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|  |  | No-Action Letter under:Investment Company Act of 1940 - Section 12(d)(1)(A) and 7(d)The France Growth Fund, Inc.
July 15, 2003Response of the Office of Chief CounselDivision of Investment Management The France Growth Fund, Inc.Our Ref. No. 2003271437File No. 811-05994
In your letter dated February 4, 2003, you request our assurance that we would not recommend enforcement action to the Commission against The France Growth Fund, Inc. (the "France Growth Fund" or "Fund") under section 12(d)(1)(A) of the Investment Company Act of 1940 (the "1940 Act") if the Fund invests its assets in securities issued by unregistered investment companies that are organized under the laws of, and operated in, France or other European Union member countries ("foreign investment companies") in excess of the limits imposed by section 12(d)(1)(A) of the 1940 Act.  In addition, you request our assurance that we would not recommend enforcement action to the Commission against the France Growth Fund or the foreign investment companies under section 7(d) of the 1940 Act if the foreign investment companies offer and sell their securities to the Fund in the manner described in your letter.1
**I.  FACTS**
You state that the France Growth Fund is a diversified closed-end management investment company that is registered under the 1940 Act.  You state that the Fund commenced investment operations in 1990, and has assets of approximately $80 million. The Fund is not currently engaged in a public offering of its shares.2  You represent that the Fund currently has an investment objective of achieving long-term capital appreciation through investment primarily in French equity securities.  You state that the Fund also may invest up to 10% of its total assets in non-French Western European equity securities.

You state that the France Growth Fund intends to continue to invest its assets primarily in the securities of French operating companies.  You state that the Fund, however, would like to supplement these holdings with investments in a select number of French mutual funds, as well as mutual funds organized under the laws of other European Union Member States, and that the offer and sale of their securities in the United States would be conducted in a manner so as not to require them to be registered under the 1940 Act.  None of the foreign investment companies is registered as an investment company under the 1940 Act.

You state that the France Growth Fund believes that investment in foreign investment companies with investment objectives and policies that are comparable with those of the Fund would enable the Fund to gain strategic exposure to a range of investment styles and strategies and more broadly diversify its portfolio than would be possible through direct investment in individual operating companies only.  You state that the Fund believes that those investments would provide enhanced diversification on a cost-effective basis and thus would benefit the Fund's shareholders.  You represent that the Fund will treat its holdings in securities issued by any foreign investment company as if they were subject to the diversification limitations for "other securities" contained in section 5(b)(1) of the 1940 Act.3  In particular, the France Growth Fund will invest at least 75% of its total assets in, among other things, securities of foreign investment companies, limited in respect of any one issuer to an amount not greater in value than 5% of the value of the total assets of the Fund, and to not more than 10% of the outstanding voting securities of the issuer.  

You state that the Fund believes that its investment strategy would best be served by making investments in a few select foreign investment companies in excess of the limitations imposed by section 12(d)(1)(A) of the 1940 Act (the "Proposed Transactions").  You also state that the Proposed Transactions may raise a concern under Section 7(d) of the 1940 Act because the foreign investment companies are not registered under the 1940 Act. 
**II.  ANALYSIS**
A.  Section 12(d)(1)(A)

Section 12(d)(1)(A) of the 1940 Act, in pertinent part, prohibits a registered investment company from acquiring the securities of another investment company, if immediately after the acquisition: (1) the acquiring company owns more than 3% of the outstanding voting stock of the acquired company; (2) the value of the securities of the acquired company exceeds 5% of the acquiring company's total assets; or (3) the aggregate value of those securities and the securities of all other investment companies owned by the acquiring company exceeds 10% of the acquiring company's total assets.  Section 12(d)(1) was intended to prevent the abuses inherent in the pyramiding of ownership caused by one investment company owning the shares of another.4

You assert that the Proposed Transactions are consistent with the policies and purposes underlying section 12(d)(1)(A) of the 1940 Act even though the Fund proposes to acquire securities issued by foreign investment companies in excess of the limitations imposed by the section.   In essence, you contend that, in the context of a registered investment company acquiring securities issued by a foreign investment company, a foreign investment company should be treated like a 3(c)(7) Fund5 for purposes of section 12(d)(1)(A) of the 1940 Act.  You note that when Congress adopted section 3(c)(7), as part of the National Securities Markets Improvement Act of 1996, it limited the extent to which, among other things, a 3(c)(7) Fund could acquire the securities issued by a registered investment company, but it did not limit the extent to which a registered investment company could acquire the securities issued by a 3(c)(7) Fund.  You essentially contend that Congress did not limit a registered investment company's investment in 3(c)(7) Funds because those investments do not raise the concerns underlying section 12(d)(1)(A).  You believe that a foreign investment company is indistinguishable from a 3(c)(7) Fund for purposes of section 12(d)(1)(A) and, accordingly, section 12(d)(1)(A) should not limit the Fund's investments in any foreign investment company.  Finally, you assert that certain of the concerns underlying section 12(d)(1)(A) also are addressed by the representations listed below.  

