November 26, 2002
Jonathan G. Katz
Re: File No. S7-36-02
Proposed Rule: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies
Dear Secretary Katz:
On behalf of the Pax World Management Corp., ("Pax World") registered investment adviser to the Pax World Balanced Fund, Inc., the Pax World Growth Fund, Inc., the Pax World High Yield Fund, Inc., and the Pax World Money Market Fund, Inc., we are grateful for the opportunity to comment on the proposed rule S7-36-02, regarding the disclosure of proxy voting guidelines and results.
In 1971, Pax World was the first mutual fund to apply a broad array of social criteria to its investments. We currently manage just over $1 billion in assets for approximately 70,000 shareholder accounts. With regard to disclosure of proxy votes, we have always had a policy of disclosing our voting record upon request. However, in 2000 we took the bold step of voluntarily putting our Balanced and Growth fund proxy votes on our website www.paxfund.com, making us the 2nd fund company to embrace public disclosure. Our proxy voting guidelines are also available on our website. We have completed three "seasons" of proxy vote disclosure, and with the exception of a few minor technical glitches, we have experienced NO negative ramifications.
Pax World has always maintained that proxy voting is a fiduciary duty, and accordingly has sought to vote in our shareholders best interests. After all, it is their money, and we are managing it because they allow us to. To abuse that privilege would be a breach of our fiduciary duty as well as a breach of our ethics.
We strongly support the recommendations set forth in the SEC's proposed rule regarding mandatory disclosure of proxy voting guidelines and results. In addition, we applaud the Commission for attempting to eliminate the conflicts of interest that can arise when mutual funds invest in the same companies whose retirement plan assets they are bidding for and/or managing.
After the SEC announced the rule proposal, we received word that some of our shareholders were interested in contacting the SEC to express their support, but were not sure how to go about it. Therefore, we established www.mutualfundproxyvotes.com, a publicly available site where any person who wishes to send a comment on the rule can do so easily. To date, more than 850 letters have been sent in.
Following are our comments on the proposed rule, some additional thoughts, and our insight with regard to the arguments being put forth against the rule.
Comments on File No. S7-36-02: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies
Our experience in voluntarily disclosing proxy votes has allowed us to identify a few additional comments we would like to offer for your consideration:
Conflict of Interest: One of the key discussion points surrounding this rule is the conflict of interest that arises when fund companies are also managing or seeking to manage retirement plan assets of companies held in their portfolios. The proposed rule does an excellent job of addressing half of the equation - the need for vote disclosure. However, the rule does not require fund companies to disclosure the existing financial relationships that constitute the conflict of interest. This additional piece of information is crucial in determining if fund managers are subject to influences other than "in the best interests of their shareholders." We suggest that the rule be amended to include a requirement for disclosure of such financial relationships.
Information Organized in a Usable Format: Emphasis has been placed on disclosure of votes and voting guidelines, however, it is important that the information be organized in such a way that it is useful to investors. A good way to do this is to adopt SEC Rule #9B, which governs how corporations must describe the item up for vote on the proxy statement.
Categories of Disclosure: One loophole in the ruling is the lack of firm language regarding the categories of voted items that must be included in the proxy guidelines and subsequently disclosed in the vote results. We have seen some of the largest fund companies issue proxy voting guidelines that were just two pages in length. In order to ensure adequate disclosure, the "suggested" categories in the Rule should be "mandatory."
Additionally, as we read the rule it appears that fund companies would be able to load their proxy guidelines with "case-by-case" recommendations, thereby avoiding the spirit of what the rule is attempting to accomplish. Certainly, there are times when "case-by-case" is the appropriate response, however, we caution against allowing it to dominate a fund company's proxy voting guidelines. There are other guidelines, such as "usually vote for" or "normally vote against" that give a flavor for the fund company's preference, yet still allow for proxy ballot issues to be considered on an individual basis.
Periodic Disclosure: We agree with the Commission that semi-annual reporting is sufficient, and it is logical to include proxy information in the semi-annual reports to shareholders. This avoids the cost of additional regulatory mailings. In addition, it is sufficient to require that language be included in the prospectus and semi-annual reports that describes where the proxy information may be found. We would recommend against including the proxy votes and guidelines in the Statement of Additional Information (SAI), as the timing of updates to the two documents may not coincide. For example, many funds may prefer to update the proxy vote guidelines prior to the beginning of the Fall proxy season, and to update the vote record after proxy seasons ends in late Spring. Separating the proxy information from the SAI would reduce the number of addendums funds are forced to insert into their SAI documents.
Response Time: We suggest that mutual fund companies be given 7 days to respond to requests for proxy information. This coincides with the current ruling on prospectus delivery.
Response to Arguments Against Proposed Rule S7-36-02
Cost: Proxy disclosure opponents argue that the cost of disclosure will drive up expenses. Our personal experience is the exact opposite. During our initial review, we found that our portfolio managers were spending an inordinate amount of time reading, analyzing, and voting proxy ballots. We discovered that it was more cost effective for us to use a voting service, and in 1999 we began contract negotiations with Proxy Monitor (now ISS). This streamlined our proxy voting, and it was very simple and inexpensive to add our vote file to our website. If a shareholder requests a hard copy, we are able to print the file from our website and mail it to them. The cost is minimal.
Quiet Diplomacy: We believe socially responsible funds are more experienced than most funds at quiet diplomacy, since these funds regularly engage management in dialogue on a wide variety of issues. Pax World has been engaging in quiet diplomacy for more than 30 years. We can state with certainty that quiet diplomacy is NOT compromised by the disclosure of proxy votes. In fact, we think it is a stretch to link the two. When it is time to cast a vote, a fund manager has a fiduciary duty to vote in their shareholders best interests, regardless of the status of private conversations with management. All parties involved in the conversation know this and should act accordingly.
Lower Stock Price: Some of the largest fund companies have expressed concern that public disclosure of a conflict with management may negatively affect a company's share price. We believe that semi-annual disclosure of votes provides enough of a time delay to mitigate any concern about vote disclosure's effect on share price.
Investor Apathy: The most disturbing argument against reform is that "investors don't care about proxy voting." For years, socially responsible investors warned about the dangers of inside boards and excessive executive compensation, only to be told that investors didn't care. Given the outrage over corporate scandals that still dominate the headlines more than a year after Enron's collapse, we now know that investors DO care. Disclosure of proxy votes will eliminate hidden areas where abuse can occur, and give investors a tool - indeed, the only tool - to find out how their fund managers are voting on issues they deem important.
We would like to once again commend the Commission's proactive stance on disclosure of proxy votes. It is an issue with dramatic impact on our markets, and we appreciate the opportunity to express our support. Please do not hesitate to contact us if you have any further questions.
E T H I C A L I N V E S T I N G