December 9, 2002
Mr. Jonathan G. Katz
Re: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, File No. S7-36-02
The Financial Services Practice Group of Dechert is pleased to have this opportunity to comment on the proposal (the "Proposal") to adopt rules (the "Proposed Rules") that would require public disclosure of proxy voting policies and procedures, as well as the actual proxy voting records by management companies registered under the Investment Company Act of 1940, as amended (the "1940 Act"), in response to the Commission's request set forth in Release No. 33-8131.
Dechert is an international law firm with a wide-ranging investment management practice that serves clients in the United States and worldwide, including many open-end and closed-end companies registered under the 1940 Act (collectively, "funds"), fund managers, and unit investment trusts.
I. Summary of Position
Dechert supports the Commission in its continuing efforts to improve corporate governance and accountability to shareholders. We agree that information regarding fund proxy voting policies and procedures may be of interest to some investors, and that such information may provide a tool by which those investors can evaluate the proxy voting philosophy of the management of the funds in which they invest. Accordingly, Dechert supports the Proposal's core objective of improving disclosure in the area of proxy voting by funds.
We have serious concerns, however, about certain of the Proposed Rules, which we believe are not warranted and may in fact adversely affect funds and investors. Therefore,
II. Disclosure of Policies and Procedures with Respect to Voting Proxies Related to Portfolio Securities
We support the Proposed Rules that would require a fund to describe in its SAI (and, for a closed-end fund, also in its filings on proposed Form N-CSR) its proxy voting policies and procedures, including, as applicable, those policies of its service providers through which the fund's voting rights are exercised.1 This disclosure would serve the Commission's stated goal of providing investors with information about fund proxy voting and procedures. Because SAIs are publicly available and are provided by funds to shareholders upon request, those shareholders who are interested in obtaining this information would have ready access to it. In addition, funds would have a strong incentive to ensure that this disclosure is clear, complete and meaningful, because the disclosure would be subject to the liability provisions of the Securities Act of 1933, as amended. For the same reason, funds can be expected to implement policies and procedures designed to assure that voting is conducted in a manner that is consistent with the disclosure.
We have two specific comments with respect to the required disclosures. First, although it is implicit in the Proposal, we believe that the Commission should expressly state that a fund may delegate the day-to-day proxy voting responsibilities to its investment adviser, so long as the fund's board has determined that its proxy voting policies and procedures are reasonably designed to serve the best interests of the fund and periodically, perhaps annually, reviews their implementation.2
Second, we believe that the Commission should provide additional guidance with respect to conflicts of interest in proxy voting. Pursuant to the Proposed Rules, a fund would be required to disclose the procedures it or its service provider uses when a vote presents a conflict between the interests of the fund and its shareholders, on the one hand, and the interests of its adviser, principal underwriter, or any affiliated person of the fund, adviser, or principal underwriter, on the other.3 The Companion Proposal would require a registered adviser to disclose to its clients how it would address "material conflicts of interest" in proxy voting.4 In that proposal, the Commission lists a number of business and personal relationships that may give rise to conflicts of interest and seems to imply that such relationships would present material conflicts of interest that would need to be addressed in the adviser's proxy voting policies and disclosed to clients. Our comment letter on the Companion Proposal notes that a presumption that all such relationships result in material conflicts of interest may lead to impractical applications of rules proposed by the Companion Proposal, and urges the Commission to narrow the scope of the relationships that would be deemed to be "material".5 We urge the Commission to provide similar clarification in any release adopting the Proposed Rules. Such clarification is particularly important in light of the fact that to our knowledge there is no administrative record evidencing abuses by funds or advisers in the area of proxy voting.
III. Disclosure of Proxy Voting Records
We oppose the Proposed Rules that would require investment companies to disclose their voting record to shareholders.
Although urged by a relatively few activist shareholders and commentators, we understand that this information is seldom requested of our clients and that adoption of the Commission's disclosure proposals would impose substantial costs on funds and, indirectly, on their shareholders. Moreover, the proposed required disclosure of actual votes is likely to deprive funds and their managers of flexibility needed to assure that the funds are able to vote their proxies in the best interests of fund shareholders.
A. Disclosure of proxy voting records is not necessary to serve Commission's goals.
The Commission stated in the Proposal that requiring greater transparency of proxy voting by funds "may encourage funds to become more engaged in corporate governance of issuers held in their portfolios ...." In addition, the Commission stated that "shedding light on mutual fund proxy voting could illuminate potential conflicts of interest and discourage voting that is inconsistent with fund shareholders' best interests."
As an initial matter, we question the basis for the implication in the Release that funds may not be adequately "engaged" in considering the corporate governance practices of the issuers in which they invest. A fund manager's sole focus, in our view, should be to maximize the value of the interests held by fund shareholders. Some funds have found, on occasion, that taking an active role in corporate governance may be consistent with maximizing shareholder value. Other funds and their managers choose to react differently to issuers' governance practices and may well conclude that "voting with your feet" is a more effective tool.
