American Federation of Labor and
Congress of Industrial Organizations
March 12, 2003
John D. Graham
Office of Information and Regulatory Affairs
Office or Management and Budget
New Executive Office Building
Washington, DC 20503
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: File No. S7-36-02
Dear Mssrs. Graham and Katz:
On behalf of the American Federation of Labor and Congress of Industrial Organizations (the "AFL-CIO"), I am writing to comment on the "collection of information requirements" imposed under rules recently adopted by the Securities and Exchange Commission (the "Commission") requiring mutual funds to disclose their proxy voting records on Form N-PX.
The AFL-CIO is the federation of America's labor unions, representing 65 national and international unions and their membership of more than 13 million working women and men. Union members participate in the capital markets as individual investors and through a variety of benefit plans with over $5 trillion in assets. Union members generally invest their 401(k) and other retirement savings in mutual funds, and significant worker pension fund assets are also invested in mutual funds.
The AFL-CIO petitioned the Commission in December 2000 to adopt rules requiring mutual funds to disclose their proxy voting records, and in the wake of scandals at companies like Enron, WorldCom and Tyco, and the appointment of a new Commission, we reiterated our request in July 2002. Requiring disclosure of proxy votes is the only way to ensure that mutual funds fulfill their fiduciary duty to vote proxies in the best interests of their investors. This is especially important given that mutual funds face conflicts of interest arising out of their desire to provide lucrative 401(k) retirement plans and other financial services to the same companies at which they vote proxies on behalf of investors.
When the Commission proposed rules last September to rein in the conflicts of interest that can lead mutual funds to cast proxy votes that promote their own business relationships ahead of individual investors' interests, we were among the record 8,000 individual and institutional investors that supported the Commission proposal. Only the conflicted mutual fund industry, led by Fidelity Investments and Vanguard Group, opposed it.
Although the AFL-CIO often comments on Commission proposals to better protect worker shareholders, this is the first time that we have offered comments to the Office of Management and Budget (the "OMB") on the "collection of information" requirements of a Commission proposal. We take this unusual step in response to reports that the mutual fund industry is seeking to use the OMB review process under the Paperwork Reduction Act of 1995 to undermine, or delay, an essential Commission reform.1
We believe that the industry is undertaking this extraordinary step in order to defend its own interests at the expense of mutual fund shareholders, who overwhelmingly support the proxy voting disclosure requirements. We further believe that the substantial benefits of the proposed rules far outweigh any possible associated costs, and urge the OMB to consider the following cost/benefit factors in conducting its review.
II. Cost/Benefit Factors
1. The Commission's cost estimates are consistent with information provided by pension funds and mutual funds that currently disclose their proxy votes.
In his comment letter supporting the proxy vote disclosure rules, John Bogle, Vanguard's founder and former CEO, offered the following warning to the Commission:
Finally, I would urge the Commission to be extremely skeptical of some of the industry's claims. If fund managers claim disclosure would be "too expensive," they should be required to present their own cost analysis2.
Although we are not in the position to provide specific cost estimates, a number of funds did provide specific estimates of the direct costs of providing the required disclosure, and the Commission reported that these estimates were generally consistent with its own estimate. We urge the OMB to give particular consideration to the comments from those pension funds and mutual funds that currently disclose their proxy voting decisions, rather than rely on hypothetical estimates prepared by those that oppose disclosure. For example, CalPERS, the nation's largest pension fund with $135 billion in assets, posts its proxy voting decisions on its Web site. In its comment letter to the Commission, CalPERS stated that the costs associated with disclosure of proxy voting results are "insignificant."
A number of mutual fund companies also voluntarily disclose their proxy voting records. Although these fund complexes tend to be much smaller than Fidelity or Vanguard in terms of asset size, the number of stocks in their portfolios (and thus the number of proxy votes they cast) are not that much fewer given that some are index funds. Domini Social Investments, for example, manages about $1.6 billion in assets and is able to post its proxy voting decisions for its 400 portfolio companies on its web site. In addition to Domini, we urge the OMB to consider the comments of Calvert Group, PAX World Funds and Walden Asset Management.
If a small fund company like Domini can disclose a large number of votes simply and inexpensively, a far larger fund should have no problem cost effectively disclosing a slightly larger number of votes.
