfofthe Copley Fund, Inc., a corporation organized under the laws of the State of
Nevada and a registered investment company under the Investment Company Act of 1940, as amended (the
"ICA") ("Copley Fund"). Copley Fund seeks assurance from the staff of the Division of Investment
Management that it will not recommend enforcement action to the U.S. Securities and Exchange
Commission (the "Commission") if Copley Fund (1) prepares and issues financial statements using a
reserve for taxes on unrealized gains based on management's estimates, rather than on the assumption that
an assets with unrealized appreciation would be sold at ctU'rent prices and/or (2) issues and redeems shares
based on current net asset value as so determined with an explanation ofthe calculation and a comparison
ofthe differences between such calculation and the calculation of net asset value with a reserve for taxes on
all unrealized appreciation.
We make this request based on (i) Copley Fund's clear investment policies which have been consistently
applied since inception, (ii) explicit language in the applicable regulations which provide for exceptions to
fixed rules and permit estimates where necessary or appropriate and (iii) the overriding policy of the federal
securities laws to promote, if not require, full and accurate disclosure of all material information.
Factual Background
Copley Fund is a regular corporation (C corporation). Like a Regulated Investment Company
("RIC"), Copley Fund seeks to earn dividend and interest income as well as capital ,gains. Unlike a RIC,
Copley is entitled to use the dividends received deduction whereby up to 70% ofthe dividend income
received, or 70% ofthe taxable income of Copley Fund, whichever is less, is exempt from federal taXation.
The remaining taxable income (whether derived from dividends, interest or capital gains) is taxed to the
Fund at a current federal tax rate of35%. Dividends, interest income and capital gains are not distributed,
but rather are accumulated within Copley Fund and are added to the value of each share on a daily basis.
Copley Fund's portfolio securities are all highly liquid and are marked to the market daily. Any increase or
decrease in value is reflected in the per share price, which is publically available after the close ofbusiness
every day on which The New York Stock Exchange is open.
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FAUST OPPENHEIM LLP
Division of Investment Management
Securities and Exchange Commission
September 28, 2011
Page2
.. Share Price "Based" on NAV
Pursuant to Rule 22c-1 of the ICA open end funds, like Copley Fund, are required to issue and
redeem shares "***at a price based on the current net asset value of such security ... " (emphasis added).
Current net asset value is defined as "***amount which reflects calculations, whether or not recorded in the
books of account, made substantially in accordance with the following, with estimates used where
necessary or appropriate" (emphasis added). ICA Rule 2a-4. Rule 2a-4(a)4 provides thfl.t in calculating
"current net asset value" for use in computing the current price of redeemable securities: "Appropriate
provision shall be made for federal income taxes ifrequired" (emphasis added). Rule 2a-4(a)(4) does not
define "if required."
The above two Rules, read together, do not explicitly require sales or redemptions at "net asset
value." Rule 22c-l(a) requires sales or redemptions to be at a price based on current net asset value. Rule
2a-4(a)4 provides for how to calculate net asset value for use ''in computing periodically the price the
current price for the purpose of" sales and redemptions. Using "net asset value" to compute a price is not
the same as requiring net asset value to be the price. One obvious accepted variation is that commissions
and other charges may be added to sale prices and deducted from redemption prices, iffully and accurately
disclosed.
There is no explicit requirement in the above two Rules tel" use GAAP, but the Commission has
required GAAP in financial statement reporting by registered investment companies. We suggest that, in
the case of Copley Fund, for the reasons set forth below, the Commission should permit Copley Fund to (1)
prepare its fmancial reports and/or (2) issue and redeem shares based on a net asset value calculation which
ret1ects, a management determined tax reserve, so long as there is transparency in ~xplanation as to how the
tax reserve and the share price is determined.
Copley Fund seeks to price its shares based on a net asset value calculated with a management
estimate ofits liability for federal income tax on unrealized appreciation, not on the assumption that the tax
reserve should be calculated at a 35% tax rate on all unrealized appreciation. Based on Copley Fund's
investment strategy and decades long history oflong-term holding of its underlying securities, a tax reserve
calculated at a 15% tax rate is more descriptive ofCopley Fund's actual need for such a reserve (see below
for a further description of the tax reserve issue). We suggest, ifyou so permit, that the prospectus contain ·
an explanation of the difference in pricing calculated at each tax rate to maxirlliie transparency to
inyestors. See below for an example of the illustration and explanation:
Tax Reserve
Requiring Copley Fund to reports its net asset value with a 35% reserve for federal income tax on
unrealized gains, and then requiring Copley Fund to issue and redeem shares based on that calculation is
materially misleading for three reasons.
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FAUST OPPENHEIM LLP
Division of Investment Management
Securities and Exchange Commission
September 28, 2011
Page 3
First: It does not accurately reflect Copley Fund's decades long investment policy and practice.
Copley Fund's investment policy and practice includes long-tenn holding of its investment positions. Its
federal income tax liability from inception, expressed as a percentage of earnings are as follows:
Year Ended
2/28/2011
2/28/2010
2/28/2009
2/29/2008
2/28/2007
2/28/2006
2/28/2005
Tax reserve as% oftotal assets using SEC mandated Tax reserve as % of total assets
using manage1.11ent determined
tax reserve
tax reserve
1.26% (Assuming a
20.25%
'
management determined tax
reserve of $1M)
1.4 5% (Assuming a management
18.11%
determined tax reserve of$ 1M)
1.56% (Assuming a management
15.67%
determined tax reserve of$1M)
1.15% (Assuming a management
20.13%
determined tax reserve of $1M)
0.92%
20.75%
19.31%
1.00%
1.04%
18.48%
The effect on the price at which Copley Fund may issue and redeem shares is as follows:
Year Ended
Share Price
NA V- Tax reserve @35%
'
. 2/28/2011
2/28/2010
2/28/2009
2/29/2008
2/28/2007
2/28/2006
2/28/2005
$46.27
$40.21
$35.80
$44.07
$43.71
$38.17
$36.12
Share Price
NAV - Management
Determined tax reserve
$57.31
$48.39
$41.81
$54.56
$54.67
$46.86
$43.88
Second: Calculating net asset value after deduction of an unrealistic "reserve" materially
understates the amount ofassets actually under management, and thereby overstates investment results as a
F:\2400-1 01\Copley'NoAction'OOS.doc
'
FAUST OPPENHEIM LLP
Division of Investment Management
Securities and Exchange Commission
September 28,.2011
Page 4
percentage of assets. The following chart indicates the misleading results.
Year
Ended
Gain/Loss
2/28/2011
2/28/2010
2/28/2009
2/29/2008
2/28/2007
2/28/2006
2/28/2005
$8,364,758
$6,583,992
($12,450,117)
$2,418,380
$12,198,111
$4,815,279
$7,715,251
Investment results using SEC tax Investment results with
management detennined .
reserve
tax reserve
10.71%
13.26%
'·
9.73%
11.71%
-19.83%
-22.14%
2.81%
3.48%
14.04%
17.57%
6.45%
7.92%
10.70%
13.00%
Third: Calculating net asset value after deduction ofan unrealistic "reserve" materially overstates
Copley Fund's operating expense ratio.
For the fiscal year ended February 28,2011, the Fund's ratio oftotal annual operating expenses to
average net assets, using the Commission staff mandated reserve, was 7.96%. This ratio includes deferred
income taxes and does not include an investment advisory fee waiver (also per the Commission Staffs
requirement). Without including. these deferred taxes, which are not an actual operating expense of the
Fund, and including the investment advisory fee waiver, the ratio would be 1.95%. Management believes
this ratio is more appropriate for comparison to other ftmds.
Year Ended
2/28/2011
2/28/2010
2/28/2009
2/29/2008
2/28/2007
2/28/2006
2/28/2005
Expense ratio using SEC tax Expense ratio · using
reserve
determined tax reserve
7.96%
1.95%
1.70%
5.54%
1.35%
1.58%
1.25%
1.56%
1.13%
5.90%
·1:21%
3.01%
1.15%
3.82%
mgnt
Discussion
GAAP is intended to provide a principled framework by which financial transactions are
recorded in an accurate, consistent, manner pennltting comparability with prior years information and
with statements prepared by other comparable entities. Those objectives are best served by permitting
F:\2400-101\Copley'NoAction'005.doc
FAUST OPPENHEIM LLP
Division of Investment Management
Securities and Exchange Commission
September 28, 2011
Page 5
fully and fairly disclosed management judgments to be used when particular facts and circumstances
warrant a departure from a literal application of a guideline or principle, e;g., where a literal application
would be misleading.
Financial reporting should not be a simple "check the box" exercise; it should provide useful
information for making informed business and economic decisions. To be useful, fmancial statements
must be reliable. To be reliable they should be verifiable, neutral, unbiased and represent what really
happened or existed during the period or on the date as of which they speak. They also should be
comparable i.e. prepared in a similar manner to comparable businesses, tailored to individual
circumstances which are fully and fairly disclosed. To the best of our knowledge, there are no other
registered investment companies structured or operating like Copley Fund, so the most relevant
comparisons are to Copley Fund's own prior reports. This makes it all the more important that
deviations in measured outcomes from period to period for Copley Fund should 'be the result of
deviations in performance, not changes in methods.
Pursuant to staff comments received in connection with Copley Fund's updating amendment to
its registration statement filed on June 6, 2008, Copley Fund was required to file an amended N-CSR/A
which contained a "Restated Annual Report to Shareholders." This restatement covered much of
Copley Fund's historical financial information including average annual returns, the per share value
table and the financial highlights .table.
Prior to this required restatement, Copley Fund's financial statements were completely within
the basic framework and objectives ofGAAP. The PCAOB examined the Fund's financials and report
thereon for the period ended February 28, 2006 and issued an affirming clean report thereon. The
fmancials had been prepared in a consistent manner for 30 years. They were useful because they
enabled informed decision making by an investor or prospective investor since they clearly and
correctly set forth results for the periods covered by the reports. They were reliable because they were
verifiable and the information accurately represented results from a historical perspective, consistently
reported. This changed dramatically in 2008. -Copley Fund's actual NAV per share at February 28,
2007 was $54.67 and it was reported as such in the Fund's Annual Report of even date. Yet, the
Restated Annual Report for the period ended February 29, 2008 reflects a per share value for that same
date (February 28, 2007) of $42.54. This simply did not reflect actual results, was 11Qt. consistent with
prior years' reporting· and thwarted comparability with prior years.
The foundation ofGAAP consists of basic assumptions, basic principles, basic constraints and
modifying conventions. Some of these are particularly relevant herein.
Assumptions: Going Concern Assumption: This assumption assumes that a business will
continue operating and will not close or be sold.
F:\2400-10 I \Copley'NoAction'005.doc
. '•
FAUST OPPENHEIM LLP
Division ofinvestment Management
Securities and Exchange Commission
September 28, 2011
Page 6
Principles: Adequate Disclosure : This principle states that all pertinent information should be
_ _fully disclosed and in understandable fonn.
