SEC Comment Letter for CORNERSTONE TOTAL RETURN FUND INC (CRF) (CIK 0000033934) (CRF) — Sep 14, 2010
CORNERSTONE TOTAL RETURN FUND INC (CRF) (CIK 0000033934)
Date: Sept. 14, 2010 · CIK: 0000033934 · Accession: 0000000000-10-053528
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File numbers found in text: 333-168926, 333-168927, 811-2363, 811-5150
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
INVESTMENT MANAGEMENT
September 14, 2010
Mary K. Stokes, Esq.
Blank Rome LLP
One logan Square
130 North 18th Street
Philadelphia, PA 19103-6998
RE: Cornerstone Strategic Value Fund, Inc. ("ClM")
File Nos.: 333-168927 and 811-5150
Cornerstone Total Return Fund, Inc. ("CRF")
File Nos.: 333-168926 and 811-2363
Dear Ms. Stokes:
On August 19, 2010, ClM and CRF, (each a "Fund" and collectively
the "Funds") each filed a registration statement on Form N-2 under the
Securities Act of 1933 ("1933 Act") and the Investment Company Act of
1940 ("1940 Act"). Each registration statement is filed in co~nection
with a proposed non-transferable rights offering of shares of common
stock. The subscription price per Share (the "Subscription Price") will
be the greater of (i) 102% of net asset value per Share ("NAV") as
calculated at the close of trading on the date of expiration of
the Offering and (ii) 90% of the market price per Share at such time.
Record date shareholders who exercise all of their basic rights
are entitled to subscribe for shares which were not otherwise
subscribed for by other shareholders (the "Additional Subscription
Privilege"). Each Fund may also, in its discretion, issue additional
Shares in an amount up to 100% of Shares available in the basic
offering to honor additional subscription requests ("Over-Allotment
Shares").
The offerings are non-transferable, meaning that only holders of
each Fund as of the record date may purchase shares of that Fund in
the offering. Any holder of record may purchase, in addition to shares
available through the exercise of his or her basic rights, (a) shares not
purchased by other holders of record through the exercise of rights
. ("Unsubscibed Shares"), and (b) shares available through the Over-Allotment. The method by which any Unsubscribed Shares or Over-
Allotment Shares (collectively, the "Excess Shares") will be distributed
and allocated pursuant to the Additional Subscription Privilege is: (a) if
there are sufficient Excess Shares to satisfy all additional subscriptions
by Shareholders exercising their rights under the Additional
Subscription Privilege, each such shareholder shall be allotted the
number of shares which the shareholder requested, and (b) if the
aggregate number of shares subscribed for under the Additional
Subscription Privilege exceeds the number of Excess Shares, the
number of shares allotted to each Stockholder in the Additional
Subscription Privilege shall be the product obtained by multiplying the
number of Excess Shares by a fraction of which the numerator is the
number of Shares subscribed for by that Stockholder under the
Additional Subscription Privilege and the denominator is the aggregate
number of Excess Shares subscribed for by all Stockholders under the
Additional Subscription Privilege.
On August 27, 2010, the last reported NAV for ClM was $6.80
and the last reported sales price on the NYSE Amex was $10.56, which
represents a 55.29% premium to the Fund's NAV. On the same
date, the last reported NAV for CRF was $5.92 and the last reported
sales price on the NYSE Amex was $9.80, which represents a 65.54%
premium to the Fund's NAV.
You should consider a comment made with respect to one
section applicable to similar disclosure elsewhere in the registration
statement. We have the following comments.
Cornerstone Strateaic Value Fund, Inc.
Cover Paae
1. Disclose that the considerable number of shares that may be
issued in the rights offering may cause the premium above NAV at
which the Fund's shares are currently trading to decline, especially if
shareholders exercising the rights attempt to sell sizeable numbers of
shares immediately after such issuance.
2. The caption "Estimated Proceeds to the Fund" appears to need
the reference for footnote (2).
2
Paae 2
3. Please disclose how the Fund's investment adviser determines
which securities to buy for the Fund's portfolio in order to meet its
investment objective of capital appreciation.
4. The prospectus states that the Fund proposes to invest "without
limitation in ETFs and other closed-end investment companies". How
does the Fund comply with Section 12(d)(1) of the 1940 Act?
Paae 4
5. We note that since 2006 most of the distributions elM has
made under its managed distribution policy are a return of capitaL. For
example, NAVas of December 31, 2009 was $8.24, down from $22.60
on January 1, 2006. During that 4 year period, return of capital
distributions were $13.03. Aggregate net investment income and
capital gains distributions duringthe same period were $1.85. Thus,
please expand the risk disclosure to state that the proceeds of the
offering may be used to support the managed distribution policy. In
addition, please disclose that sustaining the managed distribution
policy could require the Fund to raise .additional capital in the future.