2. Commission cost estimates may be overstated given that mutual funds already maintain proxy-voting records.
Mutual funds and their investment advisers have a fiduciary duty under federal and state law to vote proxies in the best interests of mutual fund shareholders. The Commission confirmed this requirement in February 20023 and again in its proposed and final rules requiring mutual funds to disclose their proxy votes. Given this fiduciary duty, we believe that mutual funds have a legal obligation to maintain their proxy voting records. The Department of Labor ("DOL") explicitly requires such record-keeping for investment managers of worker pension funds who, similar to mutual funds, have a fiduciary duty under ERISA to vote proxies in the best interests of plan beneficiaries. According to the DOL:
...if the named fiduciary is to be able to carry out its responsibilities under ERISA Sec. 404(a) in determining whether the investment manager is fulfilling its fiduciary obligations in investing plans assets ...the proxy voting records must enable the named fiduciary to review not only the investment manager's voting procedure with respect to plan-owned stock, but also to review the actions taken in individual proxy voting situations.4
In light of these facts, we are concerned by the comment from the Investment Company Institute (ICI) that disclosure costs will be higher than Commission estimates because "Fund groups ...will be forced to establish systems or make arrangements with outside vendors to capture the information in question."5 Since we believe that mutual funds are, or should, already be maintaining detailed records of individual proxy voting decisions, the incremental costs required to report this information on Form N-PX are minimal, and thus the total cost of compliance may be lower than the Commission's estimates.
3. The Commission revised its original proposal to substantially lower the costs to mutual fund shareholders, largely in response to comments from the mutual fund industry.
Contrary to recent comments by a Fidelity representative that "the SEC rushed the entire rule-making process,"6 the 11-week comment period on the proposed proxy voting rules (and on related rules for investment advisers) was longer than the comment period on the more than twenty other Commission proposals issued in the past six months (the average comment period for other recent Commission proposals has been about 6 weeks). The comment period was sufficiently long to generate a record 8,000 comment letters, the overwhelming number in support of the rule. The Commission subsequently spent seven weeks reviewing comments and revising the proposed rules before voting to adopt them on January 23rd.
The opponents also had ample opportunities to present their views. In addition to submitting lengthy letters to the Commission detailing their opposition to the rules, representatives from the ICI, Fidelity and several other funds held meetings on November 22nd with at least three Commissioners (Atkins, Glassman and Goldschmid) to press their case. Even after the comment period ended on December 6th, the ICI telephoned Commission staff on January 13th to reiterate its opposition to the rules, and Fidelity telephoned Commissioner Glassman on January 21st to discuss its objections.
In response to the industry's concerns, the Commission made a number of significant changes to its original proposal in order to reduce the cost burden on mutual funds and their shareholders. First, the final rules do not require a mutual fund to provide its shareholders with paper copies of its voting record so long as this information is available on the fund's web site. The Commission also made a number of other changes to substantially reduce the costs associated with the rules, including:
- requiring vote disclosure annually rather than semiannually;
- requiring disclosure on a calendar year, rather than a fiscal year basis;
- eliminating the required disclosure of "inconsistent votes";
- allowing funds to omit CUSIP numbers and ticker symbols if difficult to obtain; and
- applying the new rules only to votes cast on or after July 1, 2003.
The ICI specifically requested each of the above bulleted changes in a January 13, 2002 telephone conversation with the Commission in the event that the Commission required some form of disclosure.7 With the exception of the decision to only apply the rules to votes cast after July 1, 2003, which we believe is unwarranted, we support the Commission's modifications as being in the best interests of mutual fund shareholders.
4. Estimated costs are insignificant relative to total fees paid by mutual fund shareholders.
The Commission estimates the total external and internal costs of the additional disclosure required by the new rules at $12.7 million, which translates to an average cost of 13¢ for each of the nation's 95 million mutual fund shareholders. These total costs are insignificant relative to the estimated $75 billion that fund shareholders paid in management fees, administrative costs and sales commissions in 2001.8 Most importantly, as detailed below, these fees are insignificant relative to the resulting benefits to mutual fund shareholders.
