[Federal Register Volume 59, Number 191 (Tuesday, October 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24519]
[[Page Unknown]]
[Federal Register: October 4, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Rel. No. 20589; 812-9002]
AMCAP Fund, Inc., et al.; Notice of Application
September 28, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (``Act'').
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APPLICANTS: AMCAP Fund, Inc.; American Balanced Fund, Inc.; The
American Funds Income Series; The American Funds Tax-Exempt Series I;
The American Funds Tax-Exempt Series II, American High-Income Municipal
Bond Fund, Inc.; American High-Income Trust; American Mutual Fund,
Inc.; American Variable Insurance Series; The Bond Fund of America,
Inc.; Capital Income Builder, Inc.; Capital World Bond Fund, Inc.;
Capital World Growth and Income Fund, Inc.; The Cash Management Trust
of America; EuroPacific Growth Fund; Fundamental Investors, Inc.; The
Growth Fund of America, Inc.; The Income Fund of America, Inc.;
Intermediate Bond Fund of America; The Investment Company of America;
Limited Term Tax-Exempt Bond Fund of America; The New Economy Fund; New
Perspective Fund, Inc.; SMALLCAP World Fund, Inc.; The Tax-Exempt Bond
Fund of America, Inc.; The Tax-Exempt Money Fund of America; The U.S.
Treasury Money Fund of America; Washington Mutual Investors Fund, Inc.
(collectively, the ``Funds''); and Capital Research and Management
Company (``CRMC'').
RELEVANT ACT SECTIONS: Exemption requested under section 6(c) from
sections 13(a)(2), 13(a)(3), 18(f)(1), 22(f), and 22(g) of the Act, and
rule 2a-7 thereunder; under sections 6(c) and 17(b) from section
17(a)(1); and under section 17(d) of the Act and rule 17d-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek a conditional order permitting
them to offer a deferred compensation plan to certain directors and
members of their advisory boards, under which the directors and
advisory board members may elect to have their deferred compensation
adjusted at a rate equal to the rate of return of shares of one or more
investment companies of the American Funds Group.
FILING DATE: The application was filed on May 16, 1994, and amended on
July 22, 1994. Applicants have agreed to file an additional amendment
during the notice period. This notice reflects the changes to be made
by such additional amendment.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on October 24,
1994, and should be accompanied by proof of service on applicants, in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request such notification by writing to
the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 333 South Hope Street, 52nd Floor, Los Angeles,
California 90071.
FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Attorney,
at (202) 942-0583, or Barry D. Miller, Senior Special Counsel, at (202)
942-0564 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. Each of the Funds is an open-end, diversified management
investment company registered under the Act. With the exception of The
Investment Company of America, which is a Delaware corporation, each of
the Funds is either a Massachusetts business trust or a Maryland
corporation.
2. Each Fund is governed by a board of directors/trustees, a
majority of whom are not ``interested persons'' of the Funds within the
meaning of section 2(a)(19) of the Act. CRMC, a subsidiary of The
Capital Group, Inc., serves as investment adviser to each of the Funds.
In addition, certain of the Funds employ advisory boards, as defined in
section 2(a)(1) of the Act, whose members (``Advisors'') consult from
time to time with CRMC and Fund directors, primarily with respect to
such Fund's investments or management. No director or Advisor employed
by CRMC or its affiliated companies (other than the Funds) or by
Washington Management Corporation (``WMC'') (the business manager for
three of the Funds) or its affiliates receives any remuneration from
the Funds.
3. Applicants request an exemptive order to permit the Funds to
offer certain deferred compensation plans (``Plans'') to their
directors who are not employees of either CRMC or its affiliates or WMC
or its affiliates (the ``Non-Employee Directors'')\1\ and their
Advisors (collectively, the ``Participants'').\2\ Applicants request
that the exemption requested, other than the exemption from section
13(a)(3), which is requested only for certain of the Funds that are
named as applicants, also apply to any open-end management investment
company that is advised by CRMC in the future.
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\1\Most of the Non-Employee Directors are not ``interested
persons'' of the Funds as defined in section 2(a)(19) of the Act.
However, one Non-Employee Director may be deemed an interested
person due to membership on the board of directors of the parent
company of a registered broker-dealer.
\2\The Plans are substantially similar to deferred compensation
plans which previously were offered by certain of the Funds (the
``Pre-Existing Plans'') for which no-action relief was requested and
granted by the Commission. See American Balanced Fund, Inc. (pub.
avail. Feb. 13, 1984). All of the Pre-Existing Plans now have been
terminated.
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4. The purpose of the Plans is to permit Participants to defer
receipt of all or a percentage of the fees otherwise payable to them by
such Fund. Fees deferred under a Plan, and any earnings thereon, are
not subject to federal or state income taxation until actually received
by the Participants or their beneficiaries.
5. Each of the Plans became effective upon adoption by the board of
directors of the relevant Fund, prior to the filing of the application
for an exemptive order. An order is required for the Plans because the
Funds wish to use returns on investment companies in The American Funds
Group (which encompasses all of the Funds named as applicants, with the
exception of the American Variable Insurance Series) to determine the
amount of earnings and gains or losses allocated in respect of a
Participant's deferred compensation account (``Deferred Payment
Account''); this feature may not be implemented without SEC approval.
