June 12, 2003
Via Electronic Filing
Mr. Jonathan G. Katz
Re: Solicitation of Public Views Regarding Possible Changes to the Proxy Rules, Release No. 34-47778, S7-10-03
Dear Mr. Katz:
The Investment Counsel Association of America1 appreciates the opportunity to submit comments in response to the Securities and Exchange Commission's Solicitation of Public Views Regarding Possible Changes to the Proxy Rules.2 In particular, we write to suggest that the Commission address the effect of the beneficial ownership reporting rules on shareholder communications.
Pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 ("Exchange Act"), any "person" that beneficially owns more than 5% of certain individual equity securities is required to file reports with the SEC. Advisers that exercise investment discretion over portfolios of their clients generally are deemed to be beneficial owners of the securities in those portfolios for the purposes of these provisions. Thus, an adviser managing client portfolios that in the aggregate hold more than 5% of an equity security must file the required reports. Under Sections 13(d) and (g), when two or more persons act as a partnership or group for the purpose of acquiring, holding, or disposing of securities of an issuer, that group is treated as one "person" for the purpose of determining whether the 5% threshold has been crossed.3 In addition, pursuant to Rule 13d-5(b), when two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of securities of an issuer, the group formed is deemed to have acquired, as of the date of the agreement, beneficial ownership of all of the securities of the issuer owned by any such persons.
This regulatory structure has potential implications for shareholder communications in the proxy voting context. From time to time, institutional investors, including investment advisers managing equity securities on behalf of their clients, may wish to discuss common concerns with other institutional managers holding the same security. These common concerns may relate to the performance of management, evaluations of proposed corporate actions, or subjects of various proxy proposals. For example, institutional investors may want to share views on whether a proposed spin-off of a subsidiary will have an unwelcome effect on shareholder value. If so, investors may wish to jointly approach management and present their concerns regarding the proposed spin-off. Institutional investors may want to engage in joint discussions regarding restructuring issues with management of issuers experiencing financial difficulties. Investors may wish to share opinions on whether management is acting in the best interest of shareholders with respect to other types of proposed actions as well.4
A number of institutional managers approaching management or agreeing to vote together on an issue of import to shareholder value is beneficial to the clients on whose behalf the managers invest. Particularly in this current corporate climate, such shareholder communications are desirable and should be encouraged. In addition, such communications may have the effect of benefiting investors who have not retained an investment manager and do not have the resources to engage in such activities.
We understand, however, that investment advisers typically feel inhibited or chilled from engaging in communications with other shareholders because such activity could be alleged to constitute the formation of a "group" under the Exchange Act and related rules. On their face, these provisions do not require that shareholders intend to change control of an issuer in order to be deemed a group, but merely an agreement to act together for a common purpose, such as voting.5
If an adviser were deemed to have formed a group with other shareholders with respect to an issuer's securities, the reporting requirements would be quite burdensome. In addition to being required to monitor the holdings, purchases, and sales of the securities in each of its client and proprietary accounts, the adviser would also be required to coordinate with the other members of the ostensible group to monitor information regarding the securities purchased, held, or sold in all of their client and proprietary accounts. This would be extremely cumbersome with respect to completely independent investment managers that are merely in communications with one another regarding a common purpose. In addition, an adviser's being deemed to hold large blocks of shares could restrict its ability to sell the shares held by its clients pursuant to Section 16 under the Exchange Act.6
Accordingly, we respectfully request that the Commission consider amendments or interpretations to Rule 13d that would permit shareholders together holding more than 5% of a security to communicate among themselves regarding the issuer without being required to file Schedules 13D or 13G.7 Obviously, communications by a group of shareholders for the purpose of the shareholders' making a tender offer or gaining control of the issuer would not be included in such relief.
We appreciate the opportunity to comment on these issues and would be pleased to discuss any questions the Commission or its staff may have.
Karen L. Barr