B. Section 7(d)

Section 7(d) of the 1940 Act prohibits an investment company that is not organized or otherwise created under U.S. law (a "non-U.S. investment company") from utilizing any means or instrumentality of interstate commerce, directly or indirectly, to offer for sale, sell, or deliver after sale, in connection with a public offering, any security of which it is the issuer.  The section similarly prohibits an underwriter for a non-U.S. investment company from engaging in those activities.  The Commission has stated that section 7(d) generally prohibits a non-U.S. investment company from using the mails or other means of interstate commerce to publicly offer its securities in the United States or to U.S. persons.6

You essentially contend that the foreign investment companies would not offer or sell their securities directly to the United States public in contravention of section 7(d) of the 1940 Act by participating in the Proposed Transactions.  You argue, in essence, that the foreign investment companies' offer and sale of their securities to the Fund would not violate section 7(d) because the Fund: (1) would only purchase securities issued by foreign investment companies that do not offer securities to U.S. persons outside of the scope of section 3(c)(7); (2) is a qualified purchaser, as defined in section 2(a)(51) of the 1940 Act; and (3) would purchase securities issued by a foreign investment company only in a private placement. 7

You state that the Proposed Transactions may raise a concern that the foreign investment companies would violate section 7(d) of the 1940 Act by offering their securities indirectly to the United States public through the Fund.  You essentially contend that the staff's positions under sections 3(c)(1) and 48(a) of the 1940 Act relating to two-tiered private investment company structures should serve as the basis for analyzing whether a foreign investment company has made an indirect offering of its securities.8  You do not, however, explain how a foreign investment company could make an indirect public offering of its shares in the United States through the France Growth Fund, in light of the fact that the Fund commenced operations in 1990 as a closed-end fund, and is not currently engaged in a public offering of its shares.  Nor do you address the circumstances in which the Fund would be acting as an underwriter that is engaged in the distribution of a foreign investment company's securities.9

Accordingly, we take no position as an interpretive matter under section 7(d) as to whether the offer or sale of a foreign investment company's securities to the France Growth Fund would constitute an indirect public offering or sale of the foreign investment company's securities in the United States, or would result in the Fund acting as an underwriter for a foreign investment company.  You essentially argue, however, that the concerns underlying section 7(d) are addressed by the limitations that the France Growth Fund will impose on its investments in securities issued by a foreign investment company, and the other representations listed below.10
**III.  CONCLUSION**
Based upon the facts and representations that are set forth in your letter, and the July telephone calls, we would not recommend enforcement action to the Commission against the France Growth Fund under section 12(d)(1)(A) if the Fund purchases securities issued by foreign investment companies in excess of the limitations imposed by section 12(d)(1)(A).11

