[Federal Register Volume 59, Number 80 (Tuesday, April 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9969]
[[Page Unknown]]
[Federal Register: April 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-20236; International Series Release No. 658; 812-8214]
Emerging Markets Growth Fund, Inc., et al.; Application
April 20, 1994.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: Emerging Markets Growth Fund, Inc. (the ``Fund''), New
Europe East Investment Fund (``New Europe Fund''), Capital
International Emerging Markets Fund (``CIEMF''), and Capital
International, Inc. (the ``Manager'').
RELEVANT ACT SECTIONS: Order requested under sections 6(c) and 17(b)
exempting applicants from section 17(a), and under section 17(d) and
rule 17d-1 thereunder permitting certain transactions.
SUMMARY OF APPLICATION: Applicants seek an order to permit the Fund to
invest up to 2\1/2\% of its assets in the New Europe Fund, an
affiliated closed-end Luxembourg investment company that invests in
equity securities of developing countries in Eastern Europe and the
former Soviet republics.
FILING DATE: The application was filed on December 11, 1992, and
amended on June 25, 1993 and November 8, 1993.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the Commission orders a hearing. Any interested
person 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 May 16,
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 notification by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street NW., Washington, DC 20549.
Applicants, c/o. Emerging Markets Growth Fund, Inc., 333 South Hope
Street, 52nd Floor, Los Angeles, California 90071, Attn: Roberta A.
Conroy, Esq., Vice President.
FOR FURTHER INFORMATION CONTACT:
Robert A. Robertson, Branch Chief, 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. The Fund is a closed-end management investment company organized
as a corporation under Maryland law. The Fund's investment objective is
to seek long-term capital growth through investment in developing
country equity securities. It invests principally in developing country
securities that are listed on a securities exchange or are traded
actively in an over-the-counter market.
2. Applicants believe that the proposed transaction is structured
to protect the interests of Fund shareholders. Of the Fund's fourteen
directors, eight directors (who are not ``interested persons,'' as
defined in section 2(a)(19), of the Fund) represent institutional
shareholders of the Fund. Two additional non-interested directors
represent former shareholders of the Fund. All of the non-interested
Fund directors are full-time investment professionals who act in such
capacity for their respective employers in addition to their service to
the Fund.
3. Persons purchasing shares of the Fund in issuer directed
offerings must satisfy strict suitability standards. An investor that
is a ``company,'' as defined in the Act, must have total assets in
excess of $5 million. An investor who is a natural person must be an
``accredited investor'' within the meaning of Regulation D under the
Securities Act of 1933 (``1933 Act''), with an individual net worth of
at least $1 million or an individual income in excess of $200,000
during each of the two most recent years.
4. The Fund proposes to invest in the emerging markets of Eastern
Europe by purchasing shares of the New Europe Fund. The New Europe Fund
is a closed-end investment company incorporated in the Grand Duchy of
Luxembourg. Its investment objective is to seek long-term capital
appreciation through investment in companies domiciled in the countries
of East Central Europe and the republics of the former Soviet Union
that are client countries of the European Bank for Reconstruction and
Development and the International Finance Corporation.
5. CIEMF, an investment company organized and operated outside of
the United States, also proposes to invest in the New Europe Fund.
CIEMF is not subject to the Act because it has not made, and presently
does not propose to make, a public offering of its securities in the
United States, and because the outstanding securities of CIEMF are
beneficially owned by less than 100 United States persons.
6. The Manager, an investment adviser registered under the
Investment Advisers Act of 1940 (the ``Advisers Act''), advises the
Fund, the New Europe Fund, and CIEMF.
7. Shares of the New Europe Fund will be offered privately to
institutional investors worldwide to be paid for in four tranches. The
New Europe Fund has two classes of securities: (i) voting ordinary
shares of $10.00 par value per share (``A Shares'') and (ii) voting
preferred shares of $10.00 par value per share (``B Shares''), both of
which carry the right to one vote per share at all meetings of the
company. The A shares will be offered at a subscription price of $5,000
per share, and the B Shares will be offered at a subscription price of
$125,000 per share. In general, the New Europe Fund anticipates that
substantially all investment in the B Shares will be made by investors
who also purchase A Shares and who, for tax or other reasons, are
required to limit the amount of voting power they may acquire. Neither
the A Shares nor the B Shares will be redeemable, and the New Europe
Fund presently does not intend to repurchase either class of shares.
