Franklin Templeton Investments
December 9, 2002
Mr. Jonathan G. Katz
RE: Proxy Voting by Investment Companies and Investment Advisers
Dear Mr. Katz:
Franklin Templeton Investments ("FTI")1 appreciates the opportunity to comment on the proposals by the Securities and Exchange Commission relating to proxy voting by investment companies and investment advisers.
Summary of Comments
FTI strongly supports most aspects of the Commission's proposals. We particularly support: (1) requiring investment advisers to mutual funds to adopt written policies and procedures designed to ensure that proxies relating to the funds' securities holdings are voted in the interest of fund shareholders; (2) requiring mutual funds to make disclosures regarding their proxy voting policies and procedures; and (3) requiring advisers to mutual funds to maintain certain records regarding proxy voting on behalf of such funds. We believe adoption of these requirements would achieve most of the desired benefits of the proposals and result in the application of best industry practices to all advisers to funds.
FTI has reviewed a draft of the comment letter on the proposals submitted by the Investment Company Institute ("ICI") and we fully support the positions stated in that letter. Like the ICI, we strongly oppose the Commission's proposals to: (1) require public disclosure of detailed information about each and every proxy vote cast by investment advisers to mutual funds; and (2) require mutual funds to prepare extensive disclosures regarding proxy votes that are "inconsistent" with the funds' policies and procedures. We believe that the costs and potential harms associated with adoption of these requirements significantly outweigh any alleged benefits. Accordingly, we do not believe that adoption of these aspects of the Commission's proposal would be in the best overall interests of mutual fund shareholders.
Rather than requiring detailed disclosure of information that will be entirely irrelevant to the vast majority of mutual fund shareholders, we believe a far more sensible approach would be to continue to rely on board oversight to address concerns with regard to potential conflicts of interest. FTI strongly agrees with the ICI that the most direct, effective and least costly means of addressing potential conflicts of interest that could arise between those of advisers to funds and the shareholders of such funds would be to adopt specific mutual fund board oversight requirements with respect to proxy voting. Such requirements should include the review and approval of proxy voting policies and procedures by fund boards and periodic reporting of actual votes cast on behalf of the funds.
Proxy Voting Practices, Policies and Guidelines of Advisers within FTI
Each of the advisers within FTI has adopted written Proxy Voting Policies and Procedures which have been reviewed with the appropriate mutual fund boards. While there are some relatively minor differences between the procedures adopted by the various advisers, the guiding principle for all is the same, to vote proxies solely in the best interests of clients. Over the years, the advisers within FTI have encountered a wide range of proxy scenarios and have developed guidelines for voting proxies. While these guidelines are generally followed, each proxy is considered in light of the relevant facts and circumstances. The advisers within FTI take their fiduciary duties with respect to proxy voting very seriously and they consider the voting of proxies with respect to shares of companies in which a fund invests to be part of the investing process.
The advisers within FTI generally believe that the quality and depth of a company's management is an important consideration in determining the desirability of an investment. Accordingly, the recommendations of management on many issues are given substantial weight in determining how to vote a proxy. However, each issue is considered on its own merits, and the position of a company's management will not be supported whenever it is determined not to be in the best interests of the advisers' mutual fund and other clients. Such occasions, when proxy votes are cast in a manner "inconsistent" with established guidelines, would appear to represent situations that would require explanation of such "inconsistency" under the Commission's disclosure proposals. We fail to see how such explanations would provide information that would be useful to shareholders in evaluating their investment.
FTI has a group of professionals dedicated to administering the proxy voting process. The proxy voting team has responsibility to maintain a shareholder meeting data log that is updated each business day, coordinate the actual voting of proxies and maintain proxy voting records. The proxy voting team provides reports of votes cast as requested from clients, including the mutual fund boards. On average, our FTI proxy voting team votes approximately 3,000 proxies on behalf of our advisory accounts (including mutual funds) each year.
It appears that we have never received an inquiry from a mutual fund shareholder requesting information on how a particular proxy vote on a portfolio security was cast. And certainly no shareholder has ever asked us whether a particular vote cast was inconsistent with our voting policies and guidelines. Moreover, in our view, the advisers within FTI do not have any significant conflicts of interest in voting proxies. We concede that, as a theoretical proposition, potential conflicts of interest could arise in proxy voting. However, as it would apply to our operation, the Commission's proposals with regard to disclosure of proxy votes cast represent excessive (and likely ineffective) regulation of a phantom problem. In addition, we believe that the traditional role of the mutual funds' directors to oversee the performance of investment advisers provides an effective way to monitor and prevent any potential conflicts of interest.
Based on the extensive experience of the advisers within FTI and the FTI proxy voting team, we strongly agree with the ICI's assertion that requiring funds to disclose publicly their proxy votes, and provide explanations whenever such votes are "inconsistent" with established policies and guidelines, will result in mutual funds and their shareholders incurring substantial and unnecessary costs2. We do not believe that requiring disclosure of actual, individual proxy votes will benefit or serve the interests of mutual fund shareholders. Failing that, adoption of such requirements would not seem to further any legitimate public policy objective.
We wholeheartedly agree with the ICI's recommendation that the Commission proceed by adopting the remainder of the proposals and thereafter undertaking a study of proxy voting practices by mutual funds under these new rules before adopting requirements to disclose actual votes cast and "inconsistent" votes. This deliberative approach would achieve the Commission's overall goals without unnecessarily burdening, or inadvertently harming, mutual funds and their shareholders.
Questions regarding our comments or requests for additional information should be directed to the undersigned at (650-525-7331).
cc: The Honorable Harvey L. Pitt
Paul F. Roye