Constraints and Modifying Conventions. The modifying conventions include Application of
Judgment- an accotmtant may, indeed should, tailor GAAP to fit specific varied circumstances if the
result is reasonable under the circumstances, especially when the strict adherence to GAAP will
produce unreasonable results. Assuming arguendo that the use of the reserve method'to determine an
appropriate reserve for taxes is a "departure" from GAAP, it certainly appears reasonable under the
circumstances relevant to Copley Fund, where the use of the theoretical "full liability" accrual method
produces a misleading result, i.e., a per share net asset value which does not reflect the realistic net
assets ofthe Ftmd, distorts perfonnance and expense ratios, and disables redeeming shareholders from
. receiving their fair proportionate share of Copley Fund assets.
Copley Fund is unique. To its knowledge, it is the only registered investment company which
is a C corporation for federal tax purposes. As an open-end registered investment company, Copley
Fund's share price is based upon a mark to market NAVas opposed to a value based on supply and
demand for its shares. If Copley Fund were permitted to revert to its pre-2008 method of determining
its tax reserve with full disclosure, as now requested, prospective investors would know what it costs
to buy a share and investors would know what they would get by redeeming a share, with the
assurance that they were getting a fair and fully transparent price on purchase or redemption.
If Copley Fund's methodology is applied consistently, as it was in the past (pre 2008), and is
fully disclosed all shareholders and prospective shareholders through ample disclosure, comparisons
with other mutual funds will be facilitated and will not result in overstated performance, by
understating the amount of investable assets which are "at work" to produce income or loss or by
grossly misleading reported expense ratios. For this reason alone the use of a reserve method falls
well within the judgment parameters ofGAAP.
While Copley Fund believes that its pre 2008 financials historically were compiled and
presented in accordance with GAAP, the modifying conventions make clear that GAAP is not "carved
in stone" and that variations are made and considered acceptable. If nothing else, GAAP and FAS
109 are not clear on the appropriate calculation of a tax accrual particularly in view of the fact that the
"inherent assumption" underlying FAS 109 is not present given the particular circUiliStances ofthe
Fund.
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FAUST OPPENHEIM LLP
Division of Investment Management
Securities and Exchange Commission
September 28, 20 11
Page 7
CONCEPTS OF FAIR VALUE
Copley Fund is currently valued at its liquidation value. Simply put, this does not represent the
fair value of the Fund's shares. It ignores reality and misstates the assets of the Fund.
Utilization of a full liquidating value accrual method is contrary to the basic "going concern"
assumption of GAAP that Copley Fund will continue operating and will not precipitously liquidate all
ofits security positions. The use of the full liquidating value method in Copley Fund'- s' circumstances
makes the exact opposite assumption, that all portfolio securities will be liquidated as at the end of
each reporting period. This simply is not the case and is therefore unrealistic and misleading.
On September 30, 2008, the SEC's Office of the Chief Accountant issued a press release (2008
234) which addressed fair value accounting stating that "(t)he current enviromnent has made questions
surrounding the termination of fair value particularly challenging for preparers, auditors, and users of
financial information". While not precisely on point, the concepts addressed in the release are
applicable to this request. The release makes clear that Management's internal assumptions can be
used to measure fair value. It acknowledges that the determination of fair value often requires
significant judgment; particularly in unusual or atypical circumstances. The release also concludes
that clear and transparent disclosures are critical to providing investors with an understanding of the
judgments made by management.
An example of where the Commission accepted a management determined departure from a
strict, literal reading of a "required" tax accounting may be found with Weyerhauser Corporation,
("WY"). In 2010, WY converted from a "C" corporation to a real estate investment trust ("REIT").
Paragraph 28 of SFAS No. 109, Accountingfor Income Taxes, (ASC 740), provides, in part,
that, "... an enterprise's tax status may change from ... taxable to non-taxable .... A deferred tax liability or
asset shall be eHminated at the date an enterprise ceases to be a taxable enterprise.... The effect of an
election for a voluntary change in tax status is recognized on the approval date or on the filing date if
approval is not necessary .... The effect of recognizing or eliminating the deferred tax liability or asset
shall be included in income trom continuing operations ... "
Treasury Reg. Sec. 1.337(d)-7(a) provides that if property owned by a "C" corporation becomes
the property of a REIT in a conversion transaction, then "Sec. 1374 treatment" will apply unless the
"C" corporation elects "deemed sale" treatment with respect to the conversion transaction. Apparently,
WY did make a Section 1374 election. Therefore, ifWY, during the 10-year recognition period
commencing on the conversion date, recognizes gain on the disposition of assets owned at the time of
its conversion, it will be taxed on such gain (to the extent the gain had "economically accrued" as of the
conversion date) at the highest marginal corporate tax rate.
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FAUST OPPENHEIM LLP
Division oflnvestment Management
Securities and Exchange Commission
September 28, 2011
Page 8
Nevertheless, WY eliminated its deferred tax liabilities accumulated as a result of certain
"taxable temporary differences", primarily resulting :fi:om differences between the carrying amount and
tax basis of its depreciable property, as ofthe first day ofthe first taxable year for which its REIT
election became effective. Therefore, WY must have concluded that the likelihood of its disposing of
its built-in gain assets prior to the expiration of the recognition period was exceedingly remote and, ·
accordingly, chose to eliminate its deferred tax liabilities based on this judgment. Apparently, the
Commission has not challenged WY's position. We request that Copley Fund be afford.ed similar
flexil;>ility to exercise judgment in determining its tax reserve. In light of Copley Fund's record and
longs~anding policies, its management should be permitted to accrue and report an estimated deferred
tax-liability rather than a "mechanical" one. This would more fairly present Copley Fund's financial
position and its results of operations and avoid the misleading reporting described above.
.r··'
'
Copley Fund believes that it has demonstrated a clear and compelling rationale as to why the
use of the Board's reserve accrual methodology best represents a fair value for its shares. It also
believes that the disclosures made in the attached proposed Supplement to the Fund's Prospectus
provides clear and transparent disclosures with respect to both the methodology and rationale used by
tlj.e Board as well as the risks inherent therein.
The static application of an accounting concept (F AS 109 treatment of a deferred tax liability)
that is equivalent to liquidation accounting serves to undervalue the true financial position of the
Fund. It operates to overstate di:vidend yield and expense ratios and understate performance for
comparison purposes. Redeeming shareholders do not receive their proportionate share of Fund
assets.
Management of the Fund has, since 1992, attempted to reflect in the financial statements a
deferred tax liability to the extent that management anticipates, in an exercise of their best, good faith
business judgment that such a liability exists. Deferred income tax liabilities are at best an estimate
due to the nature of changing income tax rates, tax law and regulations. · As demonstrated elsewhere
herein, when management was permitted to exercise its judgment in determining a tax reserve tor
Copley Fund it never underestimated the Copley Fund's actual liability for taxes.
Expense Ratio
Copley Fund's actual expense ratio, after a consistent and voluntary $60,000per year advisory
fee waiver Copley Fund's advisor have been maintained below 1.25%. These ratios, on average, are
well below the average ratios of all equity funds, which ranged from 1.44% to 1.07% over the same
period. Investment Company Institute, Fees and Expenses of Mutual Funds, 2007. Ratios for
equivalent small funds are much higher. Under the Staff-mandated ''full tax liability" reserves,
Copley Fund ratio was increased to 5.54% (!)for the year ended February 28, 2010- with no increase
in actual fees!- which is grossly misleading.
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FAUST OPPENHEIM LLP
Division of Investment Management
Securities and Exchange Commission
September 28, 2011
Page 9
SUMMARY
The Fund's overall structure, investment strategies and operating philosophy have not
materially changed since its inception in 1978. Its underlying principles and strategies have been
consistent, year to year, and the overriding concern of Management and the Board of Directors always
has been the welfare of the individual shareholders.
'
Every effort has been made to operate Copley Fund in the best interests of the shareholders and
to reflect the true value of the Fund's assets in its net asset value. This effort has been thwarted by
compelling the Fund to use a full liquidating value accrual with respect to the -Fund's unrealized
appreciation.
Copley Fund is required by Rule 22c-la to issue and redeem its shares at a price based on1
current net asset value. Rule 2a-4a defines current net asset value and specifically states that with
respect to NAV calculations "estimates (maybe) used where necessaryor appropriate". That Rule also
provides that "(a)ppropriate provision shall be made for Federal Incotrie Taxes if required" (emphasis
added).
There is no explicit requirement however that the full liquidating liability tax accrual be used in
calculating net asset value on which the daily issue and redemption price of its shares must be based.
For the reasons set forth above the Board of Directors believe that neither GAAP nor FAS 109
mandate a liquidating liability accrual. On the other hand, the Board does believe it clear that the use
of a full liquidating liability accrual does not represent a fair value with respect to the price of Copley
Fund's shares. In fact, the application of such a methodology is unrealistic, misleading and operates
to the detriment of Copley Fund and its shareholders.
As demonstrated above, the risk of the Fund incurrLflg a tax liability in excess of the Board
established reserve is practically nil. Copley Fund believes that this risk should be assessed and
either accepted or rejected by the shareholders with the staffproviding guidance related to the risk
disclosure. Of course, Copley Fund would be receptive to any disclosure comments made by the staff
and would make every effort to include them in all disclosure documents.
The Sarbanes-Oxley Act of2002 was a legislative directive to make financial disclosure more
meaningful and less boiler-plate and required management to sign off personally on the material
accuracy of financial statements. Copley Fund's management, since 2008, has faced the Hobson's
Choice of either signing off on financial disclosures which, in its honest, reasoned and good faith
view, are materially misleading OR violate the SEC staffs directive on the calculation of Copley
1
1t should be noted that "based on" is not synonymous with "at."
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FAUST OPPENHEIM LLP
Division of Investment Management
Securities and Exchange Commission
September 28, 2011
Page 10
Fund's tax reserve . Neither choice is consistent with GAAP's objectives or with the purposes of the
Securities laws, rules and regulations.
Conclusion
The basic objective of accounting policies, and ofthe statutes, rules and regulati'ons which govern
the United States securities markets, is to provide investors and prospective investors with materially
accurate information.
We believe that, if allowed to proceed as requested, the investors in the Copley Fund will be
provided with sufficient, accurate information as to the method of calculating the price at issuance and
redemption of shares based on current NA V including a tax reserve at the management determined rate.
Further, we believe that even if this calculation of the tax reserve would be a technical deviation from
GAAP, it would not violate the fundamental principles of GAAP and would avoid the misleading
calculations which Copley Fund is now required to take and which results in misleading information to
investors and prospective investors.
We believe that full, transparent, non-misleading disclosures to investors and prospective investors
should be the paramount consideration, and not an unnecessarily restrictive interpretation ofGAAP which
is not applicable in the particular circumstance of the Copley Fund and which results in misleading
information to investors and prospective investors.
