The Capital Group Companies, Inc.
333 South Hope Street
Los Angeles, CA 90071

February 10, 1997


Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549

Re: Rules Implementing Amendments to the Investment Advisers Act of 1940
File No. S7-31-96

Dear Mr. Katz:

We appreciate this opportunity to comment on the Commission's proposal to adopt rules under the Investment Advisers Act of 1940 (the "Advisers Act") to implement provisions of the Investment Advisers Supervision Coordination Act ("Coordination Act") that reallocate regulatory responsibilities for investment advisers between the Commission and the states (Release No. IA-1601, December 20, 1996)(the "Release").

The Capital Group Companies, Inc. (the "Capital Group") is the parent of two investment advisers registered under the Advisers Act: Capital Research and Management Company ("CRMC") and Capital International, Inc. ("CII"). CRMC is the investment adviser to the 28 mutual funds that constitute The American Funds Group as well as to two mutual funds whose shares are only available for purchase by institutions exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code and two mutual funds whose shares are sold only to separate accounts of insurance companies to fund variable annuity and life insurance contracts. CII is the investment adviser to one closed-end investment company registered under the Investment Company Act of 1940 as well as several offshore funds and separately managed accounts for institutional investors worldwide.

The Capital Group is also the ultimate parent of five research companies: Capital Research Company, Capital Guardian Research Company, Capital Research International, Capital Group Research, Inc., and Capital Strategy Research, Inc. (collectively, the "Research Companies"). The Research Companies are registered as investment advisers with the State of California Department of Corporations ("DOC") and provide investment research for portfolios managed by Capital Group's investment management companies, including CRMC and CII. 1

The Capital Group is very supportive of the Commission's proposed rules. In addition, we wish to comment specifically on two of the proposals discussed in the Release.

1. Exemptions from Prohibition on Registration with the Commission

Section 203A of the Advisers Act generally requires advisers with $25 million or more of assets under management, or advisers to investment companies, to register with the Commission. Advisers with less than $25 million of assets under management that are registered with a state are prohibited from registering with the Commission. However, the Coordination Act provides the Commission the authority to exempt advisers from the prohibition on Commission registration if the prohibition is "unfair, a burden on interstate commerce, or otherwise inconsistent with the purposes" of Section 203A. Under this authority, the Commission has proposed Rule 203A-2(c) which would exempt from the prohibition against Commission registration certain affiliated advisers.

We strongly support this proposal. Without the proposal, certain advisory firms would be subject to dual regulation. For example, the Research Companies are subsidiaries of a large investment management organization and are affiliated with two Commission-registered advisers, but do not manage assets. As a result, under the Coordination Act absent proposed Rule 203A-2(c), the Research Companies have lost their ability to register with the Commission and are required to maintain their registrations at the state level, specifically the DOC. This result, however, provides no additional investor protection and requires the Capital Group, as an organization, to continue to comply with two regulatory systems. The proposal addresses this issue, and failure to implement such a rule would frustrate Congress' intention to provide a more uniform regulatory framework for Commission-registered advisers.

2. Investment Adviser Representatives

Although the Coordination Act authorizes states to "license, register, or otherwise qualify any investment adviser representative" of a Commission-registered investment adviser who has a place of business located within that state, it does not define "investment adviser representative." The Commission proposes to define "investment adviser representative" as a "supervised person" of an investment adviser if a substantial portion of the business of the supervised person is providing investment advice to clients who are natural persons. The term therefore would exclude (and thereby preclude states from regulating) supervised persons who provide advice to investment companies, businesses, educational institutions, charitable institutions and other entities that are not natural persons. Supervised persons who provide advice to natural persons, but who do not "on a regular basis solicit, meet with, or otherwise communicate to clients" also would be excepted from the definition.

We strongly endorse the Commission's approach to this issue. A definition for "investment adviser representative" would provide a uniform approach for state regulatory authorities to use when determining whether the actions of individuals associated with Commission-registered advisers should be regulated by the states, which currently does not exist. Further, the proposed definition is consistent with Congress' intention to permit state securities authorities to establish qualification standards for investment adviser representatives in order to protect individual, or "retail," investors.

Taken together, these proposals will address provisions in the Coordination Act that may inadvertantly frustrate Congress' intent in the passage of the Coordination Act, which was to provide a uniform regulatory framework (either state or federal) for investment advisers. For example, absent the passage of both proposals, the research analysts employed by the Research Companies will be required by the DOC to maintain qualification standards which are designed primarily to protect individual, or "retail," investors.

The DOC recently proposed rules increasing the testing required by associated persons of investment advisers by requiring such persons to pass two examinations administered by the National Association of Securities Dealers Regulation, Inc., including the Series 7 examination. 2 To require an associated person of an investment adviser to pass an examination intended primarily for registered representatives of broker-dealers may be based on the presumption that such associated persons are expected to conduct a substantial portion of their business with retail clients. These qualification standards may be designed to protect individual investors in California. However, unless the Commission's proposals are adopted, the Research Companies will be unduly burdened without providing any tangible benefits to individual investors in the State.

In addition, in our case, whether an analyst will be required to take the proposed examinations will be based solely on whether he or she is an employee of one of the Research Companies or an investment management company such as CRMC or CII. We believe Congress intended to remove this type of arbitrary process from the registration and regulation of investment advisers when it passed the Coordination Act.

The Commission's proposals remove these burdens on advisers affiliated with Commission-registered advisers and are consistent with the intent of the Coordination Act. The Commission is to be commended for proposing mechanisms for maintaining this framework along with the necessary investor protections.

If you wish to discuss these comments, please contact me at (310) 996-6202.

Sincerely yours,

Roberta A. Conroy
Assistant General Counsel

1 The remaining investment management companies of the Capital Group include: Capital Guardian Trust Company, a California-chartered trust company exempt from registration under the Advisers Act; and Capital International, Ltd, Capital International, S.A., and Capital International, K.K., which are headquartered in London, Geneva, and Tokyo, respectively.

2 These tests do not apply if the associated person holds one of several professional designations mentioned in the proposal, including the Chartered Financial Analyst and the Chartered Financial Planner designations. See DOC Document OP 03/93-B, dated December 18, 1996.