Accepting the proposition that greater transparency with respect to fund proxy voting would positively affect fund shareholders, we do not believe that disclosure of fund proxy voting records is necessary to achieve this end. Rather, the Commission's goals can be achieved by a combination of (i) disclosure of fund proxy voting policies and procedures, and (ii) oversight over the proxy voting process by the independent members of each fund's board of directors.
We believe that the independent members of a fund's board are well positioned to review and evaluate a fund's proxy voting record in light of the fund's policies, and to address any inconsistencies with the fund's stated policies or conflicts of interest. We note that this approach is consistent with the approach taken in other areas that may present conflicts of interest between a fund and its adviser or distributor.6 We do not believe that the possible conflicts that may arise in fund proxy voting warrant a different approach.
B. There does not appear to be broad interest among shareholders for disclosure of proxy voting records.
Implicit in the Proposal is the view that shareholders would welcome the disclosure of proxy voting records because they have an interest in such information. We question this premise.
Although we recognize that a few special interest groups and social-investing fund complexes are seeking to make fund voting records publicly available, we do not believe that this goal is shared by the broader investing public. If a significant portion of the investing public shared those concerns, one would expect shareholders to express interest in fund voting records. Based upon discussions with many of our fund clients, however, our understanding is that many funds never have received a single request for such information.7 We note that the Proposal provides no empirical or anecdotal support for the view that there is broad shareholder interest in proxy voting records.
This lack of shareholder interest in fund proxy voting practices is not surprising. The typical fund shareholder purchases shares in a fund as a passive investment with the expectation that the fund (through its adviser and other service providers) will make the day-to-day investment decisions and perform related services, such as proxy voting. He or she likely has no greater interest or expectation in receiving detailed records about proxy voting decisions concerning the underlying portfolio investments than he or she has in scrutinizing the trade blotter to understand how and when particular trades were made.
C. Funds and their shareholders would incur additional costs
Disclosure of proxy voting records would impose new costs on funds, and indirectly on their shareholders, many of which may not be immediately apparent and which, we understand from discussions with our clients, may substantially exceed the Commission's cost estimates.
D. Disclosures of votes cast may actually hinder funds in their ability to influence the corporate governance practices of their portfolio companies
We are concerned that disclosure of fund voting records will be used by certain groups to advance a political or social agenda that has nothing to do with the interests of fund shareholders.8 It is not difficult to imagine such groups attempting to pressure fund managers who fail to vote fund proxies in a manner that is supportive of a particular agenda.9 We fail to see how subjecting fund managers to such pressures is in the interest of fund shareholders and believe that this politicization of the proxy voting process is likely to divert management attention from the all important day-to-day task of maximizing shareholder value.
Moreover, disclosure of actual votes would deprive funds of the ability to protest silently against or resist a management proposal by voting against management in a confidential ballot.
Further, required disclosure of votes cast in a manner "inconsistent" with a fund's policies may well imply "non compliance" with the policy rather than a thoughtful and well reasoned determination by the fund and its directors to exercise judgment in a particular case and deviate from the fund's policies.
E. Funds should not be singled out
It is not clear to us why funds should be subject to rules requiring increased transparency in proxy voting, when proxy voting by banks, broker-dealers, insurance companies, pension funds, and other institutional investors with substantial portfolio holdings, does not raise similar concerns. We note that the Commission's rationale for the Proposed Rules seemingly would argue in favor of similarly obligating all institutional investors within the Commission's jurisdiction, or at least those with authority to vote proxies on behalf of investors. While we do not advocate this approach, to the extent that the Commission believes that disclosure of the actual proxy voting records by institutional investors is in the public interest, a more even-handed way to accomplish this would be to mandate disclosure of the voting records of all filers pursuant to Section 13(f) of the Securities Exchange Act of 1934.
F. Disclosing actual votes should be voluntary
Funds that solicit investments from the small subset of the public that is interested in receiving detailed fund voting records have been free to adopt, as part of their proxy voting policies, measures to make those records available to shareholders. For those funds, any or all of the delivery methods in the Proposed Rules would seem to be appropriate. If there is significant demand for this information, market forces should be expected to lead funds to provide this information voluntarily. Until that time, we respectfully submit that mandating such disclosure is premature.
In our view, disclosure to shareholders of each fund's proxy voting policies, together with independent board member review of each fund's voting record, any inconsistent votes, and any conflicts of interest with respect to voting, is sufficient to serve the Commission's goals underlying the Proposal. We believe that disclosure of a fund's voting record to its shareholders is not necessary and that any added benefits of such disclosure would be outweighed by the associated costs and other disadvantages discussed above.
Accordingly, we strongly urge the Commission not to adopt the proposals that would require a fund (i) to file its complete proxy voting records with the Commission on proposed Form N-CSR, (ii) to provide copies of those records to shareholders within three days from any request, and (iii) to describe in its semi-annual and annual reports any deviations from its stated proxy voting policies.10
* * *
We appreciate the opportunity to comment on the Proposal. If we can be of any further assistance in this regard, please contact John V. O'Hanlon at 617-728-7111, Paul Schott Stevens at 202-261-3348, Elizabeth M. Knoblock at 202-261-3320, or Anthony H. Zacharski at 860-524-3937.
cc: Harvey L. Pitt, Chairman