Capital Research and Management Company
333 South Hope Street
Los Angeles, California 90071-1406
Phone (213) 486 9200
Fax (213) 486 9455

November 18, 2002


Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

    RE: Proposed Rule Regarding Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002
    File No. S7-40-02

Dear Mr. Katz:

Capital Research and Management Company ("CRMC") appreciates the opportunity to comment on the Securities and Exchange Commission's (the "Commission") proposed rules under Sections 406 (code of ethics) and 407 (audit committee financial expert) of the Sarbanes-Oxley Act of 2002 (the "Act") as they specifically relate to registered investment companies. CRMC is the investment adviser to the 29 mutual funds in The American Funds Group, with approximately $350 billion in assets under management

Each of the American Funds has an audit committee comprised of individuals who are not "interested persons" of the funds, as defined under the Investment Company Act of 1940, as amended. Audit committee members have a broad range of business and financial experience, including serving as CEOs, directors and treasurers of public and private companies, business school and university professors, financial consultants and economic advisers. Each audit committee has adopted an audit committee charter outlining the committee's duties and responsibilities, including among other things, providing oversight of: i) the company's financial statements and the audit of those statements; ii) the company's accounting and financial reporting policies and practices; and iii) its internal controls and the internal controls of its principal service providers. In addition, each of the American Funds has adopted, and their boards of directors annually review, a code of ethics covering ethical standards and conflicts of interest guidelines pertinent to the investment management industry.

CRMC believes that each American Fund audit committee is comprised of qualified individuals who collectively exercise effective oversight of the funds' financial statements and condition. In addition, we believe the funds' boards of directors provide meaningful oversight of the codes of ethics governing the funds, their investment adviser and its affiliates. As a result, we respectfully submit the following comments regarding the Commission's proposed rules under Sections 406 and 407 of the Act.

    I. Audit Committee Financial Expert

Section 407 of the Act directs the Commission to issue rules requiring an issuer to disclose whether or not its audit committee includes at least one member who is a "financial expert." If the audit committee does not include at least one member who is a financial expert, the issuer must disclose the reasons why it does not have such an expert. Section 407 also requires the Commission to define the term financial expert and directs the Commission to consider various factors in developing this definition. It is our view that, in so directing the Commission, Congress provided the Commission with the flexibility to determine the relevance of particular factors for different kinds of issuers.

The Commission proposes to apply the same definition of financial expert to investment companies as it does to operating companies. We urge the Commission to recognize the inherent differences between investment companies and operating companies, particularly the fact that investment company financial statements are much more straightforward than those of operating companies. For example, investment company assets are comprised entirely of investment securities valued at market prices and expenses are relatively uncomplicated and transparent. Thus, there is little or no opportunity for an inaccurate or misleading presentation of an investment company's financial statements or condition. Consequently, with respect to investment companies, we believe the Commission should broaden the definition of "financial expert" to include individuals who have any business or financial experience that includes exposure to the financial operations or financial statements of an investment or operating company. Such individuals could be expected to have an understanding of generally accepted accounting principles, internal controls, and audit committee functions relevant to investment companies and consistent with the factors set forth in Section 407(b)(1), (3) and (4)1 of the Act. Providing a different, yet comparable, requirement for investment company financial experts is consistent with Congress' intent to require at least one audit committee member to have relevant financial expertise to discharge his or her duties.

Additionally, we believe that requiring investment company audit committees to identify an individual who is deemed to be a financial expert is not reflective of the collaborative manner in which audit committees carry out their oversight responsibilities. Because the financial statements and accounting policies of investment companies are relatively straightforward, investment company audit committees are typically comprised of individuals with more general business, financial and investment company experience. While no one individual may have direct accounting or auditing experience, collectively investment company audit committee members have significant and relevant financial and business experience. We urge the Commission to recognize the collective manner in which audit committees operate by permitting an investment company audit committee to determine whether, as a group, it could be considered to have the financial expertise required to discharge its oversight responsibilities and therefore, qualify as a financial expert. We believe this approach satisfies Congress' intent to ensure audit committees have the level of relevant financial expertise necessary to provide effective oversight.

