November 27, 2002
Mr. Jonathan G. Katz
Re: Proxy Voting By Investment Advisers: Release No. IA-2059; File No. S7-38-02
Dear Secretary Katz:
We appreciate the opportunity to submit our comments on the Securities and Exchange Commission's proposals related to proxy voting requirements for Investment Advisers and Registered Management Investment Companies. The statement represents the views of Institutional Shareholder Services (ISS) and not necessarily those of our clients.
Statement of Proxy Voting Responsibilities
As a provider of proxy voting services to hundreds of institutional investors, ISS has had the opportunity over the years to observe many investment companies' and investment advisers' voting operations at close range. From this vantage, it is clear that many institutional investors take their proxy voting responsibilities seriously and consider voting to be a fiduciary requirement. However, a considerable segment of the mutual fund and investment adviser communities still pay little or no attention to their voting responsibilities.
Almost 15 years after the U.S. Department of Labor informed corporate pension plan fiduciaries of their duties related to proxy voting under the Employee Retirement Income Security Act of 1974 (ERISA), many investment companies and investment advisers not subject to ERISA still act as if voting proxies on behalf of their clients is a routine back-office chore. The Commission's failure to date to offer clear guidance to investment companies and investment advisers, in the form of an authoritative statement on proxy voting and fiduciary duty, is largely responsible for this practice. Investment managers more interested in collecting fees than protecting their clients' interests are quick to point out that the Commission has never stated authoritatively that proxy voting is a fiduciary requirement.
If the Commission believes, as it clearly indicates in the above releases, that proxy voting is a fiduciary duty, it should unequivocally say so in a manner that leaves no doubt that voting shares on behalf of clients is a fiduciary requirement for registered investment advisers and investment companies. In the absence of such a statement, many investment advisers and investment companies will continue to take the self-serving position that voting is nothing more than a routine back-office function.
The above-captioned releases provide an excellent blueprint for a document that would enumerate these proxy-voting responsibilities. Alternatively, the SEC could formally endorse and adopt the proxy voting standards set forth in the Labor Department's Interpretive Bulletin 94-2.
The potential conflicts of interest faced by investment advisers and investment companies are similar in nature. Therefore, we recommend that the Commission establish a single standard for both.
Under the proposed rule, investment companies would be required to make all of their vote decisions public (via proposed new filings with the Commission). The proposal for investment advisers, however, stops short of a similar mandate. In effect, then, investment advisers could choose to rebuff their clients' request for similar information. The proposal states:
One set of rules, based on mandatory disclosure of all pertinent information to clients/investors, should apply to all fiduciaries with equity investments (and the authority to vote proxies) regardless of their size or structure.
Voting Policies and Procedures
We applaud the Commission's call for mandatory adoption of proxy voting policies and procedures (including recordkeeping) by both investment companies and investment advisers. Such voting policies and procedures must provide adequate information-including specific criteria for making vote determinations on significant issues-to enable existing (or potential) clients/investors to make judgments concerning proxy-voting behavior and the adequacy of safeguards to protect against conflicts of interest.
In addition to the Commission's proposed filing requirements, both investment companies and investment advisers should be required to post their proxy voting policies and procedures on their websites. They should also be required to state that individual voting decisions are available to clients (see below).
The best way to neutralize potential conflicts of interests in the proxy voting process is to allow investors to monitor actual voting behavior. Indeed, the only way for investors to know whether an investment company or investment adviser is following its stated policy is to provide investors access to individual voting determinations, together with information about exceptions to that policy.
While mandatory public disclosure is an efficient way to give clients access to this information, it would also put the information in the public domain, making it accessible to many other parties, including various advocacy groups. Understandably, some investment advisers and investment companies would object at having to disclose their votes to persons or groups who are not their clients.
We recommend, at a minimum, that the Commission require all investment advisors and investment companies to provide their clients with access to historical proxy-voting records, including data on individual vote decisions, upon demand. On any ballot item, clients should receive sufficient information to determine applicable policy, compliance or non-compliance with policy, and reasons for exceptions to the policy.
To limit the cost of compliance, the availability of this information on a fund's or adviser's password-protected website-rather than requiring printing and mailing of a paper document-should be sufficient to meet the delivery requirement. The information should be made available within a reasonable timeframe following each issuer's meeting; quarterly disclosures in the quarter following each issuer's meeting seem practicable and timely.
As an alternative to password-protected access, investment advisers and investment companies that have no objection to public disclosure could meet the voting disclosure requirement by providing unimpeded access to the above information on the public portion of their websites or in an electronic filing with the Commission.
Cost of Compliance
We disagree with arguments made by some commentators that vote disclosure is prohibitively expensive or excessively cumbersome. For the past several years, ISS (and one of its predecessor entities, the Proxy Monitor) has worked directly with several of its clients to disclose their voting determinations online. These clients are disclosing all of their votes publicly on their websites.
While there are some startup costs related to website design and programming, maintenance of these disclosures is neither difficult nor costly for any institution that has policies, follows its policies in making voting decisions, and keeps records of how it votes. Adding password protection to make this information accessible only to clients, should an investment adviser or investment company wish to limit access to this information, is neither costly nor burdensome.
Whatever the modest costs, they can easily be justified as being in the interests of clients to whom investment companies and investment advisers owe a fiduciary duty, unlike, for instance, the billions of dollars in 12(b)-1 fees that existing mutual fund shareholders pay to reimburse investment companies' marketing costs.
No Conflict with Confidential Voting
Support for vote decision disclosure poses no conflict with the principle of secret ballots in elections at public companies. Even if a company agrees to treat voted ballots in a confidential fashion, individual proxy voters retain the right to voluntarily disclose their voting decisions to the marketplace. In other words, the promise of confidential treatment flows in one direction-from issuers to the investor, not vice versa.
By extension, there is nothing inherently inconsistent in asking companies to refrain from looking at how individual investors voted, but requiring some investors to reveal their votes to their clients or investors. Confidential voting is intended to limit abuses by management, not to limit investors' options or duties.
Requiring after-the-fact disclosure of votes to clients will in no way limit the ability of institutions to discuss with the management of portfolio companies their concerns about voting issues prior to the casting of votes. In fact, the possibility that an investment adviser or investment company will vote against management and disclose this information to its clients may be a powerful incentive for the management of portfolio companies to respond positively to investor concerns before a vote is cast.
Finally, we have heard objections that the management of portfolio companies might retaliate against investment companies and investment advisers who disclose votes against management. Such objections simply underscore the need to adopt new disclosure rules that will discourage such actions. Under the proposed rules, vote results would be disclosed not just to companies, but to investors as well. That could serve as a useful counterbalance to any possible pressure from management.
In closing, we strongly urge the Commission to make an authoritative statement regarding fiduciary responsibilities of investment advisors and investment companies with respect to proxy voting. We also urge the Commission to require investment companies and investment advisors to make public their voting policies and, at a minimum, to require disclosure of individual votes to their clients. Adoption of these measures, we believe, strikes a reasonable balance: it will limit any increased costs, while encouraging investment companies and investment advisers to meet their fiduciary duties to their clients in voting proxies.