On behalf of the Copley Fund, we hereby request that the Staff give its assurance that it will not
recommend that the Commission take enforcement action ifthe Copley Fund proceeds in.the manner set
forth in this letter by specifically, (a) reverting to using a management determined tax reserve in all of its
fmancial reporting and/or (b) continuing to use the Commission's mandated tax reserve in its financial
reporting but bdng permitted to offer and redeem shares at a net asset value calculated with a management
determined reserve for federal income tax, with full disclosure as to methodology and effect.
I would be pleased to provide any additional information you request, to answer any questions you
may have and to meet with you at your convenience to discuss any or all aspects of this request.
Ver5Q_rn-I.y_yours,
FAUST-OP~NHEIM LLP
.
By:-~
L
David
F:\2400·10 I\Copley'NoAction'005.doc
Faust
Exhibit B
·,·
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
OtVIIIOMOf"
INV&eTMI(NT MANAQCWCN"f
September 26, 2007
Irving Levine
President
Copley Fund, Inc.
245 Sunrise Avenue
Palm Beach, Florida 33480
Re:
Copley Fund, Inc. (the "Company")
File Numbers: 2-60951 and 811-2815
Dear Mr. levine:
•
We are sending this letter to you as a follow-up to our teleconference
with Thomas Henry and Roy Hale held on August 16, 2007. We have
comments and questions with respect to the Company's financial statements
for the year ended February 28, 2007 ("2007 FS") filed in a Fonn N-CSR on
· May ·9, 2007. Mr. Hale, the Company's Independent accountant audited the
2007 FS and Mr. Henry serves as the Company's counsel. The Company has
not elected to operate as a regulated Investment company ("RIC") under
subchapter M of the Internal Revenue Code. Thus, the Company Is taxed as
a subchapter C Corporation.
Our concerns primarily relate to the Company's accounting and
reporting of the effects of income taxes. While It appears that the Company
has recorded Its portfolio securities at market prices In accordance with
Section 2(a)(41} of the Investment Company Act of 1940 (''1940 Act"),
resulting ·In $53,994,093 of unrealized appreciation, we believe it has failed
to measure and disclose the future tax consequences related to this
appreciation, In accordance with accounting principles generally accepted in
the United States of America ("GAAP"}.
l·
Accounting and Reporting for Income Taxes in Accordance with
GMP
The Financial Accounting Standards Board's (''FASB'') Sta~ement of
Financial Accounting Standards No. 109, Accounting For Income t:1xes ("FAS
109''} establishes the financial accounting and reporting standards for the
effects of income taxes that result from an enterprise\; activities during the
current and preceding years. Paragraph 6 of FAS 109 states that tre
objectives of accounting for Income taxes are to recognize (a) the amount of
taxes payable or refundable for the current year and (b) deferred tax
liabilities and assets for the futu.re tax consequences of events that have
been recognized In an enterprise's financial statements or tax returns.
Paragraph 11 of FAS 109 sets forth a key concept underlying the
recognition of deferred tax assets and liabilities. Paragraph 11 provides
that:
An assumption inherent In an enterprise's statement of financial position prepared In
accordance with generally accepted accounting principles Is that tbe reported amounts
·
of assets and liabilities will be recovered and settled. respectively. Based on that
·
assumption, a difference between the tax basis .of an asset or a liability and Its
reported amount In the statement of financial position will result In taxable or
deductible amounts In some future year(s) when the reported amounts of assets are
recovered and the reported amounts of liabilities are settled. (Emphasis added.) ·
Paragraph 11 also provides several examples of Items that result In
differences between the recognition of transactions or events for financial
reporting purposes and for tax purposes. Revenues or gains that are taxable
after they are recognized In fln.anclal Income are Included as an example of
this difference In Paragraph ll(a).
The FASB considered whether the deferred tax consequences of
taxable temporary differences truly represent a liability for fl'nanclal
reporting purposes. The FASB concl.uded that the deferred tax
consequences do represent liabilities. Paragraph 78 of FAS 109 states:
An enterprise might be able to delay the future reversal of taxable temporary
differences by delaying the events that give rise to those reversals, for example, by
delaying the recovery of related assets or the settlement of related llabflltles. · A
contention that those temporary differences will never result In taxable amounts,
however, would contradict the accounting assumption inherent In the stateme'nt of
financial position that the reported amounts of assets and liabilities will be recovered
and settled, respectively; thereby making that statement Internally lnconslste[lt. For
that reason, the Board concluded that the only question Is when, not
whether, temporary differences will result 111 taxable amounts In future years.
(Emphasis added.).
Paragraph 16 of FAS 109 provides that, with respect to recognition and
measurement, "[a]n enterprise .§.h.91J. recognize a deferred tax liability or
asset for .9Jl temporary differences and operating loss and tax credi(
carryforwards In accordance with the provisions of paragraph 17". (Emphasis
added.)' Paragraph 17 states:
Deferred taxes shall be determined sep~rately for each tax-paying component (an
Individual entity or group of entitles that Is consolidated for tax purposes) In each tax
jurisdiction. That determination Includes the following procedures:
2
•
•
•
a. Identify (1)' the types and amounts of existing temporary differences and (2.) the
nature and amount of each type of operating loss and tax credit carryforward and
the remaining length of the. canyforward period
b. Measure the total deferred tax liability for taxable temporary differences using the
applicable tax rate (paragraph 18)
c. Measure the total deferred tax asset for deductible temporary differences and
operating loss carryforwards using the applicable tax rate
d. Measure deferred tax assets for each type of tax credit carryforward
e. Reduce deferred tax assets by a valuation allowance if, based on the weight of
available evidence, It Is more likely than not (a likelihood of more than so percent)
that some portion or ali of the deferred tax assets will not be realized. The
valuation allowance should be sufficient to reduce the deferred tax asset to the
amount that Is more likely than not to be realized.
Paragraphs 41 to 49 of FAS 109 provide the qfsclosure requlre'ments
for financial statement presentation. Paragraph 41 generally requires the
separation of deferred tax liabilities Into current and non-current amounts
based on the classification of the related asset or liability for financial
reporting. Paragraph 43 provides that financial statements must disclose (a)
the total of all deferred tax liabilities, (b) the total of all deferred tax assets,
and (c) the total valuation allowance recognized for deferred tax assets.
Paragraph 47 requires a reconciliation of the reported amount of income tax
expense attributable to continuing operations for the year to the amount of
Income tax expense that would result from applying domestic federal
statutory tax rates to pretax income from co_Qtinuing operations .
~ ·· '"
Investment companies are also subject to the accounting and
reporting standards es~abllshed by AICPA Aefdit and Accounting Guide for
Investment Companies (May 1, 2006) ("Audit Guide"). Most Investment
companies subject to the Audit Guide elect and qualify as RICs and,
therefore, do not provide for federal Income tax. However, investment ·
companies that do not elect nor qualify as RICs (such as the Company) or
Investment companies subject to other levels of taxation (e.g., foreign
taxes) should account and report Income taxes in accordance with FAS 109.
Paragraph 6.05 of the Audit Guide states:
Some Investment companies may be subject to state, local, or foreign taxes on net
Investment Income and realized gains on a recuning basts. State, local, and foreign
taxes, If payable, are reported on the accrual basis, Including deferred taxes on the
unrealized appreciation or depreciation of Investments.
The staff' Is aware of other lnvestm~nt companies that chose· not to
qualify _a~ PJ(:S and these companies genAra!Jy follow FAS lU~ by recording a
G~fer+ed tax liability associated with the unrealized appreciatio'n of portfolio
securlties 1 • The staff Is unaware of any Investment company (other than the
•
See Tortoise Energy Capital Corp., fHe.no. 811-i1725, Form N-CSRS (Aug~ 1, 2007) and
Kayne Anderson MLP Investment Company, file no. 811-21593, Form N-CS.RS (Aug. 3,
1
2007).
3
Company) that chooses not to qualify as a RIC and does not accrue a
deferred tax liability associated with Its unrealized appreciation.
2.
Summarv of the Company's Tax Presentation
•
The statement of operations In the 2007 FS shows a provision for
income taxes of $283,481 and the statement of assets "and liabilities shows
deferred Incomes taxes of $807,345 (referencing notes 1 and 2), accrued
income taxes-current of $137,125, and net unrealized appreciation of
Investments of $53,994,093. Notes 1 and 2, In pertinent part, state:
Note 1 Significant Accounting Policies
Income Taxes
The Fund files tax returns as a regular corporation and accordingly the financial
statements Include provisions for current and deferred Income taxes.
New Accounting Pronouncements
On July 13, 2006, The Financial Accounting Standards Board ("FASB") released FASB
Interpretation No. 48 "Accounting for Uncertainty In Income Taxes" ("FIN 48"). FIN 48
provides guidance for how uncertain tax positions should be recognized, mea~ured,
presented and disclosed In the financial statements. FIN 48 requires the evaluation of
tax positions taken or expected to be taken In the course of pr.gp.arlntt the .fu.n.d's. t~x
returns to determine whether-the tax positions are "more-likely-than-not" of being
sustained by the applicable tax authority. Tax positions not deemed to meet the more
likely-than-not threshold would be recorded as a tax benefit or expense In the current
year: Adoption of FIN 48 Is required for fiscal years beginning after December 15,
2006 and Is to be applied to all open tax years as of the effective date. At this time
management believes that the adoption of FIN 48 will have no Impact on the financial
statements of the Fund.
Note 2 Federal and State Income Taxes
· The Income tax provision Included In the financial statements Is as follows:
Regular tax liability ....... .. .. ....................... .....
$283,481
The Fund provides deferred taxes for unrealized appreciation on Its Investment
portfolio to the extent that management anticipates that a liability may exist based
upon the Fund being a going-concern entity. If the Fund's Income tax liability should
exceed the amount of current and deferred Income taxes, for an unforeseen reason,
the Fund's Board of Directors Is prepared to take the necessary steps to convert the
Fund to a Regulated Investment Company (RIC). Income tax obligations associated
with the conversion to RIC status will be recognized when the Board -of Directors _,_
directs that a conversion be Implemented. It Is not the Intent of management or the
Board of Directors to convert to RIC status In the foreseeable futur~.
The amount of deferred taxes currently available to the Fund Is $807,345. The
difference between the effective rate on Investment and operating Income and the
expected statutory rate Is due substantially to the use by the Fund of the dividends
received deduction.
·
4
•
The Fund has $1,908,937 In accumulated capital loss carry forwards which. expire as
follows: $1,600,732 on February 28, 2008; and $308,205 on February 28, 2009.
The Fund Is qualified and currently conducts business In the State of Florida. The Fund
Is subject to Florida corporate taxes but is not subject to alternative minimum tax In
any year In which the Fund does not pay a federal alternative minimum tax. .
