AMERICAN BAR ASSOCIATION
BUSINESS LAW SECTION
December 6, 2002
Via e-mail - firstname.lastname@example.org
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Attention: Jonathan G. Katz, Secretary
Re: File S7-38-02
Release No. IA-2059
Proposed Rule: Proxy Voting by Investment Advisers
Ladies and Gentlemen:
We submit this letter on behalf of the Committee on Federal Regulation of Securities of the American Bar Association's Section of Business Law (the "Committee")* in response to a request for comment by the Securities and Exchange Commission (the "Commission") on proposed rule and form amendments under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), relating to proxy voting by investment advisers (the "Proposal").1 The Proposal would require an investment adviser registered under the Advisers Act (an "Adviser") that exercises voting authority over client securities to adopt and implement policies and procedures that are reasonably designed to ensure that the adviser votes securities in the best interest of clients, discloses to clients information about those procedures and policies and how clients may obtain information on how the Adviser has voted their proxies, and retains certain records relating to proxy voting.
The comments expressed in this letter represent the views of the Committee only and have not been approved by the American Bar Association's House of Delegates or Board of Governors and therefore do not represent the official position of the Association. In addition, this letter does not represent the official position of the ABA Section of Business Law, nor does it necessarily reflect the views of all members of the Committee.
As a threshold matter, the Committee recognizes that both at common law and under state securities law, an Adviser has a fiduciary obligation to its clients with respect to a client's assets, including the voting of securities in the best interests of the client. The Committee, however, is concerned that the Proposal converts a well-established fiduciary obligation under common law and state securities statutes into federal fiduciary law under the anti-fraud provisions of Section 206 of the Advisers Act.
As the Commission noted in the Proposing Release, many Advisers have adopted policies and procedures designed to ensure that on behalf of their clients, they properly vote proxies, avoid material conflicts, and otherwise fulfill their fiduciary obligations. In the Proposing Release, the Commission has proposed a new rule that would require Advisers that have voting authority over client securities to adopt and implement written policies and procedures that are reasonably designed to ensure that Advisers vote client securities in the best interest of clients. The procedures must disclose how Advisers address material conflicts that may arise between the Adviser's interests and the clients' interests.
The Establishment of a Federal Fiduciary Duty Under Section 206
The Proposal deals with two separate but parallel fiduciary issues: how an Adviser votes client securities when there is a conflict with the Adviser's interest ("Conflict Voting") and how an Adviser deals with voting securities where there is no conflict of interest ("Non-Conflict Voting"). We believe the Proposal should be modified to address Conflict Voting under Section 206; however, we believe that Section 206, the anti-fraud section in the Advisers Act, should not extend to Non-Conflict Voting.
The Committee believes that Conflict Voting issues could be covered by a narrower rule under Section 206. The Committee recommends that the Commission can accomplish this goal by restating sentence (a) to read as follows:
(a) Adopt and implement written policies and procedures that are reasonably designed to ensure that you vote client securities in the best interest of clients in circumstances where a material conflict may arise between your interests and those of your clients;
As an alternative, the Commission might consider expanded disclosure of Conflict Voting policies in Part II of Form ADV as an effective method of dealing with these conflicts. The Committee notes that the Commission has used enforcement proceedings in the past to deal effectively with conflicts of interest based upon failure to disclose detailed information about such conflicts in an Adviser's Form ADV.2
With respect to Non-Conflict Voting, we are concerned that the Commission would convert Non-Conflict Voting into a federal anti-fraud issue by adopting the Proposal. The Committee believes that common law and securities law adequately cover an Adviser's obligation to vote securities in Non-Conflict Voting circumstances and that the Commission should not transform this obligation into a "federalized" fiduciary law by adopting the proposed standard under Section 206, the Advisers Act's anti-fraud section. The Committee believes that Advisers who on occasion may vote Non-Conflict proxies inconsistent with their guidelines should not be subject to an anti-fraud claim under Section 206.3
We believe that Advisers may exercise various alternatives to fulfill their fiduciary obligations with respect to Non-Conflict Voting, such as: forwarding proxies to their clients for voting, obtaining instructions from their clients, or by voting or not voting such proxies in accordance with clearly disclosed policies and procedures. If Advisers choose to use their own policies and procedures, then the Committee believes it is appropriate for Advisers to disclose such policies to clients in Part II of Form ADV. Advisers may also decide not to vote client securities so long as they inform the clients of such non-voting policy.
We therefore recommend that the Commission modify the Proposal as described above, that Non-Conflict Voting issues should only be covered by a general description of an Adviser's proxy voting policies and procedures in Part II of Form ADV and that Advisers should be required to maintain records of their voting activities under Section 204 of the Advisers Act. Such treatment would be consistent with the framework established under Rules 204-2(a)(12) and 204-2(a)(13); which address security transactions involving the Advisers. 4
The Committee respectfully submits these comments to the Commission and requests that the Commission revise its Proposal in accordance with the comments set forth above. Members of the Committee's Subcommittee on Investment Companies and Investment Advisers are prepared to meet and discuss these matters with the Commission and the staff and to respond to any questions.
Committee on Federal Regulation
John N. Ake
Diane E. Ambler
Jay G. Baris
Stuart H. Coleman
Kimberly A. Klock
cc: The Honorable Chairman Harvey L. Pitt
Chairman of the Securities and Exchange Commission
The Honorable Paul S. Atkins
The Honorable Roel C. Campos
The Honorable Cynthia A. Glassman
The Honorable Harvey J. Goldschmid
Paul F. Roye
Director, Division of Investment Management
|*|| References to "we" and "our" refer to the Committee.
|1|| Release No. IA-2059 (September 20, 2002) (the "Proposing Release").
|2|| For example, the Commission has required extensive disclosure in Form ADV of conflicts that arise from brokerage practices of Advisers and has used the failure to disclose the details of such conflicts as a basis of enforcement actions. Such conflicts are not directly regulated under Rule 206.
|3|| No other rules adopted under Section 206 involve the imposition of traditional fiduciary standards, but instead relate either to potentially fraudulent activities (e.g., false advertising (Rule 206(4)-1), failure to disclose disciplinary sanctions (Rule 206(4)-4) and failure to disclose interests of solicitors (Rule 206(4)-3)) or to conflicts of interest (e.g., agency cross transactions (Rule 206(3)-2) and control of client assets (Rule 206(4)-2)).
|4|| We do not believe that Advisers should be required to maintain copies of proxy statements that are readily available through the Commission's website and the EDGAR system. It is burdensome to retain and file physical copies of proxy statements when they are so easily accessible as public documents.