[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

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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

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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