It is our understanding that you assert that the Company .does not
need to record the entire deferred tax liability associated with the unrealized
appreciation on the Company's books and records because:
a.
b.
c.
d.
e.
•
f.
The Company maintains a cash position to assist It In meeting
redemptions;
·
The capital loss carryforwards will shelter some amount of
capital gains;
The Company could first sell securities without unrealized
appreciation to meet redemptions;
The Company has recorded a deferred tax liability of $807,345
which would shelter some capital gains;
·
The Company's Board of Directors monitors the above factors in
light of historical trends, the Company's Investment objective; its
low level of redemptions, and Its historically low portfolio .
turnover, ensuring an appropriate reserve Is available ln}he
Company's deferred tax liability account; and
·-····
The ·entlre deferred tax liability would be due only If the whole
portfolio were sold (a circumstance you describe· as "liquidation")
and that the Board believ·es it would be Inappropriate to record
the full deferred tax .llabillty.
The Company asserts that as long as It accrues sufficient deferred
Income taxes to compensate for the anticipated sale of appreciated
securities, there Is no harm to shareholders. Moreover, It contends that to
record the entire qeferred tax liability would not be In the best Interests of
Its shareholders, and that such action might be prohibited by Rule 22c-1
under the 1940 Act. Further, It states that a deferred tax liability should
only be recorded if it Is "more likely than not" that the amount recorded
would ·ultimately be paid. Accordingly, it states that recording the full
deferred tax liability would understate Its net asset v~lue per share ("NAV").
The Company further asserts that It has provi~ed adequate disclo!rure
regarding this issue.
.
The Company also claims that its Board of Directors passed a
resolution that would require the Company to convert to RIC status In 'the
event unforeseen circumstances caused gains to be realized that consumed
the entire amount of accumulated deferred Income taxes the Company has
5
recognized. You acknowledge that If the Company elects a conversion to
RIC status, It might be required to have a deemed sale of all appreciated
securities and thus be required to recognize the tax associated with such
deemed sale. You believe this Is similar to a C corporation converting to a
subchapter S corporation and you assert that the IRS has issued regulations
that permit a C corporation to defer the tax on any appreciated property
held for 10 years or more following the conversion to S corporation· status.
You believe the Company's conversion would be similar and that the
Company should be able to argue to the IRS that, provided .the Company
held the appreciated securities for over ten years follow ing conversion to RIC
status, the deemed sale provisions should not apply.
'
. .•
3.
Staff Questions Regarding Accounting and Reporting for
Income Taxes ·
A.
Appreciation of portfolio securities represents revenue to the Company
that Is taxable after It Is recognized In financial income. Accordingly,
portfolio appreciation is a temporary difference that triggers the recognition
of a deferred tax liability under FAS 109 and the Audit Guide. As discussed
in paragraph 78 of FAS 109, the issue Is not whether Income taxes will
ultimately be due on the appreciation of portfolio securities, but when such
taxes will be due. The FASB directly refuted the notion that a delay In
recognition does not mean that a temporary difference, (such as the
Company's unrealized appreciation), will not result in taxable amounts In
future years. According ly, delaying a sale or rationalizing the delay of a sale
has no bearing on the recognition .of a deferred tax liability associated with
the unrealized appreciation ofthat position.
•
The Company appears to have estimated some amount of deferred tax
liability using the factors previously discussed in Section 2 of this letter;
recording $807,345 as of the last financial statements. However, we believe
this amount is materially understated based on the temporary differences
resulting from the appreciation of portfolio securities as of the date of the
last financial statements. Further, the mechanics and sp~clflc assumptions
underlying this estimate are undisclosed.
Paragraphs 16 and 17 of FAS 109 require that a company recegnize a
deferred tax liability for all temporary differences existing as of the date of
the financial statements. Paragraph 17(b) specifically requires measurement
of the total deferred tax liability for taxable temporary differences using the
applicab le tax rate.
6
•
Please explain why the total deferred tax liability for temporary
differences arising from appreciation of portfolio securities was not recorded
·
and reported In accordance With FAS 109.
B.
The Company has disclosed the existence of capital loss carryforwards
which It Intends to use to offset future taxable Income. The Company has
asserted that the existence of these capital loss carryforwards, In part,
obviates the need for It to recognize deferred tax Liabilities related to the
appreciation of portfolio securities. Paragraph 17 of FAS 109, however,
provides specific Instructions for the measurement and recognition of
deferred tax assets associated with the future tax benefits attributable to
capital loss carryforwards. Such future tax benefits should be measured and
recognized separate from the measurement and recognition of deferred tax
liabilities.
Please explain why the Company has not separately measured and
recognized deferred tax assets for the capital loss carryforwards and other
applicable future tax benefits in accordance with FAS 109.
•
C.
It appears that the Company has not provided all of the disclosures
required under FAS 109, as described In Paragraphs 41 through 47 of the
standard. Please explain why the Company did not provide all of the
disclosures required under FAS 109 within the notes to the financial
statements.
D.
We believe the Company has a clear obligation .to account for Income
taxes In, accordance with GMP, -whlch Includes the requirements established
by FAS 109. Rule 4-01(a)(1) of Regulation S-X provides that "[f]lnanclal
statements flied with the Commission which are not prepared In accordance
with generally accepted accounting principles will be presumed to be ·
misleading or inaccurate, despite footnote of other disclosures, unless the
Commission has otherwise provided."
Pfease explain why the Company's apparent failure, as outlined In this.
letter, to comply with FAS 109, a generally accepted accounting prirclple,
does not make the Company's 2007 FS misleading.
4.
•
Estimatec{ Deferred Tax Liabilitv
We believe that the requirements of FAS 109 apply to ttie Company ih
order for its financial statements to be presented fairly and In accordance
with GMP. Accordingly, we believe that significant adjustments are
required to the financial statements. We are pr:ovidlng the following
· estimate, based upon Information contained in the Company's latest flnanclal
7
~··
statements, to demonstrate the significance of this issue to the Company, its
shareholders, and Its prospective shareholders.
Unrealized Appreciation
Currently Enacted Tax Rate
$ 53,994,093
Entire Deferred Tax
Less: Existing Deferred Tax
$ 18,897,932
Unrecorded Deferred Tax
$ 18,090,587
35%
807,345
Outstanding shares
1,588,813
NAV/ Share Difference
($ 11.38)
The Company might avail itself of capital loss carryforwards, the use of
which could mitigate the NAV/share Impact described above. The
measurement and recognition of deferred tax assets, If any, however, are
subject to the requirements established under FAS 109, Including the
determination of whether It Is more likely than not the future tax benefits
will be realized. We are unable to estimate the Impact of deferred tax
assets, If any, on this analysis because we are uncertain If a valuation
allowance exists.
Notwithstanding potential deferred tax assets described above, we
bel-ieve the necessary adjustments to the Company's financial-statements
are material to shareholders. As of Februa·ry 28, 2007, the Company's
NAV/Share was $54.67. When ,our estimate of the Impact of adjustments Is
compared to the Company's share price as of that date, it appears that the
share price was overstated by approximately 26%.
s.
•
General Comments
A.
Page 1 of the 2007 FS states "[t]hus, if a Copley shareholder does not
redeem, the shareholder pays no taxes." Regardless of the FAS 109 analysis
that will be provided by the Company, the Company has paid taxes and
thus, the_shareholder has paid a proportionate amount ofthose taxes. We
be.lleve the statement should be revised to state that, while the shareholder
does not pay a tax directly, they do pay taxes Indirectly througn the
company, and at a rate that may be higher than If the shareholder pald such
taxes directly. The consequences of tWo fevers of taxation should also be
explained.
8
•
•
B.
The 485BPOS filed by the Company on July 2, 2007 improperly
presents the fee waiver regarding the management fee. The Company
shows the net manaqement fee of .63% in the body of the fee table, even
though a footnote states that "[w]ltnout such waiver the fee would have
been 0. 71%"and that "[t]he Advisor voluntarily waived a portion of the
advisory fees but It is under no contractual obligation to do so." See
Instructions 3(d)(l) and 3(e) of Form N-1A. The disclosure must be revised
accordingly. only contractual warvers can be presenrno ·rn the body of tlie
fee i:abr~ and both gross and net expenses must be shown In the fee table •
Rule 38a-1 under the 1940 Act mandates that the Company have a
.C.
functioning Chief Compliance Officer ("CCO") and a compliance program.
We note that there Is no disclosure regarding the Identity of the Company's
CCO. Please provide a copy of this letter to the CCO, and assure his/her
Input In the Company's response letter. Has the Company finalized a
compliance program pursuant to the requirements of the 1940 Act? Please
advise us who the ceo Is and make appropriate disclosure revisions, as
needed.
•
D.
In the Company's Form N-CSR, the Company provided disClosure
regarding its historical performance from 1984 through 2007. The
disclosure states that there was a "reserve for taxes on unrealized.Qalns" for
1989. Please explain what this Is and why the Company appears to have
made a change at that time.
* * * * * * * * * * * *
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure In the filings reviewed by the staff to be certain
that they have provided all lt:~formatlon Investors require. Since the .
Company and Its management are In possession of all facts relating to a
Comparw's disclosure, they are responsible for the accuracy and adequacy of
the disclosures they have made. ·
·
In connection with your response to our comments, please provide, In
writing, a statement from the Company acknowledging that:
•
·
•
the Company Is responsible for the adequacy and accuracy-of the
disclosure In the filings;
staff comments or changes to disclosure In response to staff comments.
In the filings reviewed by the staff do not foreclose the Commission
from taking any action with respect to the filing; and
9
·
the Company may not assert staff comments as a defense In any
proceeding Initiated by the Commission or any person under the
federal securities laws ofthe United States.
In addition, please be advised that the Division of Enforcement has
access to all information you provide to the staff of the Division of
Investment Management In our review of your filings or In response to our
comments on your filings. Please note, a non-response by the Commission
or Its staff to any Information you submit or fall to submit does not mean the
Commission acquiesces In or agrees with any position you have taken.
Please contact Bryan Morris at 202-551-6935 or Kevin Rupert at 202-551
6966 if you have any questions.
•
Sincerely,
1~
/~Rupert
Accountant
cc:
Thomas C. Henry, Esquire
Roberts & Henry
164 Honeysuckle Drive
Jupiter, FL 33458
•
Bryan J. Morris
Assistant Chief Accountant
Division of Investment Management
Richard F. Sennett
Chief Accountant
Division of Investr:nent Management
Frank Donaty
Assistant Director, Office of Disclosure and Review
Division of Investment Management
10
•
Exhibit C
1fG1 YV&./ \1 I I
,.
UNITED STATES
SEC'VRJTIES AND EXCHANGE COMMJSSlO.N
'BOSTON REGIONAL Olt'FJCE
. l3RD FLOON.
33 ARCH STRE'ET
BOSTON, MASSACHUSETTS 02110.1424
RY FACSIMILE (410) 745-5802 and F!RST CLASS MAIL
November 30, 2007
Thoma.~ C. Hcxiry, Esq.