Pending receipt of SEC approval, each Plan provides that compensation
deferred by a Participant under a Plan will be credited to the
Participant's Deferred Payment Account in the form of cash, and
credited with earnings in an amount equal to the yield on 90-day U.S.
Treasury Bills. Any conversion of previously credited cash amounts will
be effected at the net asset value of the relevant Fund(s) as of the
date of any order granting exemptive relief or an appropriate date
thereafter.
6. Compensation deferred under a Plan is credited to a Deferred
Payment Account established in the name of each Participant on the
books of the relevant Fund on the date on which it would otherwise have
been credited to a Participant. Participants may select one or more
Funds in The American Funds Group, in which their deferred compensation
will be deemed to be invested in the form of fictional shares
(``Phantom Shares'') of the Fund(s) selected by a Participant for
purposes of crediting earnings and determining payments. Participants
will receive periodic statements, at least annually, showing the
balance credited to their respective Deferred Payment Accounts. A
Participant's benefits under a Plan are not transferable or assignable,
except in the event of death. If a Participant dies at any time before
all amounts in his or her Deferred Payment Account have been paid, such
remaining amounts will be paid in a lump sum as soon as practicable to
the Participant's designated beneficiaries.
7. Except in the case of Funds that are money market funds, a Fund
sponsoring a Plan will be under no obligation to a Participant to
purchase, hold, or dispose of any underlying shares of any Fund in
order to exactly match its obligations to credit or charge
Participants' Deferred Payment Accounts with the earnings and gains or
losses attributable to any Phantom Shares. Nevertheless, if underlying
shares of any Funds are purchased by a Fund for matching purposes, any
and all such shares will continue to be a part of the general assets
and property of such Fund. Amounts credited to a Participant's Deferred
Payment Account are not evidenced by any note or other security, or
funded or secured in any way. In addition, no assets of a Fund will be
segregated for the account of any participant; Participants' will be
general unsecured creditors of the relevant Fund for payments due under
any Plan. The obligations under a Plan will be reflected as a liability
on the books of the relevant Fund.
8. Participants in any Plan may elect to transfer to such Plan any
amounts deferred by the Participant under any Pre-Existing Plan offered
by the relevant Fund. Amounts transferred from Pre-Existing Plans will
continue to earn a rate equal to the yield on 90-day U.S. Treasury
Bills (as provided under the Pre-Existing Plans). Conversion to Phantom
Shares of amounts transferred to the Plans from accounts under the Pre-
Existing Plans will be effected at the net asset value of the relevant
Fund(s) as of the date of any other granting exemptive relief or an
appropriate date thereafter.
Applicants' Legal Analysis
1. Section 18(f)(1) generally prohibits a registered open-end
investment company from issuing senior securities. Section 13(a)(2)
permits an investment company to borrow funds or issue senior
securities only as described in the recitals of policy contained in its
registration statement, unless authorized by its shareholders.
Applicants assert that the Plan contain none of the characteristics of
senior securities that led Congress to enact the restrictions on the
issuance of such securities. The Funds would not be borrowing for
securities speculation. All liabilities created by a accruals under a
Plan will be offset by assets of its corresponding Fund, which would
not otherwise exist if Participants' compensation were paid on a
current basis. Applicants also believe that, given the common existence
of deferred compensation plans today, the Plans will not confuse
shareholders, complicate the valuation of a Fund's shares, convey a
false sense of safety, or be inconsistent with the theory of mutually
of risk.
2. Section 13(a)(3) prohibits an investment company from deviating
from the fundamental investment policies set forth in its registration
statement without authorization by the vote of a majority of its
outstanding voting securities. Applicants request an exemption from
this section to enable the Funds named in the application to purchase
shares of investment companies in The American Funds Group as
underlying securities for their Participants' Deferred Payment Account
without shareholder approval. Most of the Funds have fundamental
investment policies that prohibit them from purchasing the securities
of other investment companies.\3\ This policy would prevent the Funds
from purchasing shares of any other Funds in The American Funds Group
without shareholder approval. Each Fund will disclose the existence of
the Plans in its prospectus and, if applicable, the exception to its
fundamental policies for which relief is requested herein in its
statement of additional information. Applicants content that the value
of the underlying securities will be de minimis in relation to the
total net assets of each Fund. Furthermore, the value of the underlying
securities held by a particular Fund in respect of a Participant's
Deferred Payment Account would at all times equal the value of the
Fund's obligations to pay deferred fees in respect of the corresponding
Phantom Shares credited to such account. Consequently, changes in the
value of such underlying securities would not affect the value of
shareholders' investments. Thus, permitting the Funds to invest in
underlying securities without obtaining the shareholder approval
required by section 13(a)(3) would result in no harm to shareholders.
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\3\An exemption from section 13(a)(3) is not necessary for the
EuroPacific Growth Fund, the SMALLCAP World Fund, Inc., or the
Capital World Growth and Income Fund, Inc., whose fundamental
policies permit them to invest up to 5% of their assets in shares of
other open-end investment companies. Applicants do not expect the
Plans to cause these limits to be exceeded.
