January 15, 2003
The Honorable Harvey L. Pitt
Re: File No. S7-36-02 and File No. S7-38-02: Proposed Rules on Disclosure of Proxy Voting Policies and Records of Investment Companies and Investment Advisers
Dear Mr. Chairman:
I write in strong support of the proposed rules issued by the Securities and Exchange Commission (SEC) to require registered management investment companies to disclose their proxy voting policies, records, and explanations for inconsistent votes; and to require investment advisers to adopt and disclose proxy voting policies and procedures designed to make available the adviser's actual voting record and to ensure proxies are voted in the best interests of the adviser's clients.
Over half of U.S. households now have funds invested in the stock market, either directly or through such entities as pension funds, educational institutions, or employers. Many average investors invest their savings in mutual funds, relying on these investments to buy a home, send their children to college, pay medical bills, or provide for retirement. Estimates are that U.S. Mutual funds hold corporate stock worth over $3 trillion, act on behalf of 95 million investors, and control an estimated 20 percent of proxy votes cast at shareholder meetings. Investment advisers are estimated to hold discretionary investment authority for investments, both in and out of mutual funds, totaling almost $19 trillion.
Mutual funds and investment advisers authorized to vote the proxies of the clients whose funds they manage are obligated to act as fiduciaries, owing their clients a duty to act in good faith, with due care, to advance their clients' best interests. But it is far from clear that all mutual funds and investment advisers have appropriate proxy voting policies in place, actually resolve potential conflicts of interest in favor of their clients' best interests, or appropriately disclose and explain to clients their proxy voting records. Many mutual funds and investment advisers decline to disclose to the investing public either their proxy policies or proxy voting records.
Over the past year, multiple investigations conducted by law enforcement, the SEC, Congressional committees including the U.S. Senate Permanent Subcommittee on Investigations,and others have exposed a complex web of interlocking conflicts of interest that permeate the financial services industry and dilute investor protections. If investor confidence in U.S. markets is to be restored, we need new rules requiring conflicts of interest to be resolved in favor of protecting investors and strengthening investment managers' accountability to shareholders. The proposed rules would address both concerns.
In addition, investment managers and advisers need to become greater advocates of investor interests to curb corporate excesses and misconduct. Issues addressed in company proxy filings, including votes on management and shareholder proposals, can play a key role in deterring corporate abuses now under scrutiny, including, for example, misleading accounting, excessive executive compensation, and weak board oversight. Those voting on behalf of shareholders need to become active participants in such proxy matters and exercise their fiduciary obligation to cast votes favoring their clients' interests over company management.
As discussed in the preambles to the proposed rules, the conflicts of interest permeating the financial services industry do not exclude mutual fund managers and investment advisers. The preambles note that fund managers and investment advisers are sometimes under pressure to vote for proxy positions recommended by management, even where an opposite vote might better protect the interests of their clients. For example, if a fund's adviser also manages or seeks to manage assets held by a publicly traded company whose securities are held by the fund, that adviser may, because of business interests, be tempted to please company management by supporting its proxy recommendations. This potential conflict of interest needs to be recognized and policies developed to ensure the adviser's fiduciary obligations to its clients are placed before other business interests. The approach advocated in the proposed rules, requiring written policies, identification of potential conflicts, full disclosure of proxy votes, and explanations of proxy votes that appear inconsistent with pre-existing policies, offers practical and useful means to accomplish that result.
If the proposed rules are made final, fund managers and investment advisers will no longer have the power to vote their clients' shares without disclosing when, how, and why they voted the way they did. They will also be required to disclose relevant conflicts of interest so that investors will have the necessary information with which to protect their investments. These requirements will also encourage fund managers and investment advisers to become more aware of corporate governance issues, to increase scrutiny of corporate directors and officers and company policies and actions, and to help guard against corporate fraud and abuse.
Investors who entrust their money to mutual funds and investment advisors have a right to know how their funds and advisers are voting their proxies. They have a right to have their interests protected when funds and advisers vote on vital matters affecting a company's leadership, plans for mergers or other restructurings, anti-takeover provisions, changes in capital and preferred stock issuance, the status of proxy votes, and various other social and corporate responsibility issues. They have a right to protect the money they have worked hard to save. Enactment of the proposed rules will require mutual funds and investment advisers to adopt andimplement policies and procedures designed to ensure that proxies are voted in the best interest of their clients, and that clients can obtain relevant information regarding those votes. These rules will increase investor protections, improve transparency, and strengthen accountability to shareholders.
Thank you for this opportunity to comment on the proposed rules.