Roberts'& Henry
·
164 Honeysuckle Drive
Jupiter. FL .33458
Re: .Qypley Fund. Inc. CB-02335)
Dear Mr. HCltr)':
This Jetter conllnns today' s telephone conversation in which thL: staiT advised you that it
intends to recommend that the Commission bring an emergency civil injunctive ·action against
your client; Copley Flmd. Inc.. alleging that it violated both Rule 22c-l promulgated under
Section 22(c) ofthe Investment Company Act of 1940 as well as Section 34(b) of the Investment
Company Act. In connection with the contemplated action, the staff may seek prelimina.ry and
permanent injunctions (including a preliminary order barripg the Copley fund from selling or
redeeming shares at kl net assot value that b not calculated in conformity with generally accepted
accounting principles), civil monetary penalties and other relief. In accordance with Rule 5(c) of
the Commission's Rules on Infonna1 and Other Procedures. 17 C.P.R.§ 202.5(c), we arc otl'ering
your client the opportunity to makes Wells Submission.
.
We enclose for your i.nfon11atiop a copy of Secwitics Act Release No. 5310 entitled
"Procedures Relating to the Commencement of Enforcement 'Proceedinr,s Md Tenn.ination of
Staff Investigations." If your client wishes to make a written m: videotaped submission setting
forth ~my rca.qons of Jaw. policy or faci why it believes the civil injunctive action should not be
brought, or ~nging any facts to the Commission's nttention in connection with its consideration
of this matter, you should forward the submission to me by no later than December 5, 2007. Any
written submission should be limited to 40 pages, and any video submission should not exceed
12 minutes. Any submission should be sent to:
Thomas C. Henry, Esq.
November30, 2007
Page 2
LeeAnn G. Gaunt
Assistant Regional Director
Securities and Exchange Commission
33 Arch Street. 23r<J Floor
Boston, MA 02110~1424
In the event the staff mak~;:s an enforcement recommendation to the Commission on this matter, we will
forwatd any submisS~ion that you make to the Commfssion. Please be advised lhat the Commission may use the
information contained in such asubmission as an admis.'lion, or in ttny other manner pcnnitted by the Federal Rule~
of Evidence, in connection with Commission enforcement proceedings, or otherwise. This practice is explicitly
provided for in the list ofRoutine Uses or Information (Item 4), which is contained in Form 1662, "Supplamr:ntal
lnfonnation for Persons Requested to Supply Information Voluntarily or Directed to Supply Information Pursuant
to a Commission Subpoena.'' For your information, a copy of:Form 1662 is enclosed. Please also be adVi~ed that
any submission you make may be discoverable by third parties in accordance with appli:able law.
If you have any questions, please contact me at 617~573~8945.
i?b(J!Jatt#LeeAnn G. Gau.nt
Assistanl Regional Director
Enclosures:
St:curitics Act Rclo~e No. 5310
SEC Fonn 1662
Exhibit D
Unassociated Document
Page 1 of28
N-CSR/A 1 v120186 ncsra.htm
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORlvf N-CSR Amended
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NillvffiER 811-2815
COPLEY FUND, INC.
(Exact name of registrant as specified in charter)
5348 Vegas Drive
Suite 391
Las Vegas, NV 89108
(Address of principal executive offices) (Zip code)
Irving Levine, President
5348 Vegas Drive
Suite 391
Las Vegas, NV 89108
(Name and address of agent for service)
REGISTRANT'S TELEPHONE NlJNffiER, INCLUDING AREA CODE: 1-561-744-5932
DATE OF FISCAL YEAR END: FEBRUARY 29, 2008
DATE OF REPORTING PERIOD: FEBRUARY 29, 2008
Form N-CSR is to be used by management investment companies to file reports with the commission not later than 10 days after the
transmission to stockholders of any report that is required to be transmitted to stockholders under Rule.30e-l under the Investment
Company Act of 1940 (17 CFR 270.30e-l). The Commission may use the information provided on Form N-CSR in its regulatory,
.
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this iniormation public. A
registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid
Office of Management and Budget ("OMB") control number. Please direct comments conceJ!ling the accuracy ofthe information
collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection.of information under the clearance requirements of 44
u.s.c. ss. 3507.
.
~.-
httn· //VJWW.~ec.rmv/ Archives/edQar/data/721291/000 114420408040755/v120 186
ncsra.htm
3/1/2012
Page 2 of28
Unassociated Document
Item I . Annual Report
Restated Annual Report
February 29, 2008
COPLEYFUND, INC.
A No-Load Fund
TABLE OF CONTENTS
COPLEY FUND, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDING
FEBRUARY 29, 2008
Table of Contents
Title
Page
Shareholder Letter and Management's Discussion of Fund Performance
1 ~
Per Share Value Graph
±
Comparative Performance
li
l-lttn·//www ser. ~ov/ Archives/edliar/data/7212911000114420408040755/vl20186 ncsra.htm
3/1/2012
Unassociated Document
Page 3 of28
Independent Auditor's Report
.(2
1-.fl
Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
lQ
il
Statement of Changes in Net Assets
Statement of Cash Flow
12
.Ll
li
Notes to Financial Statements
ll'.
Financial Highlights
20
Disclosure of Fund Expenses
Supplemental Data
General
Voting Proxies on Portfolio Securities
Disclosure of Portfolio Holdings
Approval of Investment Advisory Agreement
21
About the Fund's Directors and Officers
~
22
22
22
22
Inside Back
Cover
- -- --- - -·- ----··-----------···--------------·-·-
·TABLE OF CONTENTS
Tel: (508) 674-8459
Fax: (508) 672-9348
.· COPLEY FINANCIAL SERVICES CORP.
Adviser and Administrator to Copley Fund Inc.
Post Office Box 3287
Fall River, Massachusetts 02722
April 2008
Dear Fellow Shareholder:
November 30, 2007, was an eventful day for the Copley Fund. The Securities and Exchange
Commission (SEC) compelled us to change our method of accounting for deferred income tax on all
unrealized gains. The unrealized gain in our approximately $90 million portfolio was about $60 million. This
accounting change reduced our per share value by $13.89 by increasing a deferred liability to a level that
would be realized only if the entire appreciated portfolio was liquidated. This change did not affect the
total assets of the Fund and they remain intact. The Board immediately began to explore ways in which the
Fund might be able to restore some or all of this reserve to the NAV. One of thes~ _1.._venues, a change in
the Fund's state venue from Florida to Nevada, provided a direct benefit to the Fund by reducing our per
share adjustment to approximately $12.00 per share.
During our thirty years of existence we had always maintained a reserve for unrealized gains which has
always been more than sufficient to cover any capital gains tax liability. As you consider this issue, it is
important to note that the only way we would have to actually pay out the full reserve would be an entire
liquidation of Copley Fund. Obviously we do not intend to liquidate and go out of business.
Management and the Board of Directors strongly disagree -with the SEC's position and are actively
attempting to identify and pursue any alternatives which may be-available to restore some or all of the
reserve to NAV. Of course, there can be no assurance that we will be successful in these efforts. Thus, we
are left with a price per share that reverts back to 2005 and 2006. However, we now have nearly an
additional $17 million of tax reserves giving us income and hopefully stock increases to add to our net
asset value. This change in treatment of deferred income tax is an accounting issue and no capital gains
1-lttn•//umrm <lP<' arnrl Arl''hi·m~<l/F>rlcr~r/rht~/7? 129 1/()()() 11442()4()R()40755/v120 186
ncsra.htm
· 3/1/2012
U nassociated Docrunent
Page 4 of28
taxes have been paid nor are any even currently payable. The Fund retains all of its current assets and
continues to earn dividends in ever increasing amounts and gains (or losses) continue to be taken on the
entire value of the portfolio which is approximately $90 million.
a
This unexpected reserve caused Copley to have loss of 10.8% in 2007 instead of a gain of 12.2%
under normal circumstances. Our sector diversification insulated us from much of the havoc of the market.
Utilities and energy stocks were some of. the prime movers in our substantial market gain. The financial
sector was particularly hard hit by the mortgage market and tightening of credit. We were fortunate in
disposing of a fair amount of our financial stocks in September thus avoiding the huge losses which
occurred during the balance of the year.
The volatility of the market in 2008 causes us to cite averages in approximations as stocks and sectors
can change as much as 2% daily. At this writing Copley is down between 4.5% and 5% year to date. The
Dow Jones average is down between 5% and 7%. No major sector is up. However the financials have been
the hardest hit. Our reductions of this sector in September of 2007 saved us from much larger losses. Note
also our defensive cash position is approximately 11% of the portfolio.
.' '
1
TABLE OF CONTENTS
Our retail associates in whose stores Copley Operating Division had the bag departments closed the
majority of their stores which caused a substantial decrease in our operating volume. Thus we decided tci
expand in another direction. Over the years we have had a close association with two families, Raffa and
Riccardi, who individually have been in the country Italian Restaurant business for over 50 years, owning
among them nine restaurants. Patrick Riccardi, 53 years of age, has worked in one family restaurant for 35
years. Based upon his experience and success Copley Operating has elected to open a restaurant in
Bristol, RI called Rice's Ristorante and to employ Mr. Riccardi as it's operator and manager. We look
forward to the same success and tradition that the Raffa and Riccardi families have achieved.
Meanwhile we are continuing· our same investment philosophy, i.e., highly visible and dividend paying
stocks in ever increasing amounts. Note our dividend income is at an all time high and should continue to
add substantially to our net asset value. We communicate with our Chicago consultants very often for
exchanges of ideas. Thus the Fund is assured of long term continuance.
We are making every effort to keep our expense ratio close ·to normalcy but with the challenge of the
accounting issue and Sarbanes-Oxley it is no easy task.
However, please remember that we have all of our assets intact, we have not been subject to credit or
sub-prime mortgage problems; thus, we look forward to the future.
All the above are reflected in our chart and the following numbers.
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
+ 23.9%
+25%
+18%
-8%
+20%
+16%
-2%
+18%
+18%
+10%
-7%
(Top performing Fund 1984)
+ 26%
+5%
+25%
1-.tt,...·llurnrnr t;!Pf' n-mrl A rr.hivpc;:fpfial'lrlil::~t::~/7? 1?.Ql /()()()11442040R04075S/v120186
ncsra.htm
3/1/2012
Unassociated Document
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Page 5 of28
-6.86%
+22.50%
-9.30%
-13.9%
+14.31%
+ 12.. 99%
+5.89%
+ 19.70%
-10.83%
-7.48%
(Reflects the increased tax reserve)
(As of March 31, 2008)
2
TABLE OF CONIENTS
Note. The performance figures provided for years prior to 2007 are consistent with the information
furnished in prior reports and do not reflect an adjustment for the change in accounting treatment of
deferred income tax.
