[Federal Register Volume 63, Number 180 (Thursday, September 17, 1998)]
[Notices]
[Pages 49717-49720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24959]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 23433; 812-10634]
Emerging Markets Growth Fund, Inc.; Notice of Application
September 11, 1998.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').
ACTION: Notice of application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from section 22(e)
of the Act and rule 22c-1 under the Act.
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SUMMARY OF APPLICATION: The order would permit applicant Emerging
Markets Growth Fund, Inc. (``EMGF'') to operate as a registered open-
end investment company that would redeem its shares at monthly
intervals.
FILING DATES: The application was filed on April 25, 1997, and amended
on July 31, 1998.
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
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on
[[Page 49718]]
October 6, 1998, and should be accompanied by proof of service on
applicant, 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
may request notification of a hearing by writing to the SEC's
Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicant, c/o Capital International, Inc., 11100 Santa Monica
Boulevard, Los Angeles, CA 90025.
FOR FURTHER INFORMATION CONTACT:
Elaine M. Boggs, Senior Attorney, at (202) 942-0572 or Christine Y.
Greenlees, 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 is available for a fee at the
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC
20549 (telephone (202) 942-8090).
Applicant's Representations
1. EMGF, a Maryland corporation, is a closed-end management
investment company registered under the Act. EMGF's shares are
registered under the Securities Act of 1933 (the ``1933 Act''). Capital
International, Inc. (the ``Adviser''), registered under the Investment
Advisers Act of 1940, serves as EMGF's investment adviser. EMGF's
investment objective is to seek long-term capital growth by investing
in equity securities of issuers in developing countries.
2. EMGF's shares are not listed on any securities exchange (except
for a nominal listing on the Luxembourg Stock Exchange). EMGF offers
new shares for sale on a limited basis to investors that meet certain
suitability criteria prescribed by EMGF. EMGF's current investor
suitability criteria provide that a prospective investor that is a
``company'' (as defined in section 2(a)(8) of the Act) must have total
assets in excess of $5 million and that each prospective investor that
is a natural person must be an ``accredited investor'' within the
meaning of Regulation D under the 1933 Act. Under EMGF's articles of
incorporation, outstanding shares of EMGF may be transferred only to
persons who meet this suitability criteria. Because of these
restrictions on transferability, and EMGF's concern that its shares, if
listed on a securities exchange, might trade at a discount to their net
asset value (``NAV''), a secondary market in EMGF's shares has not
developed.
3. EMGF would like to be able to offer its shareholders an
opportunity to dispose of their shares at NAV should they wish to do
so, without unduly disrupting EMGF's portfolio or interfering with
EMGF's investment objectives. EMGF states that it considered making
periodic tender offers to its shareholders, but believes that the
process is cumbersome, expensive and of limited benefit to the
shareholders. EMGF also considered relying on rule 23c-3 under the Act,
the ``closed-end interval fund'' rule, that permits closed-end funds to
make periodic repurchase offers to their shareholders as an alternative
to periodic tender offers. EMGF concluded that this alternative was
undesirable because of the rule's restrictions on the frequency and
amount of repurchase offers. EMGF also states that its portfolio, which
consists primarily of equity securities of issuers in emerging markets,
is not sufficiently liquid to enable EMGF to operate as a traditional
open-end fund that redeems its shares daily.
4. EMGF thus proposes to convert into a registered open-end
investment company. EMGF would redeem its shares monthly, as further
described in this notice (``Redemption Policy''). The Redemption Policy
would be a fundamental policy of EMGF, changeable only by vote of a
majority of the outstanding voting securities of EMGF, as defined in
the Act. EMGF's existing shareholders have approved the Redemption
Policy. EMGF's board of directors (the ``Board''), including a majority
of directors who are not ``interested persons,'' as defined in section
2(a)(19) of the Act, also has approved the Redemption Policy.
5. Under EMGF's proposal, EMGF's new investors will be limited to
``qualified purchasers,'' within the meaning of section 2(a)(51) of the
Act and the rules and SEC interpretive positions under the Act.\1\
Existing shareholders who are not qualified purchasers will be
permitted to remain shareholders of EMGF and to purchase additional
shares. Prior to relying on the requested order, EMGF will implement
procedures to assure that shares are not transferred by shareholders to
third parties that are not qualified purchasers. EMGF's current
articles of incorporation provide that transfer to EMGF's shares may be
made only to those investors that satisfy EMGF's suitability criteria
specified by the Board. As provided for in EMGF's articles of
incorporation, the Board will amend the current share transfer
restrictions to provide that no shareholder may transfer shares to any
other person or entity that is not a qualified purchaser. EMGF would
seek to enforce the transfer restriction against any shareholder who
attempted to transfer shares in violation of the restriction. The Board
may not further amend the share transfer restrictions to permit
transfers to persons or entities other than qualified purchasers
without the prior approval of the Commission.