We are also concerned that requiring an individual to be designated as a financial expert may cause qualified directors to be reluctant to join audit committees because of the perception that such a designation carries with it additional responsibilities or legal liability. Investment companies will likely also have difficulty finding individuals with not only the accounting or auditing background required under the proposed rules, but with the relevant business experience most beneficial to investment companies. Permitting an audit committee to determine if it, as a group, is a financial expert would eliminate these issues and therefore, ensure audit committees continue to be comprised of individuals capable of providing effective oversight on behalf of investment company shareholders.

Finally, as discussed above, we believe there is a limited pool of individuals with both relevant business and direct accounting experience. As audit committee members already possess business or investment company expertise, we believe the Commission should allow investment companies to recognize members who further their general accounting or auditing knowledge through continuing education programs. Where applicable, we would propose allowing investment companies to disclose that audit committee members participate in pertinent continuing education programs.

    II. Code of Ethics

Pursuant to Section 406(a) of the Act, the Commission has proposed rules that require investment companies to disclose in Form N-SAR or Form N-CSR whether it, its investment adviser and its principal underwriter have adopted a code of ethics that applies to each of their principal executive officers, principal financial officers, principal accounting officers or controllers, or individuals performing similar functions for each of the entities. Further, under Section 406(b), the Commission has proposed rules requiring disclosure of any changes in, or waivers of, any provision of the code of ethics for any of these individuals. The Commission also proposes that any written code of ethics and any amendments be filed with the Commission as an exhibit to Form N-SAR or Form N-CSR.

Rule 17j-1 of the Investment Company Act of 1940, as amended, already requires investment companies, their affiliates and personnel to adopt and follow comprehensive code of ethics requirements. Investment company boards of directors must annually approve the code of ethics and review reports on activity, including material violations of the code, at least annually. In our view the boards are fully engaged on this subject and already provide meaningful oversight.

In its Proposing Release, the Commission states that the proposed rules are meant to cover a "broader range of conduct" than what is prescribed under Rule 17j-1. We believe that the broader range of conduct delineated in the Proposing Release is adequately covered by Rule 17j-1 and other regulations and practices. For example, investment companies' codes of ethics or conduct typically cover general ethical obligations and conflicts of interest. Many codes of ethics also mention a duty to comply with governmental laws, rules and regulations, but even if they don't the obligation to comply with all laws, rules and regulations already exists and merely stating a company will comply provides no meaningful assurance that it will actually do so.

In addition, we note that investment companies already file their codes of ethics and any material amendments with their registration statements as an exhibit to Form N-1A. Moreover, Form N-1A requires investment companies to prominently disclose on their prospectuses that investors may receive free copies of the code of ethics from the investment company or the Commission (via Edgar or the public reference room). Accordingly, we believe existing rules, regulations and practices covers a "broader range of conduct" and do not believe further rulemaking in this area is necessary for investment companies.

The Commission also proposes to require investment companies to disclose any changes to, or waivers of, provisions of codes of ethics applicable to individuals covered by the rules. We believe the boards of directors already provide sufficient review and oversight of this through the annual reporting and approval process described above. However, should the Commission decide to impose additional requirements on investment companies we believe some clarification in this particular area is necessary. For example, is it the Commission's intent to require disclosure of any change to a code of ethics, including administrative changes and amendments that apply not just to those covered by the proposed rules, but other personnel of the investment company and its affiliates? We believe it is necessary to specify that disclosure is only required for material changes or waivers affecting only individuals covered by the proposed rules. Again, we note that material changes to the code of ethics must be approved by the board of directors of an investment company, including a majority of directors that are not interested persons, and are already disclosed in an exhibit to an investment company's registration statement filing. Furthermore, any material violations are required to be reported to the company's board. Therefore, we believe adequate disclosure of this issue already exists and further rulemaking is not necessary.

We appreciate your consideration of our views. Any questions regarding our comment letter may be directed to either of the undersigned at the telephone numbers reflected below.


/s/ Anthony W. Hynes
Anthony W. Hynes
(714) 671-7524

/s/ Kristine M. Nishiyama
Kristine M. Nishiyama
(213) 486-9652

1 Section 407(b) requires the Commission to consider as a factor in defining "financial expert" whether a person has, through education and experience as a public accountant, auditor, principal financial officer or similar position of an issuer, an understanding of, or experience in various financial matters and audit committee functions.