The performance data quoted represents past performance and investment return. Principal value of an
investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than
the original cost. Please remember that past performance does not guarantee future results and current
performance may be higher or lower than the performance data quoted.
Our thanks are to our Board, and to the many shareholders who contacted me over the past several
months. All these shareholders expressed an appreciation for our Funds past performance and look
forward to the future.
Cordially yours,
h
-
· .~
· '· ,..
~
'
.
0
·'
0
••
0
O M'
'
Irving Levine
President
P.S. The Wall Street Journal no longer lists Copley Fund under Mutual Funds as its minimum assets
listing is one hundred million dollars. However, one can get our net asset value daily over the internet. Go
to Google home page search for Copley Fund then click on Mutual Funds and it will bring up Copley.
3
TABLE OF CONTENTS
COPLEY FUND, INC.
PER SHARE VALUE
3/112012
Unassociated Document
Page 6 of28
!i5 . ..... . ............. .......... . ....... . .... . .... .......... . ................ ...... . ... . ..... !!n · · - -- ---·
•
•
I
00 ' .
4£1il ·-" ..
41)
4512
Tt ·
•- - .. - - · • · ·- • ---- - -- ••
SO · ... .. . . . ...... ·
The per share values provided for years prior to 2/28/08 are consistent with information furnished in prior
reports and do not reflect an adjustment for the change in accounting treatment for deferred income tax-es.·
4
TABLE OF CONTENTS
COPLEY FUND, INC.
COMPARATfVEPERFORMANCE
This chart shows the value of a hypothetical $10,000 investment in the Fund ap.d the S&P 500 which is
a broad-based market index comprised of 500 of the largest companies traded on the u:s. Securities
Markets as measured by market capitalization. Market Indexes do not include expens~s which are
deducted from Fund returns. There can be no assurance that the performance of the Fund will continue
into the future with the same or similar trends depicted below. The graph does not reflect the deduction
for taxes that a shareholder may pay on the redemption of shares or dividends and capital gains received.
Ten Year Cumulative Return
Copley Fund As of 2/29/08
.$2-r,ooo ,
I
2:l,OJJG
2D,CQIJ
i .e,QQQ
16,000 .
· ~4.000
l2,01JO
t O,COil'
~.CO<! · ~-~--~~----~---~-------
AVERAGE ANNUAL RETURNS
1-,;-t..,..
I'"""'"' ~PI" rum/ Arl"hhrP.;:/pfia::lrln::lt:::!l7212911000114420408040755/v120186 ncsra.htm
311/2012
Unassociated Doclllllent
Page 7 of28
The follpwing table depicts the periodic 1-, 5-, and 10-year annualized returns and the S&P 500 Index;
Periods Ended 2/29/08
1 Year
Copley Fund
S&P 500
3.60%
(3.60)%
5 Years
11.62%
7.23%
Dow Jones Wilshire 5000
(4.07)%
'12.90%
7.69%
9.80%
10 Years
4.80%
Current performance may be higher or lower than the quoted past performance, which cannot.guarantee
future results. Share price, principal value and return will vary, and you may have a gain or loss when you
sell your shares. For most recent performance please call us at 877 - 881-2751. Returns do hot reflect
taxes that a shareholder may pay on redemption of Fund shares. When assessing performance, investors
should consider both short and long-term returns.
5
TABLE OF CONTENIS
Shareholders and Board of Directors
Copley Fund, Inc.
Las Vegas, Nevada
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying statement of assets and liabilities, including the portfolio of
investments, of Copley Fund, Inc., as of February 29, 2008, and the related statement of operations for the
year then !=lnded, the statement of changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. My responsibility is to express an
opinion on these financial statements and financial highlights based upon my audit.
I conducted my audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amourits and
disclosures in the financial statements. My procedures included confirmation of securities owned at
February 29, 2008 by receipt of correspondence from the custodian. An audit also includes assessing the
accounting principles used and significant estimates rriade by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements and financial highlights referred to above present fairly, in all
material respects, the financial position of Copley Fund, Inc., as of February 29, 2008, the results of its
operations for the year then ended, the changes in its net assets, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting principles .generally accepted in the
United States of America.
As discussed in Note 1 to the financial statements, the Copley Fund, Inc., chan~dits method of accrual
for deferred income taxes in 2007.
Roy G. Hale
Certified Public Accountant
April 28, 2008
La Plata, Maryland
6
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TABLE OF CONT ENTS
3/112012
Unassociated Document
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COPLEY FUND, INC.
PORTFOLIO OF INVESTMENTS
February 29, 2008
' Shares
Value
Common Stocks -113.10%
Banking - 7.41%
Bank of America Corp.
J.P. Morgan Chase & Co.
KeyCorp.
25,000
42,000
15,000
PNC Financial Services Group
35,000
$
993,500
1,707,300
330,750
2,150,050
5,181,600
Diversified Utility Companies - 13.91%
Alliant Energy Corp .
Dominion Resources; Inc.
20,000
60,000
FPL Group
110,000
694,800
2,396,400
6,631,900
9,723 ,100
Drug Companies - 3.24%
100,000
2,261,000
Public Service Eqterprise Group
Scana, Corp.
35,000
40,000
40,000
33,000
40,000
30,000
50,000
Sempra Energy, Inc.
35,000
1,432,200
2,703,600
1,017,200
1,515,690
1,676,400
1,323,000
1,893,500
1.859,550
Bristol Myers Squibb Co.
Electric and Gas -19.20%
American Electric Power
First Energy Corp.
Great Plains Energy, Inc.
Integrys Energy Group, Inc.
Progress Energy, Inc.
13,421,140
Electric Power Companies- 19.25%
Arneren Corp.
DTE Energy Co.
Duke Energy Co.
Exelon Corp.
Nstar Corp.
PP&L Corp.
30,000
55,000
54,600
23,200
50,000
100,000
Southern Co.
35,000
1,281;000
2,189,550
957,684
1,736,520
1,545,000
4,538,000
1,208,550
13:456,304
Gas Utilities & Supplies - 8.83%
20,000
40,000
Delta Natural Gas Co.
Energy East Corp
510,400
1,066,000
The accompanying notes are an integral part of the finan cial statements.
7
·----.
·---··--·----- ----·--~-----·--
..-------------------..
-·.--·----~-
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TMLE OF CONTENTS
COPLEY FUND, INC.
PORTFOLIO OF INVESTMENTS
February 29, 2008
Shares
Value
New Jersey Resources Corp.
Northwest Natural Gas Co.
37,500
40,000
$ 1.725,375
1,681,600
WGL Holdings, Inc.
38,000
1,185,220
6,168,595
Health Care Products - 0.44%
*Zimmer Holdings, Inc.
Insurance - 2.70%
poo
308,689
Arthur J. Gallagher & Co.
Oil Companies- 21.30%
BP Amoco PLC.
Chevron Texaco Corp.
80,000
1,888,000.
25,500
46,200
1,654,185
4,003,692
9,230,543
Exxon-Mobil Corp.
106,086
'
14,888,420
Oil Refineries - 4.37%
Sunoco, Inc.
Pipelines - 0.90%
50,000
3,054,000
Spectra Energy Corp.
Publishing- 0.03%
27,300
630,903
*Idearc, Inc.
Retail- 1.42%
4,711
22,707
Wal-Mart Stores, Inc.
Telephone -10.10%
AT&T, Inc.
Citizens Communications Co.
20,000
991,800
. 93,555
3,258,521
375,900
3,422,506
35,000
94,232
Verizon Communications, Inc.
7,056,927
Excess of liabilities over cash and other assets
79,053,185
(9,658,656)
Net Assets
$69,394,529
Total value of investments (Cost $28,630,5n9)
* Non-income producing securities.
The accompanying notes are an integral part of the financial statements.
8
TABLE OF CONTENTS
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COPLEY FUND, INC.
PORTFOLIO OF INVESTMENTS
February 29, 2008
Federal Tax Information: At February 29, 2008, the net unrealized appreciation based on cost for Federal
income tax purposes of $50,422,626 was as follows:
Aggregate gross unrealized appreciation for all investments
for which there was an excess of value over cost
Aggregate gross unrealized depreciation for all investments
for which there was an excess of cost over value
$50,658,953
(236,327)
$50,422,626
Net unrealized appreciation
The accompanying notes are an integral part of the financial statemepts.
9
TABLE OF CONTENTS
COPLEY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
February 29, 2008
ASSETS
Investments in securities, at value (identified cost
$28,630,559) (Note 1)
Cash
Receivables:
Securities Sold
Trade (Notes 5 & 6)
Dividends and interest
Inventory (Notes 1 & 6)
Machinery & Equipment (Note 1)
Leasehold Improvements (Note 1)
$79,053,185
7,126,759
$
108,501
3,958
330,162
Prepaid Expenses and other assets
Total Assets
LIABILITIES
Payables:
Redemptions
Trade
Accrued income taxes
Accrued expenses
Deferred income taxes (Note 1)
442,621
113,259
264,755
96,838
27,609
87,125,026
-.
4,939
11,356
146,016
51,311
17,516,875
Total Liabilities
Commitments and Contingencies (Note 7)
17,730,497
Net Assets
Net assets consist of:
$69,394,529
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12,053,268
Undistributed net investment and operating income
Accumulated net realized gain on investment
transactions
Net unrealized appreciation in value of investments
(Note 2)
3,279,447
50,422,626
$69,394,529
Total
Net Asset Value, Offering and Redemption Price Per Share
(5,000,000 shares authorized, 1,574,658 shares of $1.00
par value capital stock outstanding)
$
44.07
The accompanying notes are an integral part of the financial statements.
10
TABLE OF CONTENTS
COPLEY FUND, INC.
STATEMENT OF OPERATIONS
For the year ending February 29, 2008
Investment Income (Note 1)
Income
$ 2,885,330
Dividend
259,302
Interest
Investment income
Expenses:
Investment advisory fee (Note 5)
Professional fees
Custodian fees
Accounting and Shareholder Services
Printing
Postage and shipping.
Directors fees
Blue Sky fees
Insurance
Office expense and miscellaneous
Less: Investment advisory fee waived
Net investment income before income taxes
Operating Loss (Notes 2, 5 and 7)
Gross profit
Less: Operating expenses
Net operating loss before income taxes
Net Investment and Operating Income before Income Taxes
$3,144,632
603,710
175,768
26,149
68,551
13,893
4,478
14,148
6,580
45,293
3,788
962,358
(60,000)
- -902,358
2,242,274
34,826
129,652
(94,826)
Less provision for income taxes (Notes 2 and 7 )
2,147,448
275,016
Net investment and operating income
1,872,432
Realized and Unrealized Gain (Loss) on Investments
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Realized gain from investment transactions during
the period
1,557,833
Decrease in unrealized appreciation of investments
during current period, net of income tax affect
(1,011,885)
545,948
Net realized and unrealized loss
$2,418,380
Net Increase in Net Assets Resulting from Operations
The accompanying notes are an integral part of the financial statements.