6. Page 2 discloses a stated purpose of the rights offering is to
maintain the Fund's flexibility in maintaining its managed distribution
policy. Given that the use of proceeds will essentially be used to help
the Fund maintain that distribution policy, please discuss whether the
Board has made a determination that continuation of the Distribution
Policy would be in the best interests of the shareholders, especially in
light of the size of the Fund's trading premium. Disclose and explain
why the Board of Directors has opted to make a rights offering below
market price, rather than sell shares in a traditional offering at market
price.
7. The Fund asserts the ability of closed-end funds to invest in
illquid securities as a benefit. However, page 3 appears to generally
limit the Fund's investment in illiquid securities to 15%. Please explain
supplementally why the limit is 15% and revise the disclosure
accordingly.
8. Disclose whether the offering will go forward if Fund shares trade
at a discount.
3
Page 6
9. Why would the Fund invest just its net assets defensively as
discussed in the first paragraph?
10. The management risk section should include the investment
adviser's conflict in increasing assets under management with the
rights offering as those new assets will concomitantly increase its
management fee.
11. Supplement the managed distribution risk section on this page
by including a five year chart that contains historical performance
information of the managed distribution policy (~, year by year
presentation of NAV per share, average annual total return in relation
to the change in NAV for the period presented, managed distribution
amounts per share, amount of the managed distribution characterized
as a return of capital per share, realized capital gains distributions per
share, and investment income distributions per share, over a five year
period, with cumulative totals as needed). The chart should also
supply the Fund's gross expense ratio for each year to demonstrate
the impact, if any, of the managed distributions on the Fund's expense
ratio. Please ensure that the presentation adequately explains that a
return of capital distribution does not reflect positive investment
performance.
12. Provide a statement that shareholders should not draw any
conclusions about the Fund's investment performance from the
amount of its managed distributions or from the terms of the Fund's
managed distribution plan. .
13. The Fund's managed distribution amounts differ significantly
from the Fund's returns based on NAV. Please disclose to shareholders
why this occurred and why it was permitted to continue, as well as the
rationale behind the policy. Disclose whether a shareholder should
expect the Fund's managed distribution rates to correlate with the
Fund's total return based on NAV over time, and what differences, if
any, will result in changes to the Fund's managed distribution plan.
14. Supplementally state whether the Fund has adopted policies and.
procedures pursuant Rule 38a-1 under the 1940 Act that are
reasonably designed to ensure that all required notices and disclosures
with respect to its managed distribution plan and associated
distributions are appropriately communicated to shareholders and third
parties. If not, why not?
4
Paae 7
15. In light of the Fund's investment objective of long-term capital
appreciation, why does it engage in securities lending and repurchase
agreements?
Paae 8
16. The staff takes the position that a fund must recall a loaned
security in the event of a material vote. Please explain why the Fund's
inabilty to recall and vote securities it has lent does not constitute a
breach of fiduciary duty by the Fund's investment adviser. Please
revise the disclosure.
17. The sixth and eleventh sentences of the managed distribution
paragraph differ by just a few words. Is there a material difference
between the sentences? Revise the disclosure as needed.
Paae 10
.18. Explain why the gross expense ratio of 2.01 % in the Fund's
Financial Highlights as of December 31, 2009 differs from the gross
expense ratio of 1.93% presented in the fee table.
19. Please recalculate the Example and round the results to the
nearest whole dollar.
20. Please disclose \Nhether the proceeds from the offering are
considered in the fee table. If the proceeds are not considered in the
fee table, please delete the last sentence of footnote (2). Please
revise the disclosure as needed. See General Instruction 10(e) and
10(f) to Item 3 of Form N-2.
Paae 11
21. Substitute the word "receive" for the word "realize" in the last
sentence of the penultimate paragraph.
Paae 12
22. The statement that "(t)he Board also considered ...the potential
effect of the Offering on the Fund's stock price" does not provide a
5
conclusion or a basis for a conclusion. Please revise the disclosure
accordingly. See comment 38 below.
23. Describe and disclose all benefits, if any, accruing to the
investment adviser or any affiliates of the investment adviser from
their participation in this rights offering. If there are no benefits for
the adviser or its affiliates, so state. Will any related parties attempt
to acquire any shares in this offering? See comments 25 and 26
below.