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\1\ Section 2(a)(51) of the Act generally defines qualified
purchasers as natural persons who own $5 million of investments and
institutions that own or manage on a discretionary basis $25 million
of investments.
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6. Under the Redemption Policy, EMGF would accept redemption
requests on or before the close of business on the first business day
of each month (the ``Redemption Request Deadline''). (The first
Redemption Request Deadline will occur no sooner than 45 days after
EMGF's prospectus is mailed to the shareholders. The prospectus will
include disclosure of the change in share transfer restrictions
discussed above.) Any redemption request received during the course of
any calendar month would be effective as of the next Redemption Request
Deadline. Redemption requests received prior to a Redemption Request
Deadline would be revocable until the Redemption Request Deadline. On
the Redemption Request Deadline, redemption requests would become
irrevocable.\2\ EMGF will price the shares for redemption at the close
of business on the last business day of that month (the ``Redemption
Pricing Date''). EMGF would pay the proceeds of redemption requests
within seven calendar days after the Redemption Pricing Date (the
``Redemption Payment Date'').
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\2\ EMGF states that the irrevocability of redemption requests
after the Redemption Request Deadline is necessary to permit the
Adviser to make arrangements to meet redemption requests made as of
that date with the least disruption of EMGF's portfolio.
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7. The Board will have the right to suspend the Redemption Pricing
Date and the Redemption Payment Date only in accordance with section
22(e) of the Act.\3\ The Board will have the right to accelerate the
Redemption Pricing Date and the Redemption Payment Date only if doing
so would be in the best interests
[[Page 49719]]
of EMGF's shareholders and only upon the following conditions: (a) the
Redemption Payment Date will occur within seven days of the accelerated
Redemption Pricing Date; and (b) the Board finds that the accelerated
Redemption Pricing Date is not likely to result in any significant
dilution of interests of the redeeming or the remaining
shareholders.\4\
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\3\ Section 22(e) generally provides that the right of
redemption may not be suspended and the date of payment may not be
postponed except for a period during which the New York Stock
Exchange (``NYSE') is closed or trading on the NYSE is restricted,
during certain emergencies, or for periods as permitted by
Commission order. Section 22(e) also provides that the Commission
shall by rules and regulations determine the conditions under which
(i) trading will be deemed to be restricted and (ii) an emergency
will be deemed to exist.
\4\ The Board may not suspend the Redemption Request Deadline or
the right to make redemption requests.
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8. EMGF states that at least 85% of its assets must either (a)
mature by the next Redemption Payment Date; or (b) be capable of being
sold between the Redemption Request Deadline and the Redemption Payment
Date at approximately the price used in computing EMGF's NAV (the
``Liquidity Standard''). The Liquidity Standard would be a fundamental
policy of EMGF, changeable only by vote of a majority of the
outstanding voting securities of EMGF, as defined in the Act.
9. EMGF will accept orders to purchase its shares on the last
business day of each week and month. The purchase price will be the NAV
next determined following receipt of the purchase order.\5\ To protect
investors, purchase payments received by EMGF before the last business
day of the week or month will be placed in a segregated account for the
benefit of the purchaser.
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\5\ EMGF will maintain an ``800'' telephone number (or will use
an equivalent method) to provide shareholders with ready access to
updated information on the NAV of EMGF's shares.
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10. EMGF states that any change in the Redemption Policy, the
Liquidity Standard, or the operation of EMGF as described in the
application that is not otherwise permitted by the Act and the rules
under the Act will require approval by the SEC.
Applicant's Legal Analysis
1. Section 22(e) of the Act provides that a registered investment
company may not suspend the right of redemption, or postpone the date
of payment or satisfaction upon redemption of any redeemable security
in accordance with its terms for more than seven days after the tender
of the security to the company. EMGF requests an exemption from section
22(e) to permit EMGF to redeem its shares on a monthly cycle.