11
TABLE OF CONTENTS
COPLEY FUND,. INC.
STATEMENT OF CHANGES IN NET ASSETS
Restated
Year Ended
Year Ended
2/29/08
2/28/07
Increase (Decrease) in Net Assets from Operations
Net investment and operat.ing income
Net realized gain on investment transactions
Net change in unrealized appreciation on investments
Increase in net assets resulting from operations
Capital Share Transactions (Note 3)
$ 1,872,432 $ 1,861,031
353,076
1,557,833
(1,011,885)
6,044,537
2,418,380
8,258,644
(604,547)
23,780
1,813,833
8,282,424
67,580,696
59,298,272
End of Year (including undistributed net investment and
,
$ ,
operating income of $12,553,750 and $11,480,653
69 394 529
respectively)
$67,580,696
Increase (decrease) in net assets resulting from capital
share transactions
Total increase (decrease) in net assets
Net Assets
Beginning of Year
The accompanying notes are an integral part of the financial statements.
12
TABLE Of CONJ'ENTS
COPLEY FUND, INC.
STATEMENT OF CASH FLOWS
For the year ending February 29, 2008
Increase (Decrease) in Cash
Cash flow s from operating activities
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Proceeds from disposition of long-term portfolio investments
6,524,557
Receipts from customers
125.418
(264,004)
(1,052,291)
(3,571,737) .
Payments of taxes, net
Expenses paid
Purchase of long-term portfolio investments
(103,137)
Payments to suppliers
Net cash provided by operating activities
4,799.430
Cash flows from investing activities .
Purch~se of Machinery, Equipment & Leasehold Imp
Net cash provided by investing activities
(361,593)
(361,593)
Cash flows provided by financing activities
4,196,963
(4,73,3,552)
Fund shares sold
Fund shares repurchased ·
Net cash used by financing activities
(536:589)
Net increase in cash
Cash at beginning of the year
3,901,248
3,225,510
Cash as of February 29, 2008
$ 7,126,758
Reconciliation of Net Decrease in Net Assets Resulting from
Operations to Net Cash Provided By Operating Activities
Net Increase in net assets resulting from operations
Decrease in investments
Increase in receivable for securities sold
Increase in dividends and interest receivable
Decrease in receivables from customers
Increase in inventory
$ 1,073,097
5,075,438
(108,501)
(23,053)
13,950
(3,478)
8,891
2,747
16,981
(1.256,642)
Increase in incom.e taxes payable
Increase in trade payables
Increase in accrued expenses
Decrease in deferred taxes
3,726,333
Total adjustments
Net cash provided by operating activities
$ 4.799,430
The accompanying notes are an integral part of the financial statemenis.
13
TABLE OF CONTENTS
COPLEY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Fund is registered under t he Investment Company Act of 1940, as amended, as a diversified, open
end management company. The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The policies are in conformity with
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accounting principles generally accepted in the United States of America.
Security Valuation
Investments in securities traded on a national securities excha·nge are valued at the last reported sales
price on the last business day of the period; securities traded on the over-the-counter market and listed
securities for which no sale was reported on that date are valued at the mean between the last reported
bid and asked prices.
Sales of Securities
In determining the net realized gain or loss from sales of securities, the cost of securities sold is
determined on the basis of identifying the specific certificates delivered.
Distributions
It is the Fund's policy to manage its assets so as to avoid the necessity of making annual taxable
distributions. Net investment and operating income and net realized gains are not distributed, but rather
are accumulated within the Fund and added to the value of the Fund's shares.
'
Inventory
Inventory is valued at the lower of cost (determined by the first in/first out method) or market.
Mach.inery; Eqwpment & Leasehold lmpro vement.
Property and equipment are recorded at cost. Expenditures for major additions and improvements are
capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When
property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful lives of the related assets using the
straight-line method for financial statement purposes. The Fund uses other depreciation methods
(generally accelerated) for tax purposes where appropriate. The estimated useful lives for the machinery
and equipment held by the Fund is 3 to 20 years.
Amortization of leasehold improvements is computed using the straight-line method over the shorter of
the remaining lease term or the ~stimated useful lives of the improvements.
Income Taxes
The Fund files tax returns as a regular ~orporation and accordingly the financial statements include
provisions for current and deferred income taxes.
Other
Security transactions are accounted for on the date the securities are purchased or sold. Dividend
income is recorded on the ex-dividend date. Interest income is recorded as earned.
14
TABLE OF CONTENTS
COPLEY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies - (continued)
New Accounting Pronouncements
Effective August 31, 2007, the Fund adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 48 ("FIN 48") "Accounting for Uncertainty in Income Taxes", a clarification of FASB
Statement No. 109, "Accounting for Income Taxes". FIN 48 provides guidance for how uncertain tax
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positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48
requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund's
tax returns to determine whether thetax positions are "more-likely-than-not" of being sustained by the
applicable tax authority.
In September 2006, FASB issued Statement on Financial Accounting Standards (SFAS) No. 157 "Fair
Value Measurements." This standard est?blishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosure about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. The changes to current generally accepted accounting
principles from the application of this Statement relate to the definition of fair value, the methods used to
measure fair value, and the expanded disclosures about fair value measurements. At this time, management
does not believe the adoption of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures may be required about the inputs used to develop the
measurements and the effect of certain o.f the measurements reported on the statement of changes in net
assets for a fiscal period.
'
Restated Financial Statements
Recent Developments
On November 30, 2007, an adjustment was made to the long-term liabilities section of the Fund's
balance sheet to recognize the total potential federal and state income taxes associated with the
accumulated unrealized appreciation generated by the Fund's stock portfolio. For financial reporting
purposes, this change should be regarded as a correction of an error on prior-period financial reports. The
affect of the adjustment will be to increase the liabilities of the Fund for all prior year information
contained in this annual report and thereby reduce the overall net assets of the Fund. The total assets of
the Fund, contained on page· 10 of this annual report, are not affected. Under the current application of
generally accepted accounting principles, the Fund is required to recognize a full accrual of the Federal
income tax associated with the unrealized appreciation in the Fund's security portfolio. Accordingly, the
Fund will recognize an accrual of deferred income at the ·Federal statutory rate of 35% on a daily basis on
the taxable amount of accumulated unrealized appreciation.
It should be understood that the foregoing application of generally accepted accounting principles is
based upon the assumption that at some point the appreciated securities of the Fund will be sold and the
applicable income tax will be paid. With the· Fund's history of holding securities for long periods of time,
the actual payment of the deferred income tax may not be paid for many years and it is conceivable that
with fluctuating market conditions, the total liability at any given point in time will never be paid.
15
TABLE OF CONTENTS
COPLEY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies - (continued)
Past Policy
For over 15 years, the Fund has recognized a liability for .deferred income tax to the extent that the
management of the Fund felt a real liability may exist. This po.licy, applied consistently over the entire
period, demonstrated that the Fund was able to reasonably estimate the extent of the deferred tax
obligation in that at no point in time during the fifteen year period, did the actual liability associated with
the liquidation of appreciated securities exceed the accumulated deferred taxes recognized in the Fund's
semi-annual or annual financial statements.
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Notwithstanding the management of the Fund's reasonable ability to estimate the carrying value of the
deferred income tax liability, FASB Statement of Financial Accounting Standatd 109 (FAS 109) requires all
entities to recognize a full accrual on the deferred income tax that may be payable at the end of each fiscal
year. Based upon a decision by the Board of Director's that the Fund would change its taxable status from a
regular corporation to a regulated investment company (RIC) if the Fund fol!nd itself in a position where it
had reserved insufficient deferred income taxes to meet actual income tax obligations associated with its
appreciated security portfolio, an action available to the Fund as a registered investment company, this
decision was felt to be a reasonable response to the application of FASB 109. Albeit conversion to RIC
status is not a tax free event, the transactions required could be managed by the Fund in such a manner
that the Fund would not be required to recognize the full deferred income tax accrual required under FAS
109.
Correction of an error in comparative financial statements
In accordance with generally accepted accounting principles, the cumulative effect of the change for the
periods prior to March 1, 2007, totaling $16,727,527, has been recognized in the February 29, 2008
Statement of Assets and Liabilities as a restatement of the beginning balance of undistributed net
investment and operating income.
2/28/07
2/29/08
Undistributed net investment and operating
income at beginning of year, as previously
reported
$10,180,836 $ 25,047,332
Cumulative effect on prior years of retroactive
restatement
Net investment and operating income
Undistributed net investment and operating
income
0
(16,727,527)
1,872,432
1,861,031
$12,053,268 $ 10,180,836
16
TABLE OF CONTENTS
COPLEY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
2. Disclosure of the provisions for income taxes, reconciliation of statutory rate to effective rate, and
significant components of deferred tax assets and liabilities.
The Federal and state income tax provision (benefit) is summarized as follows:
. ;' Fiscal Year
2008
2007
248,162
26,854
$ 215,'02"3
38,170
275,016
253,193
500,482
(2,270,716)
3,370,927
568,540
(1,770,234)
$(1,495,218)
$4,192,660
Current:
Federal
State
$
Deferred:
Federal
State
Net provision (benefit) for income taxes
Effective income tax rate
35.00%
3,939,467
38.58 %
Differences between the effective tax rate and the federal statutory rates as of the last day of the fiscal
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year are as follows:
Fiscal Year
2008
2007 .
35.00%
(1.92)
Federal statutory rate
35.00%
State income tax benefit
State income tax rate
0.00
0.00
Effective tax rate
35.00%
5.50
38.58%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying .
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The deferred tax liabilities relate to the Fund's unrealized gains on marketable securities.
The reduction in deferred tax liabilities for the fiscal year ending February 29, 2008 is due to a change
in tax venue for the Fund from Florida to Nevada. The state of Nevada does not access a corporate level
income tax.
'
The Fund has $308,205 in ac~umulated capital loss carryforwards which expire as follows: $308,205 on
February 28, 2009.
17
TABLE Of CONTENTS
COPLEY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
3. Capital Stock
At February 29, 2008, there 'w ere 5,000,000 shares of $1.00. par value capital stock authorized.
Transactions in capital shares were as follows:
Year Ended
2/28/07
Year Ended
2/29/08
Shares
Amount
Shares
Amount
Shares sold
Shares repurchase d
73,475
(87,630)
$ 4,126,682
(4,731,229)
103,791
(107,802)
$ 5,369,011
(5,345,231)
Net change
(14,155)
$ (604,547)
(4,011)
$
23,780
4. Purchase and Sale of Securities
For the year ended February 29, 2008, purchases and sales of securities, other than United States
government obligations and short-term notes, aggregated $3,571,737 and $6,610,433 respectively.
