December 4, 2002
Jonathan G. Katz
Re: Comments on proposed Disclosure of Proxy Voting Policies and Votes by Registered Investment Companies (File No. S7-36-02)
We are writing to express our views on the above proposal as independent trustees of the Scudder Funds.
First, a little history. We have had a long and serious interest in the subject of proxy voting and believe that our responsibility of representing shareholders extends to voting the proxies. We have set the overriding proxy-voting policy (that proxies are to be voted in the best economic interest of the shareholders) and have officially delegated the voting to the adviser. We retain oversight of the voting guidelines and review them annually prior to the proxy-voting season. We have had extended discussions with the adviser about various guidelines. We receive a report about how fund proxies are voted, including instances in which the adviser, pursuant to the discretion we have permitted, voted contrary to the guidelines. We have a longstanding rule that our proxy policies, guidelines and votes are available to any fund shareholder who requests them. To date, none have.
In reviewing the Commission's proposal, we agree with some of it and disagree with some of it.
If the goal of the proposal is to "let a little sunlight in" on proxy voting by mutual funds, particularly with respect to proxy voting policies and guidelines, we support that and see nothing that would make us oppose a requirement that funds make their policies and guidelines public in some reasonable fashion. We view this issue in the same general way that we view funds disclosing their general investment policies and guidelines. To the degree that a shareholder is interested in such information, he should be able to get it upon request, promptly and in a manner set by the board.
With regard to actual proxy votes, however, we urge the Commission to craft a proposal that allows the board of trustees - or just the independent trustees, if the Commission prefers - to set the policy for their funds and fund shareholders with regard to disclosure of individual proxy votes and to oversee and be responsible for any adviser conflicts of interest. The law trusts the trustees to negotiate fund fees, oversee internal controls, value securities, resolve other conflicts and undertake other serious and complex responsibilities on behalf of fund shareholders. Particularly with regard to addressing potential adviser conflicts of interest, trustee oversight has proven effective in the past. Why not, therefore, allow trustees the ultimate authority and accountability for whether, in their sound and independent business judgment, individual proxy votes should be made public, to whom and when?
There are many reasons to place the accountability with trustees, who then will have to explain their rationale to the outside world and their fund shareholders. Large fund complexes may cast literally thousands and thousands of votes. The board may decide to publicize only the most controversial votes, or votes regarding a particular company or issue, both to make a point and to save considerable expenses. In a time when fund assets are shrinking, costs are rising and pressure is increasing on fund trustees to save money without sacrificing such important controls as fund accounting, ethics and compliance or shareholder servicing, to spend money on overdisclosure of meaningless detail is unlikely to make sense to a fund's board.
Some outsiders may believe that mutual funds always vote with management or, if they don't like management, can "vote with their feet." In fact, neither is the case. There are good reasons why a fund may continue to hold a particular security and yet a portfolio manager, the adviser and the fund board will oppose management on a particular matter. Particularly if the fund is a large investor, the fund may have more influence if its vote is confidential than if it is disclosed - or if the adviser and the fund can choose under what circumstances and when to disclose it to the outside world. This decision is best left to the fund board to decide.
Furthermore, trustees will have the benefit of experience regarding the issue of proxy voting and should retain flexibility regarding policies. It may well be that they initially decide to not make all votes public, but then find that interest on the part of shareholders dictates otherwise. The trustees then might change their mind and decide as a matter of fund policy to make all or some of the fund votes public.
We can imagine that some fund trustees might choose not to make their votes public at all, simply for cost reasons, particularly if the method you outlined in the proposal is required - an unacceptably complex, time-consuming, costly and unworkable procedure. Funds don't disclose in their annual and semi-annual reports detailed explanations of their investment decisions, including reasons why the fund bought or did not buy any particular security - this is the thought process that shareholders are paying funds to exercise on their behalf and is the intellectual capital for which funds pay advisers. For the same reasons funds should not have to write and disclose a discussion of the reasons why the fund voted or failed to vote in a manner inconsistent with its policies and procedures. In any given instance the trustees may determine that the information may be proprietary; it should be enough then for the fund adviser to report that decision to the trustees as long as the trustees concur.
In the end, this is an issue that is interesting to some people but may not be relevant to most shareholders or one that guides their investment decisions. If shareholders have a particular point of view about a proxy matter, they can certainly write to the fund board or to the adviser, or they can channel their investments to a fund that holds itself out as one that supports a particular proxy policy.
In sum, while the Commission's proposal on proxy voting by mutual funds is on solid footing on some ground, it overreaches on others.
Thank you for your consideration of our views.
cc: Paul Roye