Applicants represent that no application currently is being made to
list the A Shares or the B Shares. In addition, none of these shares
may be offered or sold, directly or indirectly, in the United States or
to any United States person except in a transaction which is exempt
from registration under the 1933 Act.
8. The Fund proposes to invest U.S. $50 million, approximately 2\1/
2\% if its total assets, to acquire approximately 25% of the economic
value of the New Europe Fund's securities. Section 12(d)(1) restricts
registered investment companies from acquiring more than 3% of the
total outstanding voting stock of another investment company. To comply
with this restriction, the Fund will invest in a combination of A
Shares and B Shares so that it will hold less than 3% of the total
voting power, but approximately 25% of the economic power, of the New
Europe Fund.
9. CIEMF proposes to invest approximately 2% of its total assets,
equivalent to U.S. $6,100,000, to acquire approximately 3% of the
Company's outstanding securities. The Capital Group, Inc., the indirect
parent company of the Manager, also plans to invest approximately $2
million to acquire approximately 1% of the New Europe Fund's
securities. Both CIEMF and The Capital Group, Inc. will purchase only A
Shares. The Capital Group, Inc. and all of its affiliates, including
CIEMF, who purchase shares of the New Europe Fund will vote their
shares in the New Europe Fund in the same proportion as the votes of
all other shareholders in the company. Applicants represent that this
minimizes the risk that insiders will use their voting power to advance
their interests to the detriment of other shareholders of the company.
10. Under the Investment Advisory and Service Agreement currently
in effect between the Fund and the Manager, the Fund pays the Manager a
fee at the annual rates of 0.90% of the first U.S. $400 million of
aggregate net assets of the Fund, 0.80% of such aggregate net assets in
excess of U.S. $400 million, and 0.70% with respect to aggregate net
assets in excess of U.S. $1 billion, as determined on the last business
day of each week. The Manager has agreed to waiver that portion of its
fee that would exceed 0.65% of aggregate net assets in excess of $2
billion. To avoid the possibility that the Manager will receive
duplicate fees from the Fund and the New Europe Fund, the Manager will
waive its fee, including administrative fees, with respect to the
Fund's net assets represented by the Fund's proposed investment in the
New Europe Fund. In calculating the fee waiver, the Manager will not
take into account the amount of expenses or fees, if any, that were
reimbursed to or waived for the Fund in connection with any voluntary
or mandatory expense cap limitation or any fee waiver. Currently, the
Fund does not have an expense cap arrangement with the Manager,
although the Fund is subject to mandatory expense cap limitations
imposed by state regulatory authorities. Any applicable expense cap or
fee waiver will not limit the Manager's fee waiver with respect to the
Fund's investment in the New Europe Fund.
11. The Manager will be entitled to a one-time incentive fee
payable if and when the New Europe Fund becomes open-ended or has its
shares listed and traded or, failing either, is placed in liquidation.
Applicants believe that the incentive fee arrangement complies with the
safe harbor of rule 205-3 of the Advisers Act. In addition, as
investment adviser to the New Europe Fund, the Manager will receive an
advisory fee at the rate of 2% per annum of the New Europe Fund's total
adjusted assets, i.e., total net assets without a deduction for any
accrual of the Manager's incentive fee.
Applicant's Legal Analysis
1. Section 17(a) generally provides, in part, that it is unlawful
for any affiliated person of a registered investment company, or any
affiliated person of such person, acting as principal, knowingly to
sell or purchase any security or other property to or from such
investment company. Section 17(b), however, provides that the SEC may
grant an exemption from section 17(a) if the terms of the proposed
transaction are reasonable and fair and do not involve overreaching on
the part of any person concerned, the proposed transaction is
consistent with the policy of each registered investment company
concerned, and the proposed transaction is consistent with the general
purposes of the Act.
2. Under section 6(c), the SEC may exempt any series of
transactions from any provisions of the Act or rule thereunder if and
to the extent 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.
Applicants request an exemption under section 6(c) as well as section
17(b) because the relief is requested to exempt more than one
transaction.