5. Investment Advisory Fee and Other Transactions with Related Parties
Copley Financial Services Corporation (CFSC), a Massachusetts corporation, serves as investment
advisor to the Fund. Irving Levine, Chairman of the Board of the Fund, is the owner of all of the
outstanding common stock of CFSC and serves as its President, Treasurer and a member of its Board of
Directors.
Under the Investment Advisory Contract, CFSC is entitled .to an annual fee, payable monthly at the rate
of 1.00% of the first $25 million of the average daily net assets; .75% of the next $15 million; and .50% on
average daily net assets over $40 million.
For the year ended February 29, 2008, the fee for investment advisory service totaled $603,710 less
fees of $60,000 voluntarily waived. Also during the period unaffiliated directors received $14,148 in·
directors' fees.
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Operating Divisions
The Fund has an operating division, Cople y Fund, Inc.- Operating Division ("COD"), which imports
merchandise for resale. A portion of its merchandise is placed on ·consignment with a company controlled
by Irving Levine. The Fund invoices the consignee when the merchandise is ultimately sold.
The Fund also recently formed a ne·w wholly owned subsidiary, Copley Operating Group LLC ("COG"),
which owns equipment and operates a restaurant, Rice's Ristorante. The real property used by the
restaurant is leased.
During the period covered in this report, the Fund made a $100,000 equity investment in COD: COD also··
made an equity investment of $5,000 in COG. In addition, COD provided a loan to COG in the amount of
$483,978.
18
TABLE OF CONTENTS
COPLEY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
5. Investment Advisory Fee and Other Transactions with Related Parties - (continued)
The combined results of these subsidiary companies during the year ended February 29, 2008, are as
follows:
·
Sales
Cost of goods sold
Gross profit
$ 111,469
(95,687)
15,782
General & administrative expenses
(129,652)
Net loss from operations
Other income (dividends and interest)
(113,870)
Net Loss
19,044
$ (94,826)
6. Notes Payable
A $3,000,000 line of credit has been secured for the operating division from Fleet National Bank. The
assets of the Fund are pledged as security for this line of credit. The amount currently outstanding on this
line is zero. ·
7. Conunitments and Contingencies
Since the Fund accumulates its net investment income rather than distributing it, the Fund may be
subject to the imposition of the federal accumulated earnings tax. The accumulated earnings tax is imposed
on a corporation's accumulated taxable income at a rate of 15% for years commencing after December 31,
2002.
Accumulated taxable income is defined as adjusted taxable income minus the sum of the dividends paid
deduction and the accumulated earnings credit. The dividends paid deduction and accumulated earnings
credit are available only if the Fund is not held to be a mere holding or investment company.
The Internal Revenue Service has, during examinations of the Fund's federal income tax returns, upheld
management's position that the Fund is not a mere holding or investment company since the Fund is
conducting an operating division. This finding by the Internal Reyenue Service is always subject to review
by the Service and a finding different from the one issued in the past could be made by the Service.
Provided the Fund manages accumulated and annual earnings and profits, in excess of $250,000, in such
a manner that the funds are deemed to be ob ligated or consumed by capital losses, redemptions and
expansion of the operating division, the Fund should not be held liable for the accumulated earnings tax by
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the Internal Revenue Service.
19
T@LE OF CONTENTS
COPLEY FUND, INC.
Financial Highlights
The financial highlights table is intended to help you understand the Fund's financial performance for
the fiscal years 2/29/04 through 2/29/08. Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that an investor would have ean:ted or lost on an
investment in the Fund. The information for fiscal years prior to February 29, 2008 have been restated to
incorporate the correction of an error as it relates to accumulated deferred income taxes on unrealized
appreciation associated with the securities portfolio. The information set forth herein will be consistent
with the financial information contained in the restated financial statements for the period ending February
29, 2008. Shareholders should be certain that they have the most recent annual report which should be
read in connection with the prospectus.
The financial information was audited by Roy G. Hale, CPA, whose report, along with the Fund's
financial statements, is included the Fund's annual report to Shareholders, a copy of which is available at
no charge on request by calling 877-881-2751.
Year Ended
February February 28,
29,2008
2007
February February 28, February 29,
2005
2004
28, 2006
$ 42.54
$ 37.23
$ 35.28
$ 32.63
$ 27.62
Net investment income (loss)
1.18
(1.31)
0.27
(0.44)
(1.86)
Net gains Closses) on securities (both
realized and unrealized)
0.35
6.62
1.68
3.09
6.87
1.53
5.31
1.95
37.23
$
2.65
$ 35.28
5.01
$ 32.63
Net asset value, beginning of year
Income Closs) for investment operations:
Total investment operations
Net asset value, end of year
Total return
Net assets, last day of February ·(in
thousands)
$ 44.07
3.60%
69,395
$ 42.54
14.26%
67,581
5.53%
59,298
8:12%
57,948
18.14%
57,747
Ratio of net expenses, including regular
& deferred taxes, to average net
assets
1.72%
7.88%
3.80%
5.65%
10.60%
Ratio of net expenses, excluding
deferred taxes, to average net assets
1.72%
1.67%
1.72%
1.49%
1.59%
Ratio of net investment and operating
income (loss) to average net assets
2.73%
(3.28)%
0.76%
(1.30)%
(6.18)%
2.73%
4.11%
2.93%
2.83%
2.86%
2.84%
0.50%
0.73%
0.44%
0.92%
Ratio of net investment and operating
income (loss), excluding deferred
taxes, to average net assets
Portfolio turn over rate
Number of shares outstanding at end of
period (in thousands )
1,770
1,643
1,575
1,589
1,593
The financial highlights shown above included the waiver of $60,000 of the investment advisory
fee (as noted in the Statement of Operations). If the waiver of .$60,000 of investment advisory fees
had not been included, the following ratios would app ly:
Ratio of net expenses, including regular
& deferred taxes, to average net
assets
1.81%
7 .97%
3.90%
5.76%
10.71%
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aererrea taxes, to average net assets
Ratio of net investment and operating
. income Closs) to average net assets
Ratio of net investment and operating
income (loss), excluding deferred
taxes, to average net assets
!.I:H '1o
1. ( 0'10
1.tj0'1o
l.OU'1o
1. f U'1o
2.65%
(3.37)%
0.66%
(1.41)%
(6.29)%
2.65%
2.84%
2.73%
2.75%
2.72%
The accompanying notes are an integral part of the financial statements.
20
TABLE OF CONTENTS
COPLEY FUND, INC.
DISCLOSURE OF FUND EXPENSES
All mutual funds have operating expenses. As a shareholder of a mutual fund, your investment is
affected by these ongoing costs, which include investment advisory fees, It is important for you to
understand the impact of these costs on your investment return.·
Operating expenses such as these are deducted from the mutual fund's gross income and directly
reduce its final investment return. These expenses are expressed as a percentage of the mutual fund's
average net assets; this percentage is known as the mutual fund's expense ratio.
·The following examples use the expense ratio and are intended to help you understand the ongoing
costs (in dollars) of investing in your Fund and to compare these costs with those of other mutual funds.
The examples are based on an investment of $1,000 made at the beginning of the period shown and held
for the entire period.
The table below illustrates your Fund's costs in two ways:
Actual Fund Return. This section helps you to estimate the actual expenses after fee waivers that your
Fund incurred over the period. The "Expenses Paid During Period" column shows the actual dollar
expense cost incurred by a $1,000 investment in the Fund, and the "Ending Account Value" number is
derived from deducting that expense cost from the Fund's gross investment return.
You can use this information, together with the actual amount you invested in the Fund, to estimate the
expenses you paid over that period. Simply divide your actual account value by $1,000 to arrive at a ratio
(for example, an $8,600 account value divided by $1,000 = 8.6), then multiply that ratio by the number
shown for your Fund under "Expenses Paid During Period."
·
Hypothetical5% Return. This section helps you compare your Fund's costs with those of other mutual
funds. It assumes that the Fund had an annual 5% return before expenses during the year, but that i:he
expense ratio (Column 3) for the period is unchanged. This example is useful in making comparisons
because the Securities and Exchange Commission requires all mutual funds to make this 5% calculation.
You can assess your Fund's comparative cost by comparing the hypothetical result fOr your Fund in the
"Expenses Paid During Period" column with those that appear in the same _charts in the shareholder
reports for other mutual funds.
Note: Because the return is set at 5% for comparison purposes- NOT your Fund's actual return- the
account values shown may not apply to your specific investment.
Expenses Paid
During Period*
Beginning
(9/1/07
Annualized
Account Value Ending Account
2/29/08)
9/1/07
Value 2/29/08 Expense Ratios
Actual Fund Return
Hypothetical 5% Return
$
$
1,000 $
1,000 $
1,018.28
1,031.40
1.72%
1.72%
$
$
8.86
8.98
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3/172012
Page 21 of28
Unassociated Document
* Expenses are equal to the Fund's annualized expense ratio multiplied by the average account value over
the period, multiplied by 182/366 (to reflect the one-half period).
21
TABLE OF CONTENTS
COPLEY FUND, INC.
SUPPLEMENTAL DATA
General
Investment Products Offered
Are not FDIC Insured
May Lose Value
Are Not Bank Guaranteed
The investment return and principal value of an investment in the Copley Fund (the "Fund") will
fluctuate as the prices of the individual securities in which it invests fluctuate, so that your shares, when
redeemed, may be worth more or less than their original cost. You should consider the investment
objectives, risks, charges and expenses of the Fund carefully before investing ..For a free copy of the
Fund's prospectus, which contains this and other information, call the Fund toll free at (877) 881-2751 or
write to Gemini Fund Services at 4020 South !47th Street, Omaha, NE 68137.
This shareholder report must be preceded or accompanied by the Fund's prospectus for individuals who
1
are not current shareholders of the Fund.
Voting Proxies on Fund Portfolio, Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies
relating to the Fund's portfolio securities, as well as information relating to portfolio securities during the
12 month period ended June 30, 2007, (i) is available, without charge and upon request, by calling 1-800
352-9908; and (ii) on the U.S. Securities and Exchange Commission's website at http://www.sec.gov.
Disclosure of Portfolio Holdings
The SEC has adopted the requirement that all funds file a complete schedule of investments with the
SEC for their (irst and third fiscal quarters on.Form N-Q. The Fund's Forms N-Q, reporting portfolio
securities held by the Fund, is available on the Commission's website at http://www.sec.gov, and may be
reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the
operation of the public reference room may be obtained by calling 800-SEC-0330.
Approval of Investment Advisory Agreement
On March 14, 2008, the Board of Directors of the Fund approved the continuation:-·of the advisory
agreement with Copley Financial Services Corp. ("CFSC"). Prior to approving the continuation of the
advisory agreement, the Board considered:
the nature, extent and quality of the services provided by CFSC
the investment performance of the Fund
the costs of the services to be provided and profits to tie realized by CFSC from its relationship with
the Fund
the extent to which economies of scale would be realized ~s the Fund grows and whether fee levels
reflect these economies of scale
the expense ratio of the Fund
httn:/
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.