C A P I T A L R E S E A R C H A N D
M A N A G E M E N T C O M P A N Y
333 South Hope Street, Los Angeles, California 90071
Telephone (213) 486-9216 Fax (213) 486-9041
PAUL G. HAAGA, JR.
Executive Vice President
December 6, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
RE: Proxy Voting by Investment Companies
File No. S7-36-02
Dear Mr. Katz:
Capital Research and Management Company ("CRMC") is the investment adviser to the 29 funds in The American Funds Group, with approximately $350 billion in assets under management. We appreciate the opportunity to comment on the Commission's proposals relating to proxy voting by investment companies.1
We support fully the principles underlying the Commission's proposals - that portfolio company proxies are an asset belonging to fund shareholders and must be exercised in their best economic interests without regard to other, potentially conflicting, interests. However, we believe that there is an alternative to the Commission's proposal that would better advance these principles. Specifically, we believe certain of the proposed rules, such as the requirement to adopt written proxy voting policies and procedures and to keep records relating to proxy votes, are reasonably designed to achieve the Commission's goals. We do not object to the requirement to disclose policies and procedures to shareholders in the Statement of Additional Information. However, we do not believe that public disclosure of a fund's complete proxy voting record and information regarding any "inconsistent" proxy votes will advance the interests of fund shareholders. Moreover, we are concerned that it would in fact involve several negative consequences that would inhibit achievement of the Commission's goals.
The proposed rules would require mutual funds to:
- Disclose in their registration statements the policies and procedures that they follow in voting proxies relating to portfolio securities;
- File with the Commission and make available to shareholders, upon request and free of charge, the fund's proxy voting record. Funds would also be required to disclose in their annual and semi-annual reports to shareholders and in their registration statements the methods by which shareholders may obtain information about proxy voting; and
- Disclose in their annual and semi-annual reports to shareholders information regarding any proxy votes that were inconsistent with their proxy voting policies and procedures, and the reasons for the inconsistent votes.
According to the release, the Commission is concerned, among other things, about potential conflicts between the interests of advisers and those of fund shareholders in the voting of fund proxies.
We were surprised that the Commission expressed concern about potential conflicts but did not require independent director oversight or even mention the role of fund directors in the proposing release. We urge the Commission to rely on the independent directors, as fiduciaries representing fund shareholders, to act as "watchdogs" over the proxy voting process. Accordingly, we support adding to the proposed rule a requirement that proxy voting policies adopted by funds include a specific role for the independent directors in overseeing possible conflicts.
Because we believe that independent directors are fully capable of-and in the best position to-ensure that proxies are voted conscientiously and in the best interests of fund shareholders, we do not believe that broader disclosure would advance the principles underlying the proposed rules. Moreover, as stated, we are concerned that there may be several negative implications to the required disclosure that would actually inhibit achievement of the Commission's goals in this area.
First, disclosure of every vote would undermine confidential voting policies adopted by many operating companies to protect the votes by their shareholders from outside influences. We find it ironic that many of these policies were adopted at the behest of the very unions who are now urging the opposite approach for mutual funds (but only for mutual funds). In fact, we understand that many of the proponents of the disclosure requirement are groups that intend to use the information to pressure funds to vote in ways that support their social or political agendas rather than the economic interests of fund shareholders.
Second, our funds have had written proxy voting policies and procedures in place for a number of years. Because proxy votes are inherently part of the investment process, the policies rely heavily on the research analysts who cover particular companies to make recommendations on those companies' proxy matters. Few matters lend themselves to the type of automatic decision-making that is implied by the Commission's proposed requirement to disclose "inconsistent votes". For example, in considering the important issue of executive compensation plans, our policies instruct analysts to take into account a number of factors including potential dilution of earnings, whether options are priced at or below market, the growth rate of the company, staffing requirements, breadth of the dissemination of awards, confidence in management including confidence in their prudent use of option awards, etc. While there are numerical guidelines for some factors (such as dilution and option pricing), discretion and judgment are necessary in applying all the factors. Accordingly, it would be difficult if not impossible to decide when we had acted "inconsistently with our policies" in voting on executive compensation plans as well as most other matters. A natural response of fund groups seeking to avoid the stigma of disclosing "inconsistent" votes would be to adopt either policies that are so general they could never be violated or so narrow that no discretion or judgment is ever exercised (or that reflect a combination of these two approaches). Moreover, wherever a vote might be deemed "inconsistent", they likely will vote in a way that appears consistent with their policies even if that is not in the best interests of shareholders in order to avoid such disclosure. In any case, this requirement is unlikely to enhance the thoughtful and conscientious exercise of judgment in the voting of proxies and therefore will be inimical to the Commission's goal of enhancing corporate governance.
Third, we believe the cost estimates provided by the Commission in the release understate by a wide margin the actual costs of implementing the required disclosures. Among other things, they do not take into account the large numbers of portfolio holdings across funds, nor do they appear to address what we believe may be significant costs in identifying and summarizing the nature of the issues on which votes were submitted.
We appreciate the opportunity to comment on this important regulatory initiative. We would be pleased to provide the Commission's staff with additional information relating to our policies or voting practices if it would be helpful in the rulemaking or oversight process.
/s/ Paul G. Haaga, Jr.
Paul G. Haaga, Jr.
|1 ||Investment Company Act Release No. 25739 (Sept. 20, 2002), 67 Fed. Reg. 60828 (Sept. 26, 2002).