# SECURITIES AND EXCHANGE COMMISSION > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ab6f82952e13d0a6e ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 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 BLANK '· ROMELLP COUNSELORS AT LAW Pflone: (212) 885 - 5455 Fax: (21 2) 885-5002 Email: psalomon@blankrome. com April 12, 2013 u-~ RE ~:-:: C E:":':'-= IVE="= D-. 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. The Chrysler Building 405 Lexington Avenue New York, NY 10174-0208 www.BiankRome.com California • Delaware • Florida • New Jersey • New York • Ohio • Pennsylvania • Texas • Wash ington, DC • Hong Kong BLANK ' ROMELLP COUNSELORS AT LAW 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. BLANK ROME LLP 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 BLANK ROMELLP COUNSELORS AT LAW 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 • Florida • New Jersey • New York • Ohio • Pennsylvania o Washington, DC . o Hong Kong BLANK ROME uP 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 BLANK ROMELLP 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. BLANK ROME uP 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] B LAN K- ROME UP 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.) BLANK . . ROMEuP 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.) "· B-LANK ROMELLP 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. BLANK 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.) ' ,.' BLANK 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. BLANK ROME UP 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 ROMEtLP 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 FACSIMILE (212) 371·8410 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. F:\24DO-l 0 1\Copley'NoAction'OOS.Doc 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. F:\2400-1 0 I\Copley'NoAction'OOS.doc 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. F:\2400-1 0 1\Copley'NoAction'OOS.doc 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. F:\2400-1 01\Copley'NoAction'OOS.doc 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. F:\2400-1 0 l \Copley'NoAcrion'005.doc 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." F:\2400-1 0 l \Copley'NoAction'OOS.doc 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. 23rrlcr~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,.,...,. ~hHdaad'-~aid a•d.uetion--that is, tha am¢u.nt distri~uted. to · •... - •, - · -· · · ~.• •......___,...,._.._.~A. n...,...n,_tetion .. ~.07 Copley Fund, Inc. AltQrnative Tax Mafiagement Strategy ! · 1 Page 3 I I lGast tha su~ of: (1} $0 percent of ~he company's investment company .taxa~le inc om•, cornp'l.lte.d wi)thout deducting a di videnas ~ee¢ived deouction, plus (2) 90 pere$~t of its net exQmpt inter~st ~ncome~ 9apital gains are tt-eated sepcd:ately. A :R.IC may hQld or distr~hute any pot-tion of the capitallgain realized during the tax yaar. If the ~IC distribut~s 100% of\the capital gain realized it rae$ives a lOOt dividends paid deduction; if it distributes SO% it receives an SO% divida~ds paid aeduct~on. l . An investment company aesirin9 ito qualify as 'a regulated invastmant eempany will proceed .qener~lly as £ollowe; : - I (1) adopt a q~alifying form of organization (Copley ~lready maets this requirement); ; · .! . ( 2) ·identify the t irst tl!xable y~ar in which it seeks to so qua.lify; . . · ! . : . (3) arranqe .and maintain a portlfolio mix that meets g:ross . income and diverai£io~tion requiremen~s; · (4) declare and PilY dividends to \its shareholders before th~ end of the year or shortly thereafter;I . · . (5) fila ~tax - return electin9 tb be a regulated investment oompany and rafleeting that it has m•t the distribution anq related rules-for bein9 ta:~tad unt!•r Subobapter M of the Internal Revenue Code, 1986, as amended. cunqi.nq OQ.1Qp6ny. ~rom a .te9'ular oo~porat.icn to a r~lat.w investnU!!l'lt to In addition meetins the fiva requirements listed above~ Copley Fund~ Inc., must ~eet two aQditional r$quirements. . · (l) Tb~ runa must clistribute all earnings and profits aeoumulated prior to th6 year in which RIC status is elected; and · (2} it must pay a federal inoome. tax on all accumulated unrealized gains at the point in time RIC statu.s is elected. ond.er an existinc;' ll\S Regulatiet value. substantially. Tho not asset value must be a trua reflection of the value o.f each share of stock and not ~e inctll'llbered by value judqement.a (increases or ae.ereasas) that do not have some basis for reoo9nition. It eleetinq RIC st~tus will reduce the tax eone.aquances to tha Fu.nd, t.he Fund financial s~atements should refleot ·this ooourrence. -­ o! It is imperative that the Board Directors comply with the full disclosure conee.pt. of generally accept•cl aocountinq principles and SEO rule• and requlations on any major changa to accQunting ma:thotis or p:rocedurea. The willinqness to recognize RIC status and th~ eorrespondinq impact on individual sharaholQers must be fully disclosed in the prospectuc an4 in the financial statements issued to shareholders. Some proposed lanquaqa tor the prospectus and the individual statem~nts .i• l!!llet £brt:h in t.h• following pages .in tha ----~·-l._n_olln._ . . . . . . . . . . . . 16.67% Net assets, last day of February (in thousands) 86,868 11.77% 25.31% (16.81)% (5.72)% 72,079 6 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ab6f82952e13d0a6e. Public record. Not legal advice.