Alliance Capital Management of New York is asking shareholders of the closed-end Korean Investment Fund to approve a proposal to convert to an open-end mutual fund. But the conversion, which Alliance said will alleviate the fund's persistent discount, will bring with it two stringent redemption fees aimed at preventing a severe outflow of assets. It will also mean the introduction of a 0.30 percent 12b-1 distribution fee.

If the conversion plan is approved, investors who redeem their shares of the Korean Investment Fund within the first 199 days after its conversion, will pay a four percent redemption fee. Investors who redeem assets within 200 to 365 days after the conversion will have to pay a two percent fee.

The redemption fees will be refunded directly to the fund to defray the costs of redemptions that Alliance anticipates it will incur, even with the fee imposition. If approved at a shareholder meeting July 11, Alliance expects the conversion to take place in September.

The Korean Investment Fund's board of directors adopted the four percent redemption fee in light of the no-action letter Fidelity Investments of Boston received from the SEC earlier this year for a similar conversion, according to the preliminary proxy statement Alliance filed May 25.

In a March 7 letter, the SEC told Fidelity that is would not recommend enforcement action against the investment company for installing a four percent redemption fee on redemptions that took place within 199 days of the conversion of the Fidelity Advisor Korea Fund from a closed-end to an open-end fund. That conversion took place on June 30, 2000.

The 199 day limit was the time within which Fidelity estimated any arbitrage-related redemptions would likely take place, said the SEC's no-action letter. Arbitrageurs often buy up blocks of closed-end funds trading at discounts, then wait for the funds to open and pay investors the higher net asset value share price.

Fidelity sought formal approval from regulators in February, despite imposing the four percent exit fee seven months earlier. But it had been given oral assurances that the fee was acceptable by the SEC before the fund conversion was executed, according to the no-action letter.

Fidelity had requested approval of the fee, which is twice the maximum two percent redemption fee that fund advisers had been allowed to impose previously.

In its no-action reply letter to Fidelity, the SEC said the reorganization of the Fidelity Advisor Korea Fund presented "special circumstances that warrant a limited exception to the staff's general position on redemption fees." The SEC further said that approval for the higher fee was granted in light of the fund being a single-country emerging markets fund that "would likely incur significant costs in selling large amounts of portfolio securities to meet the anticipated redemptions and exchanges."

Relying on the no-action letter the SEC granted to Fidelity, Alliance chose to follow a similar path and impose its own four percent redemption fee on a similar single-country fund which had chosen to convert to open end status in a similar manner, said Ed Bergan, general counsel at Alliance.

"This is not an innovation. We are doing what the Fidelity Advisor Korea Fund did last year," Bergan said.

Alliance could have sought its own no-action relief from the SEC for a longer period than the 199 days Fidelity had specified. But Alliance chose not to, said Bergan. Alliance's evaluation was that "the SEC had gone as far as it wanted to go" with the Fidelity approval, he said. In December, Alliance first announced its intention to open-end the fund, arguing that other possible remedies to extinguish the nagging double-digit discount had not, or likely would not, be successful. But at that time, the adviser mentioned imposing a more modest two percent redemption fee, Bergen said. That thinking changed when the SEC's no-action letter came to light, he said.

But Alliance has gone one step further than Fidelity. Alliance wants to impose a subsequent two percent redemption fee which will become effective on the 200th day after the conversion, the day after the initial four percent redemption fee ends.

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