2. EMGF states that the primary purpose of section 22(e) was to
address the following abuses: (a) the lack of provisions in a fund's
governing documents concerning redemption rights; (b) the ability of
fund management to restrict redemptions without shareholder approval;
and (c) inadequate or misleading disclosure in fund documents and
marketing materials concerning redemption rights. EMGF states that the
Redemption Policy will not raise the possibility of any of these
abuses. EMGF states that its existing shareholders have approved the
Redemption Policy, and that the Redemption Policy will be changeable
only by a majority vote of its shareholders and only upon approval by
the SEC or its staff. EMGF further states that the Redemption Policy
will be stated on the cover of its prospectus and in any marketing
materials and that EMGF will not hold itself out as a ``mutual fund.''
EMGF also states that its new investors will be limited to qualified
purchasers, who EMGF asserts are unlikely to misunderstand their
limited redemption opportunity. EMGF notes that Congress has determined
that qualified purchasers are sophisticated investors who do not need
the protections of the Act. Finally, as noted above, EMGF states that
it would suspend the Redemption Pricing Date and the Redemption Payment
Date only in accordance with section 22(e) of the Act.
3. EMGF asserts that the Liquidity Standard will enable EMGF to
meet redemptions without unduly disrupting its portfolio. Any change in
EMGF's Liquidity Standard will require approval by a majority of EMGF's
shareholders and the SEC. In addition, EMGF states that it will comply
with rule 2a-4 under the Act, which concerns the valuation of the
portfolio securities of an open-end investment company, and any related
SEC or staff interpretations or releases (except to the extent that
EMGF may have its assets invested according to the Liquidity Standard).
4. Rule 22c-1 under the Act generally requires an open-end
investment company to calculate its NAV each day on which an order to
purchase or redeem its shares is received, and to price its shares for
sale or redemption at a price next determined after receipt of a
redemption request. EMGF requests relief from rule 22c-1 to postpone
pricing its shares tendered for redemption on or before a Redemption
Request Deadline until the next Redemption Pricing Date.
5. EMGF asserts that rule 22c-1 was designed primarily to prevent
the practice of ``backward pricing'' of fund shares. EMGF argues that
its proposal does not raise this concern because shares would be priced
after a redemption request is received. EMGF also assets that its
proposed pricing timeline is consistent with the Act because it is
designed to treat all investors in EMGF equally and avoid any dilution
of non-redeeming shareholders' interests. EMGF further asserts that its
Redemption Policy will provide its existing shareholders with a greater
opportunity to dispose of their shares than they have had in the past.
In addition, EMGF states that since new investors will be qualified
purchasers, they will be in a position to understand any risks
associated with EMGF's pricing timeline.
6. EMGF also requests relief from rule 22c-1 to permit it to
calculate its NAV and price shares for purchase only on the days on
which EMGF actually will accept requests to purchase its shares (i.e.,
on the last business day of each week and month). To protect investors,
funds received prior to the date on which they will be invested in EMGF
will be placed in a segregated account for the benefit of the
purchaser.
7. Section 6(c) under the Act permits the SEC to exempt any person
or transaction from any provision of the Act, if such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policies of the Act. For the reasons discussed above, EMGF submits that
the requested order meets these standards. EMGF states that its
proposal will enable it to offer its shareholders an opportunity to
dispose of their shares at NAV should they wish to do so, without
unduly disrupting EMGF's portfolio or interfering with EMGF's
investment objectives.
Applicant's Conditions
EMGF agrees that any order of the SEC granting the requested relief
will be subject to the following conditions:
1. EMGF's shareholders will have approved the Redemption Policy
prior to EMGF's relying on the requested order (the ``Reliance Date'').
2. Any new investor purchasing EMGF's shares on or after the
Reliance Date will be a ``qualified purchaser'' within the meaning of
Section 2(a)(51) of the Act and the rules and SEC or staff interpretive
positions under the Act.
3. Prior to the Reliance Date, the Board, including a majority of
the disinterested directors, will have adopted procedures designed to
assure that EMGF will comply with the terms and conditions of the
requested order. The Board will review these procedures at least
annually and approve such changes as it deems necessary.
4. EMGF will not hold itself out as a ``mutual fund'' and will
disclose its Redemption Policy on the cover page of
[[Page 49720]]
its prospectus and in any marketing materials.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-24959 Filed 9-16-98; 8:45 am]
BILLING CODE 8010-01-M
