[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]


-----------------------------------------------------------------------

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'').

-----------------------------------------------------------------------

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