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3. Section 17(a)(1) generally prohibits an affiliated person of a
registered investment company, or any affiliated person of such person,
from selling any security to such investment company. This section was
designed to prevent sponsors of investment companies from using
investment company assets as capital for enterprises with which they
were associated or to acquire controlling interests in such
enterprises. The sale of securities issued by a Fund pursuant to a Plan
would not involve Congress' concerns in enacting this section, but
would merely facilitate the matching of a Fund's liability for a
Participant's deferred fees with the underlying securities that would
determine the amount of such Fund's liability.
4. Section 22(f) prohibits a registered open-end investment company
from restricting the transferability or negotiability of any security
of which it is the issuer unless the restriction is disclosed in its
registration statement, and does not contravene rules and regulations
prescribed by the SEC. The section was designed to bar only those
restrictions on transferability or negotiability that were either not
disclosed to the holder of the security or were expressly prohibited by
SEC rules and regulations. Applicants assert that neither of these
circumstances would apply to the restriction on transferability of a
Participant's benefits under a Plan; such restrictions are clearly set
forth in the Plans and do not adversely affect the interests of the
Participants or of any Fund shareholder.
5. Section 22(g) prohibits a registered open-end investment company
from issuing any of its securities for services or for property other
than cash or securities. The provision was intended to prevent the
dilutive effect on the equity and voting power of the equity of an
open-end company that could result from the issuance of securities for
consideration not readily value. Applicants believe that the Plans do
not have this effect, particularly in view of current disclosure
requirements applicable to directors' compensation. Moreover, a Fund's
obligation to make payments under a Plan would not be ``issued'' for
services or for property other than cash or securities. Although any
Participant's fees which become payable to the Participant would be for
services rendered to the relevant Fund, any such fees would become
payable independently of the Plans.
6. Rule 2a-7 provides that the current price per share of any money
market fund may be computed by use of the amortized cost method or the
penny rounding method, provided the fund meets certain conditions.
These conditions include requirements that the fund (a) limit its
investments to securities that have a remaining maturity of 397 days or
less and meet certain credit quality standards, and (b) does not
maintain a dollar-weighted average portfolio maturity that exceeds 90
days. Applicants request an exemption from rule 2a-7 for each Fund that
is a money market fund solely to the extent necessary to permit each
such Fund to invest in underlying securities (and to exclude underlying
securities in calculating its dollar-weighted average maturity) so that
an exact match with the investments chosen by the participants from
such Funds can be achieved. Such an exemption would ensure that the
deferred fees will not affect net asset value. The amounts involved
will in all cases be de minimis in relation to the total net assets of
each fund, and will have no effect on the per share net asset value of
the Fund (since any increase or decrease in the value of the underlying
securities will be precisely offset by a simultaneous increase or
decrease in the value of the Fund's liability for deferred fees).
7. Section 6(c) provides that the SEC may, by order upon
application, conditionally or unconditionally exempt any person,
security or transaction from any provisions of the Act, if, and to the
extent that, such exemption is necessary or appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of the Act.
Section 17(b) provides that any person may file with the SEC an
application for an order exempting a proposed transaction of the
applicant from one or more provisions of section 17(a), provided that
the terms of the proposed transaction are reasonable and fair, the
transaction is consistent with the policy of each registered investment
company concerned, and is consistent with the general purposes of the
Act. Applicants believe that the requested exemption meets the
standards of sections 6(c) and 17(b).\4\
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\4\Applicants represent that, except for the investment policies
of certain Funds which prohibit such Funds from purchasing the
shares of another investment company, the Funds meet all of the
standards for relief under section 17(b). The Funds' qualification
for relief under section 17(b)(2) therefore is premised on the
assumption that the relief requested from section 13(a)(3) is
granted.
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8. Section 17(d) and rule 17d-1 thereunder are designed to limit or
prevent a registered investment company's joint or joint and several
participation with an affiliated person in a transaction on a basis
different from or less advantageous than that of the affiliated person.
Applicants note that, while the Plans do possess profit-sharing
characteristics, they do not have the effect of placing any Fund on a
basis different from or less advantageous than that of any Participant.
The effect of a Plan is merely to defer the payment of fees that the
corresponding Fund otherwise would be obligated to pay on a current
basis as services are performed by the Participants, enabling the fees
to remain as part of the Fund's general assets and property.
Applicants' Conditions
Applicants agree that any order of the SEC granting the requested
relief shall be subject to the following conditions:
1. If a Fund purchases shares issued by an affiliated Fund, the
Fund will vote such shares in proportion to the votes of all other
holders of shares of the affiliated Fund.
2. Any Fund that is a money market fund that values its assets by
the amortized cost or penny-rounding methods will buy and hold shares
in the Funds selected by a Participant that determine the performance
of Deferred Payment Accounts to achieve an exact match between the
liability of any such Fund to pay deferred fees and the assets that
offset that liability.
For the SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24519 Filed 10-3-94; 8:45 am]
BILLING CODE 8010-01-M
