December 9, 2002
Mr. Jonathan G. Katz
Re: Proxy Voting by Investment Advisers, File No. S7-38-02
The Financial Services Practice Group of Dechert is pleased to have this opportunity to comment on the proposal (the "Proposal") to adopt rules (the "Proposed Rules") that would require the adoption, implementation, and disclosure of proxy voting policies and procedures by investment advisers registered under the Investment Advisers Act of 1940, in response to the Commission's request set forth in Release No. IA-2059.
Dechert is an international law firm with a wide-ranging investment management practice that serves clients in the United States and worldwide, including many investment advisers registered under the Advisers Act, open-end and closed-end companies registered under the Investment Company Act of 1940, and unit investment trusts.
I. Summary of Position
We agree with the Commission that the Proposal would assure that advisers have an effective system in place to identify and address any material conflicts of interest with respect to proxy voting and to vote proxies in the client's best interest, while placing clients in a better position to determine whether an adviser's proxy voting policies meet their expectations.1 Accordingly, Dechert supports the Proposal's core objective of preventing material conflicts of interest from affecting the manner in which advisers vote client proxies.
We have several specific comments on the Proposal, however, that are intended to clarify certain ambiguities and minimize the costs and burdens of compliance:
II. Advisers with Split Voting Authority
We agree with the Commission that only advisers with voting authority over client proxies should be subject to the Proposed Rules.2 We recognize, however, that there are many instances where advisers do not have sole discretion to vote client proxies and that clients often retain some voting authority. For example, a client may retain voting authority with respect to certain issues, or the advisory contract may provide that the adviser should consult with the client on voting matters. Therefore, we believe that the Proposed Rules should apply only to proxies with respect to which an adviser has full discretion to vote and should not apply in instances where the client has retained some voting authority.
III. Conflicts of Interest
While we support the Proposal's goal of preventing material conflicts of interest from affecting the manner in which advisers vote client proxies,3 we seek clarification with respect to the relationships that may constitute material conflicts of interest. Clarification is of particular importance given the lack of an administrative record evidencing abuses by advisers in the area of proxy voting. The Proposal lists a number of business and personal relationships that may give rise to conflicts of interest in proxy voting. However, many of the relationships described in the Proposal rarely present a material conflict of interest or are of such a nature as to improperly influence the proxy voting decision-making process of an adviser. We are concerned that a presumption that all such relationships result in material conflicts of interest may lead to impractical applications of the Proposed Rules.
For example, many large advisers follow hundreds of issuers and employ many employees. It would be difficult for such firms to determine on a continuous basis whether employees have "personal or business relationships" with issuers, their employees or directors, participants in proxy contests, or proponents of proxy proposals.4 Therefore, we urge the Commission to clarify that in order for a business or personal relationship involving an officer, director or employee of an adviser to be deemed to be material the relationship must involve a person who makes voting decisions for the adviser.
In addition, we urge the Commission to provide additional guidance as to the nature of potential business conflicts that should be deemed to be material conflicts under the Proposed Rules. We believe that for a business relationship to be deemed to be material, the relationship must be one of substantial economic value to the adviser.
IV. Proxy Voting Information
We support the Proposal's position that each adviser be provided the flexibility to construct on an individual basis a format for disclosing to a client its proxy voting record on behalf of the client. We agree that a prescribed "one-size-fits-all" approach would not be appropriate given the diversity in advisory clientele. Moreover, we support the Commission's assertion that specific decisions as to the nature, format and scope of the information that must be disclosed should rest with advisers and their clients.5
However, in order to ease the administrative costs of implementing the Proposed Rules, we recommend that an adviser only be required to provide its proxy voting record with respect to a reasonable time period. We believe that a period of one year would be sufficient for a client to monitor how the adviser has voted its proxies. Without such a limit, the costs of compliance would in our view outweigh the benefits of providing voting information to clients.
V. Recordkeeping Requirements
While we recognize the need to retain records of proxy-voting materials and understand that record retention would permit examiners to ascertain compliance with the rule,6 we believe the Proposed Rules will place an unnecessarily heavy burden on advisers in three ways.
First, we believe the requirement that advisers "maintain all communications received and internal documents created that were material to the voting decision" is overly burdensome. Advisers frequently receive contact from special interest groups and proxy solicitation firms. It would be difficult for an adviser to decide which of these contacts are actually material and it would be quite burdensome to document every contact of this nature. Therefore, we recommend that the final rule only require documentation when the proxy vote relates to an identified material conflict of interest.
Second, we believe the requirement that advisers maintain records of oral communications is also overly burdensome. Without clarification from the Commission, it is possible that the Proposed Rules would extend to both external and internal communications. We believe that this requirement would impose a substantial burden on advisers by requiring them to systematically track, control and document these types of communications. The costs associated with such a system would significantly outweigh the benefits to investors. Therefore, we urge the Commission to eliminate this requirement from the Proposed Rules.
Finally, we believe the requirement that advisers keep all proxy statements for five years is overly burdensome, and is not necessary to serve the purposes of the Proposal. Therefore, we recommend that the Commission clarify its final rule to state that physical record of each proxy statement received is not necessary and that advisers can simply make appropriate log entries for each proposal.
VI. Requested Amendments to the Proposal
We strongly urge the Commission to implement any new proxy voting disclosure requirements in a manner that is sensitive to the significant potential compliance costs, which ultimately will be borne by the investing public. For the reasons stated above, we respectfully request that the Commission amend the Proposed Rules so as to address the concerns stated herein.
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We appreciate the opportunity to comment on the Proposal. If we can be of any further assistance in this regard, please contact John V. O'Hanlon at 617-728-7111, Elizabeth M. Knoblock at 202-261-3320, or Colin Dean at 617-728-8624.
cc: Harvey L. Pitt, Chairman