24. In the first paragraph of the "Additional Subscription Privilege"
section, disclose whether or not there is any limit on the number of
shares a shareholder may attempt to acquire under the Additional
Subscription Privilege. If there is no limit, please explain why.
Paae 13
25. When the amount of Excess Shares is less than the amount
requested under the Additional Subscription Privilege, the allocation of
the Excess Shares does not appear to allocate shares based on a
shareholders proportionate ownership interest in elM. Indeed, the
calculation appears designed to grant more shares to anyone that
simply requests a large number of shares under the Additional
Subscription Privilege. The prospectus does not explain why an
allocation is made on a basis other than some form of proportional
ownership of the Fund with respect to shareholders requesting shares
under the Additional Subscription Privilege. The proposed allocation
methodology seems to favor large share requests to the detriment of
smaller share requests, regardless of actual Fund ownership. Please
explain. We may have further comment.
26. Given the large number of shares that may be issued as a result
of this rights offering and the substantial premium currently available,
please discuss supplementally whether there would be any potential
underwriter issues if a related party sold a significant amount of shares
issued under this rights offering. What action, if any, will the Fund
take?
Paae 18
27. State that the financial highlights are audited and describe how
shareholders can obtain the Fund's audit report and financial
statements.
6
28. Substitute the caption "Total Distributions" for the caption "Total
dividends and distributions to shareholders" in the Financial Highlights
table. See Item 4.1.d of Form N-2.
Page 20
29. Please revise the first sentence of the first paragraph to indicate
how the Fund will use the proceeds from the basic offering and from
the Over-Allotment. Since it also appears possible that some of the
proceeds may eventually be used to support the managed distribution
policy, please revise the disclosure accordingly.
30 Please disclose how the managed distribution policy and the
historic return of capital rates that the Fund has provided are
consistent with the investment objective described by the Fund on this
page. The Board of Directors assert in the application for relief under
Section 19(b) of the 1940 Act and Rule 19b-1 thereunder, that the
"Distribution Policy could be adopted without adversely affecting each
applicant's investment objective and strategies". The application
further states that "(o)ver the long-term, each Fund's investment goal
is to achieve net investment returns that exceed the amount of its
fixed distribution policy". Given the Fund's past distribution history,
you should make further disclosure in this regard.
Paae 33
31. In the third full paragraph, disclose that if the managed
distribution plan depletes Fund assets through the return of capital,
the Fund may attempt to recapitalize itself through future rights
offerings. .
32. The discussion of the managed distribution plan is generic. The
Fund has tangible and essential history under its plan, and the actual
application of the Fund's managed distribution policy has resulted in
regular and substantial returns of capital to shareholders. Thus, return
of capital does not appear to be an abstract possibility, but a systemic
reality, clearly demonstrated by Fund history. The sustainability of the
managed distribution plan in light of the large returns of capital and
the significant premium to NAV should also be considered and
addressed. Please revise and expand the disclosure accordingly.
7
Paae 42
33. Revise the last paragraph to refer to the current 1933 Act
number.
Statement of Additional Information
Paae 8-22
34 The Fund will need to incorporate its most recent semi-annual
financial statements and include as an exhibit an updated accounting
consent.
General
35. If there have been previous rights offerings, please add
appropriate disclosure regarding all prior rights offerings, including,
but not limited to, the date of each offering, the dollar amount of
proceeds, how the Fund used the proceeds, and the amount of time
taken to invest the proceeds.
36. Please explain whether a 100% over-allotment and the proposed
allocation of that over-allotment are consistent with FINRA rules.
37. Please explain the specific Board findings with respect to the
potentially negative impact on the market price of each Fund's shares
as a result of the large increase in shares available as a consequence
of the rights offering (including the 100% Over-Allotment). Has any
closed-end fund ever traded at a similar high premium to NAV and at
the same time conducted such a high ratio rights offering? What was
the outcome? Did the Board retain an independent consultant on this
issue? If not, why not? Why was the Over-Allotment share amount
set at 1000/0? Why did the Board ultimately approve the Offering as
presently constructed?
38. We note that material portions of the filing are incomplete and
that all exhibits and the financial ~tatements are omitted. We may
have additional comments on such portions when you complete them
in a pre-effective amendment, on disclosures made in response to this
letter, on information supplied supplementally, or on exhibits added in
any pre-effective amendments.
39. Other than the prior exemptive application noted above, please
advise us if you have submitted or expect to submit an exemptive
8
application or no-action request in connection with your registration
statement.
40. Please state in your response letter whether the FINRA has
reviewed the arrangements of the offering.
Cornerstone Total Return Fund, Inc.
41. As the registration statements a