3. Section 2(a)(3)(C) defines an ``affiliated person'' as ``any
persons directly or indirectly controlling, controlled by, or under
common control with, such other person.'' In addition, under section
2(a)(3)(E) the investment adviser to an investment company is an
``affiliated person'' of such company. The Fund, the New Europe Fund,
and CIEMF may be deemed to be under common control because the Manager
is the investment adviser to each of them. Accordingly, the New Europe
Fund may be affiliated with the Fund, and section 17(a) may prohibit
the New Europe Fund from selling its securities to the Fund.
4. Applicants contend that the proposed transaction meets the
standards for relief under sections 6(c) and 17(b). Applicants believe
that the terms of the transactions between the Fund and the New Europe
Fund are reasonable and fair and do not involve overreaching. The Fund
will purchase A Shares and B Shares of the New Europe Fund at the same
purchase price and on the same basis as all other purchasers of such
shares. Applicants further believe that the proposed transaction is
consistent with the policies of the Fund. By purchasing securities in
the New Europe Fund, the Fund can invest in the emerging markets of
Eastern Europe and the former Soviet republics while benefiting from
the economies and diversification provided by pooled investments. In
addition, applicants believe that the proposed transaction is
consistent with the general purposes of the Act because the Fund and
its shareholders are not disadvantaged by the self-dealing or
overreaching of any affiliated person.
5. Section 17(d) prohibits an affiliated person of a registered
investment company from affecting any transaction in which the company
is a joint participant in contravention of SEC rules. Rule 17d-1
prohibits an affiliated person of any registered investment company,
acting as principal, from participating in or affecting any transaction
in a ``joint enterprise or other joint arrangement'' in which the
company is a participant, without prior SEC approval. The Fund and
CIEMF's investment in shares of the New Europe Fund may constitute a
joint enterprise or other joint arrangement within the meaning of rule
17d-1. Applicants believe that the proposed transaction is consistent
with the provisions, policies, and purposes of the Act. Applicants
assert that the Fund's highly autonomous board has approved the Fund's
investment in the New Europe Fund after considering all relevant
factors and concluding that the Fund would not be disadvantaged by the
proposed transaction. Moreover, investing in the New Europe Fund will
enable the Fund to diversify its investments in the emerging securities
markets of Eastern Europe and the former Soviet republics at a lower
cost than would be possible if it were to pursue such investments
directly. In addition, the Fund, CIEMF, and all other investors in the
New Europe Fund will participate in the investment on equal terms.
Applicants' Conditions
Applicants agree that any order granting an exemption will be
subject to the following conditions:
1. The manager will waive its management fee (which includes
administrative fees) with respect to the Fund's net assets represented
by the Fund's proposed investment in the New Europe Fund. To effectuate
this waiver, Fund assets represented by the New Europe Fund securities
purchased by the Fund under the proposed investment will be excluded
from the net assets of the Fund in the calculation of the Manager's
fee. As such waiver relates to the Manager's fee schedule, any Fund
assets invested in the New Europe Fund will be excluded from the Fund's
assets before any fee calculation is made; thus, the Fund's aggregate
net assets would be adjusted by the amount invested in the New Europe
Fund prior to determining the fee based on the Manager's fee schedule
(the amount waived pursuant to this procedure shall be defined as the
``Reduction Amount'' for purposes of Condition 4, infra).
2. Any fees payable by the Fund to the Manager so excluded in
connection with the proposed transaction will be excluded for all time,
and will not be subject to recoupment by the Manager or by any other
investment adviser at any other time.
3. The Fund's proposed investment in the shares of the New Europe
Fund will be limited to 2\1/2\% of the Fund's total assets, taken at
the time of the Fund's subscription.
4. If the Manager waives any portion of its fees or bears any
portion of its expenses in respect of the Fund (an ``Expense Waiver''),
the adjusted fees for the Fund (gross fees minus Expense Waiver) will
be calculated without reference to the Reduction Amount. Adjusted fees
then will be reduced by the Reduction Amount. If the Reduction Amount
exceeds adjusted fees, the Manager will reimburse the Fund in an amount
equal to such excess.
5. The Fund's shares of the New Europe Fund will be voted by an
independent director designated to act in such capacity.
6. All shareholders of the New Europe Fund that are affiliated with
The Capital Group, including CIEMF, will vote their shares in
proportion to the vote of all other shareholders of the New Europe
Fund.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9969 Filed 4-25-94; 8:45 am]
BILLING CODE 8010-01-M
