Sheet Metal Workers' International Association
1750 New York Avenue, NW
Washington, DC 20006
Tel 202 783 5880
Fax 202 662 0894
MICHAEL J. SULLIVAN
December 3, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Reference: File Number S7-36-02
Subject: Proxy Voting
Dear Secretary Katz:
The Sheet Metal Workers' International Association, AFL-CIO ("SMWIA") has over 100,000 members who participate in retirement plans, many of which invest in mutual funds. Consequently, the SMWIA strongly supports the proposed rule of the Securities and Exchange Commission ("Commission") that would require registered management investment companies (i.e., mutual funds) to make disclosures about how they vote proxies relating to portfolio securities.
Many of the defined contribution plans in which our members participate require participants to make their own investment selections. The investment options frequently include mutual funds. Our members cannot make sound investment decisions without adequate information, including information regarding the mutual fund's proxy voting practices.
Proxy voting is an integral component of investment management. The SMWIA subscribes to the notion that long-term corporate performance is enhanced by sound corporate governance policies on issues such as labor relations, executive compensation, auditor independence and director independence. Therefore, our members have a strong interest in knowing about a mutual fund's policies on such issues, as well as the fund's proxy voting practices. Our members also have an abiding interest in ensuring that a mutual fund's investment adviser does not vote proxies in a manner that serves other interests.
When a participant chooses a particular mutual fund in which to invest his or her retirement funds, he or she has in mind a particular investment objective. Therefore, a mutual fund fulfills essentially the same function as an investment manager under ERISA. Unlike investment managers, however, mutual fund managers are not subject to the fiduciary requirements of ERISA, since the assets of a registered investment company are not treated as "plan assets." (See, 29 C.F.R. § 2510.3-101 (a)(2)). This means that a participant does not enjoy all of the protections afforded by ERISA when his or her retirement plan assets are invested in a mutual fund, as opposed to being managed directly by an investment manager. We believe mutual funds should be managed the same way an investment manager administers retirement plan assets. This is essential to preserving investor confidence in mutual funds, as well as ensuring that mutual funds continue to be effective investment vehicles for retirement plans.
Even though ERISA generally does not apply to mutual funds, the board of directors of mutual funds and any investment adviser appointed by the board are nevertheless fiduciaries under common law. As the Commission correctly observes, the duties of these fiduciaries extend to all functions performed on the mutual fund's behalf, so they must vote proxies on behalf of a mutual fund in a manner consistent with the best interests of the mutual fund and its shareholders. This is not unlike the duties imposed upon investment managers under ERISA.
With respect to proxies, the Department of Labor has stated that ERISA's fiduciary duties:
require that, in voting proxies, the responsible fiduciary consider those factors that may affect the value of the plan's investment and not subordinate the interests of the participants and beneficiaries in their retirement income to unrelated objectives. These duties also require that the named fiduciary appointing an investment manager periodically monitor the activities of the investment manager with respect to the management of plan assets, including decisions made and actions taken by the investment manager with regard to proxy voting decisions. The named fiduciary must carry out this responsibility solely in the interests of the participants and beneficiaries and without regard to its relationship to the plan sponsor.
(See, 29 C.F.R. § 2509.94-1).
Similar requirements apply under common law to directors of mutual funds and their investment advisers. The Commission's proposed rule will make it more difficult for mutual fund fiduciaries to shirk their fiduciary duties, and will make them more accountable to their shareholders. Our members would be able to verify that the mutual funds in which they place their hard-earned retirement funds are being managed in the best interest of the shareholders, and not in a manner compromised by other interests. This, in turn, helps our members make informed decisions about whether to invest and retain investments in specific mutual funds. Likewise, the proposed rule will assist plan fiduciaries in selecting and retaining appropriate investment choices for their defined contribution and defined benefit plans. Many of our members serve as fiduciaries on plans that are jointly administered by labor and management and need as much information as possible to make prudent investment choices. Access to the proxy voting practices of mutual funds will significantly help these fiduciaries discharge their own duties and obligations under ERISA.
In conclusion, we believe the Commission's proposed rule will significantly help our members, as well as the general public, make intelligent and informed investment decisions. The expected cost to the mutual fund industry appears to be negligible. Moreover, the proposed rule will promote investor confidence in mutual funds, and the enhanced disclosure requirements will ensure that mutual funds remain viable and attractive investment vehicles for ERISA-governed retirement plans.
On behalf of our members, I appreciate the opportunity to comment on the proposed rule and encourage its swift adoption.
MICHAEL J. SULLIVAN
cc: B. Hernandez