Our position is based particularly on your representations that:
- The Fund's board of directors will monitor the overall appropriateness of the Fund's fee structure (including sales charges, advisory fees, and administrative costs) in light of the Proposed Transactions.  The Fund's board, including a majority of its independent directors, will not authorize the payment of any investment advisory fee by the Fund to its investment adviser unless the fee is based on services that are in addition to, rather than duplicative of, the advisory services that the Fund has received indirectly through its ownership of the securities issued by the foreign investment companies; 12  The Fund will invest only in securities issued by foreign investment companies that do not themselves own securities issued by other investment companies; Prior to engaging in the Proposed Transactions, the Fund will issue a press release that announces the Fund's intention to invest in securities issued by foreign investment companies, and that will contain concise, plain English disclosure designed to inform investors of the unique characteristics of the proposed ownership structure, including, but not limited to, its expense structure and the added expenses of investing in foreign investment companies.  The Fund will provide similar disclosure in its annual and semi-annual reports to shareholders, and in any prospectus used subsequent to the date of this letter; and
13
- The Fund is a closed-end investment company.   Similarly, we would not recommend enforcement action against the Fund or the foreign investment companies under section 7(d) if the foreign investment companies offer and sell their securities to the Fund as described in your letter.   Our position is based particularly on your representations that:    - The Fund is a closed-end investment company;  The Fund will not make any "in kind" distribution to its shareholders of the securities issued by foreign investment companies;The securities issued by foreign investment companies that the Fund will purchase will be issued only by foreign investment companies that have conducted offerings of their securities in the United States or to U.S. persons in accordance with the provisions of section 3(c)(7) of the 1940 Act; and 
- The Fund will treat its holdings in securities issued by foreign investment companies as if they were subject to the diversification limitations for "other securities" contained in section 5(b)(1) of the 1940 Act.     Because our positions are based on all of the facts and representations made in your letter and in the July telephone calls, you should note that any different facts or circumstances might require a different conclusion.  Further, these positions express our positions only with respect to enforcement action, and do not express any legal conclusion on the issues presented.  Eric S. PurpleSenior Counsel    Endnotes  1  Telephone conversation among Eric S. Purple of the staff and Margaret A. Bancroft and John V. O'Hanlon of Dechert LLP, counsel to the France Growth Fund, on July 3, 2003, as supplemented by a telephone conversation between Eric S. Purple and John V. O'Hanlon on July 15, 2003 (together the "July telephone calls").  2  July telephone calls.  3  July telephone calls.    4See*Hearings Before House Subcomm. of the Comm. on Interstate and Foreign Commerce on H.R. 10065*, 76th Cong., 3d Sess. at 112 (1940).**The abuses include: (1) the pyramiding of voting control in the hands of persons that owned only a nominal stake in the acquired company; (2) the ability of the acquiring company to exercise undue influence over the adviser of the acquired company through the threat of large-scale redemptions and the concomitant loss of advisory fees received by that adviser; (3) the difficulty of investors appraising the true value of their investments due to the complex structures involved; and (4) the layering of sales charges, advisory fees, and administrative costs.  See*Public Policy Implications of Investment Company Growth*, H.Rep. No. 2337, 89th Cong., 2d Sess. (1966).    5  A "3(c)(7) Fund" is an issuer: (1) whose outstanding securities are owned exclusively by persons who, at the time of the acquisition of those securities, are qualified purchasers as defined in section 2(a)(51) of the 1940 Act; and (2) that is not making, and does not propose to make, a public offering of its securities.  Such issuers are excluded from the definition of investment company by section 3(c)(7) of the 1940 Act, except for purposes of the limitations in sections 12(d)(1)(A)(i) and (B)(i) of the 1940 Act relating to (a) their acquisition of securities issued by any registered investment company and (b) the sale of any security issued by any registered open-end investment company to any 3(c)(7) Fund.  Section 3(c)(7)(D).  6See Use of Internet Web Sites To Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore, SEC Rel. No. IC-23071 (Mar. 23, 1998).    7  We previously have agreed that section 7(d) of the 1940 Act does not prohibit a non-U.S. investment company from conducting a private U.S. offering within the scope of section 3(c)(7) simultaneously with an off-shore public offering.  See Goodwin, Proctor & Hoar (pub. avail. Feb. 28, 1997).  Seealso Touche, Remnant & Co. (pub. avail. Aug. 27, 1984).  We note that a non-U.S. investment company would not, however, constitute a 3(c)(7) Fund unless all of its shareholders, regardless of whether they are U.S. persons, were qualified purchasers at the time that they invested in the company, and the company did not make any public offering of its shares in the United States or offshore.   8  Section 48(a) makes it unlawful for any person, directly or indirectly, to cause to be done any act or thing through or by means of any other person which it would be unlawful for such person to do under any provision of the 1940 Act, or any rule, regulation, or order thereunder.  In discussing section 48(a), you do not address the presence of the word "indirectly" in section 7(d) itself, or the circumstances in which the Fund's shareholders could be deemed to be the owners of the securities issued by a foreign investment company.  9See Section 2(a)(40) of the 1940 Act (definition of underwriter), Section 2(a)(11) of the Securities Act of 1933 ("Securities Act") (definition of underwriter), and Rule 140 under the Securities Act (definition of "distribution" in section 2(a)(11) for certain transactions). Seealso Letter from Richard Breeden, Chairman, U.S. Securities and Exchange Commission, to John Dingell, Chairman, Committee on Energy and Commerce, U.S. House of Representatives (pub. avail. June 2, 1993) (discussing application of Rule 140 to the hub-and-spoke structure).  10  July telephone calls.  11  You have not asked for and we do not express our views on the circumstances in which the Proposed Transactions would implicate the prohibitions contained in section 17(a) of the 1940 Act.  We also note that the acceptance by any affiliated person of the Fund, as defined in section 2(a)(3) of the 1940 Act, or any affiliated person of such a person, acting as agent, of compensation for the Fund's purchase of the securities issued by the foreign investment companies could implicate section 17(e)(1) of the 1940 Act.    12  July telephone calls.  13Id.    Incoming Letter  
February 4, 2003

Sections 12(d)(1)(A) and 7(d) of the |
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