5. Benefits of proposed rule far outweigh any possible associated costs.
We believe that the tendency of mutual funds to side with management in casting proxy votes has already contributed to the destruction of $7 trillion of shareholder value since the market peak. By requiring mutual funds to disclose their proxy voting records, the Commission's rules will effectively rein in the inherent conflict of interest than have led mutual funds to cast proxy votes in support of runaway executive pay, conflicted auditors and entrenched boards of directors.
These conflicts, and their devastating consequences for mutual fund shareholders, are apparent in the voting record of Fidelity, one of the staunchest opponents of vote disclosure. In 1998, for example, Fidelity cast proxy votes on behalf of millions of its mutual fund shareholders against a shareholder proposal calling for a majority of independent directors on Tyco International's board.9 Fidelity's vote may have furthered its own interests, as Fidelity earned $2 million in 1999 administering Tyco's employee benefit plans.10 But we do not believe that this vote was in the best interests of Fidelity's mutual fund shareholders, who lost an estimated $5 billion since January 2002 amid allegations of improper accounting practices and financial wrongdoing by several top former Tyco executives.11
Relative to the losses suffered by Fidelity's mutual fund shareholders at just one company ravaged by a corporate governance scandal, the costs of the Commission's new rules are insignificant. By the same standard, the potential benefits are enormous.
We commend the Commission for approving new rules requiring mutual funds to disclose their proxy votes on Form N-PX, and urge the OMB to resist the fund industry's corrosive lobbying and swiftly approve the "collection of information requirements" of Form N-PX. As noted above, the Commission's costs estimates are fair and these costs are reasonable. Most importantly, the resulting benefits of the new rules far outweigh any associated costs. If you have any questions regarding our comments, please contact Michael Garland in the AFL-CIO Office of Investment me at (202) 508-6969.
Richard L. Trumka
cc (U.S. Mail only)
William H. Donaldson, Chairman
Paul S. Atkins, Commissioner
Roel C. Campos, Commissioner
Cynthia A. Glassman, Commissioner
Harvey J. Goldschmid, Commissioner
Paul F. Roye, Director, Division of Investment Management
|1|| "Lucchetti, Aaron and Deborah Solomon, "Big Fund Firms Seek Delay on Proxy-Vote Disclosures", Wall Street Journal, February 18, 2003.
|2|| Comments of John C. Bogle on SEC proposal S7-36-02, December 4, 2002 (available on the Commission's web site at www.sec.gov/rules/proposed/s73602/jcbogle1.htm).
|3|| Letter from Harvey L. Pitt, SEC Chairman, to John P.M. Higgins, President of Ram Trust Services, dated February 12, 2002.
|4|| Department of Labor, 1994 Interpretative Bulletin 94-2.
|5||Comments of Craig S. Tyle, ICI General Counsel, on SEC proposal S7-36-02, December 6, 2002 (available on the Commission's web site at www.sec.gov/rules/proposed/s73602/cstyle1.htm).
|6|| "Lucchetti, Aaron and Deborah Solomon, "Big Fund Firms Seek Delay on Proxy-Vote Disclosures", Wall Street Journal, February 18, 2003.
|7|| Memorandum dated January 15, 2002, from Paul G. Cellupica, Assistant Director, Division of Investment Management, re: January 13, 2003, Telephone Conversation with Craig Tyle, Investment Company Institute (ICI) (available on the Commission's web site at www.sec.gov/rules/proposed/s73602/ici011303.htm)
|8||As per Bogle (12/4/02), the ICI's "Mutual Fund Costs, 1980-1998" (September 1999) calculated asset-weighted expenses of 1.32% for stock funds, 1.24% for bond funds, and 0.51% for money market funds, with an average of 1.09% of all industry assets. Applied to average fund assets of $7.0 trillion in 2001 yields a revenue total of $76 billion.
|9||Fidelity responded to our AFL-CIO Key Votes Survey in 1998, which included this Tyco vote. It is unclear to us why they responded in 1998, and have not responded since.
|10||Calculated by the AFL-CIO from Form 5500 data filed with the IRS by Tyco International and its subsidiaries.
|11|| Fidelity's funds owned approximately 6% of Tyco's shares during 2002, and Tyco's total market capitalization fell from about $114 billion on 1/2/02 to $28.5 billion on 2/25/03. Thus, Fidelity's mutual fund shareholders lost an estimated 6% of the $85.5 billion decline, or $5 billion.