Creative Investment Research
PO Box 55793
Washington, DC 20040-5793
866-867-3795 phone
866-867-3795 fax

Monday, May 05, 2003

Mr. Jonathan G. Katz
450 Fifth Street, NW
Washington, D.C. 20549-0609

RE: File No. S7-10-03

Dear Mr. Katz:

I am writing concerning Press Release 2003-46 announcing that the Commission has directed the Division of Corporation Finance to formulate possible changes in the proxy rules and regulations and their interpretations regarding procedures for the election of corporate directors. As stated in that press release, this review will address the following topics:

    * shareholder proposals;
    * the corporate director nomination process;
    * elections of directors;
    * the solicitation of proxies for director elections;
    * contests for corporate control; and
    * the disclosure and other requirements imposed on large shareholders and groups of shareholders.

We appreciate this effort, and note the following. The following are the simple facts:

Repeatedly, over the past twenty-five years, signal market participants have abandoned ethical principles in the pursuit of material well being.1 This has occurred in both bull and in bear markets and has taken place in the most materially advantaged country ever. A culture of avarice, arrogance, and malice has flourished in capital market institutions, propelling standards of behavior downward.

For example, in some cases, investment analyst research reports and "buy and sell" recommendations became "manipulative or deceptive device(s)," part of "a (successful) scheme to defraud" the investing public. Clearly, these identifiable entities and individuals (investment banks and analysts) engaged in criminal activities.2 Recent prosecution efforts have insured that these firms and individuals have, for the most part, not evaded prosecution.3

The Commissions' prosecution strategy is consistent with basic principles of fairness, since remuneration for crimes committed is now more closely tied to a realistic measure of damage caused. We understand that, given any proposed rule, crimes will continue to be committed.4

Significant reform measures are clearly called for.


William Michael Cunningham registered with the U.S. Securities and Exchange Commission as an Investment Advisor on 2/2/1990. He registered with the D.C. Public Service Commission as an Investment Advisor on 1/28/1994.

Mr. Cunningham manages an investment advisory and research firm, Creative Investment Research, Inc. The firm researches and creates socially responsible investments and provides socially responsible investment advisory services. The company was founded in 1989. On November 16, 1995, the firm launched one of the first investment advisor websites.

The firm and Mr. Cunningham have long been concerned with the SEC's ability to manage the market regulatory process:

  • On July 9, 1993, Mr. Cunningham wrote SEC Commissioner Mary Schapiro to suggest the SEC warn the investing public about a certain investing "scam." A timely warning was not, to our knowledge, ever issued.

  • In an April 1995 article titled "Profit From Debt: The Black Enterprise Fixed Income Roundtable" Mr. Cunningham recommended investors not purchase municipal securities issued by the District of Columbia, given social and financial difficulties the city was experiencing. In retaliation, shortly thereafter, Mr. Cunningham was subject to certain "unfair regulatory practices" by the Public Service Commission of the District of Columbia (DC Public Service Commission Case 943-G.) He complained to the SEC about this action, but no review of this matter was ever conducted.

  • In September, 1998, Mr. Cunningham opposed the application, approved by the Federal Reserve Board on September 23, 1998, by Travelers Group Inc., New York, New York, to become a bank holding company by acquiring Citicorp, New York, New York, and to retain certain nonbanking subsidiaries and investments of Travelers, including Salomon Smith Barney Inc., New York, New York. Mr. Cunningham based his opposition on the fact that Salomon Smith Barney Inc. had a history of attempting to monopolize markets and defrauding investors. This single fact rendered the merger potentially injurious to the public welfare.

    Specifically, Mr. Cunningham felt the merger was not consistent with 12 U.S.C. Section 1841 et. seq., the Bank Holding Company Act of 1956. The Act states that:

    "The (Federal Reserve) Board shall not approve -

    (B) any other proposed acquisition or merger or consolidation under this section whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade.."

    On April 28, 2003, Citigroup Global Markets Inc. and Salomon Smith Barney Inc. (SSB) settled an S.E.C. enforcement action involving conflicts of interest between research and investment banking operations. Citigroup Global Markets Inc. and Salomon Smith Barney Inc. paid fines totaling $400 million. The firms were found to be defrauding investors by operating schemes in restraint of trade.

  • In October 1998, in a petition to the United States Court of Appeals5, Mr. Cunningham cited evidence that growing financial market malfeasance greatly exacerbated risks in financial markets, reducing the safety and soundness of large financial institutions. He went on to note that:

    "The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, public safety is at risk."

  • From October 1999 to March 2002, Mr. Cunningham served as Manager, Social Purpose Investing for a pension fund. In that role, he was responsible for proxy voting activity. In 2001, he voted on 1395 issues impacting 401 companies. In 2000, he voted on 1903 issues impacting 422 companies. On Thursday, February 14, 2002, Mr. Cunningham wrote to Ms. Linda Snyder in the Office of the General Council to inquire about his responsibility under the duty of care standard to monitor corporate events and to vote proxies, as an SEC and State-registered investment adviser who also worked for a pension fund. Mr. Cunningham noted several incidents at work that led him to be concerned about his ability to carry out his duty to exercise proper care. As a result, he questioned Ms. Snyder about his liability for negligence on the part of his employer. The Commission responded in a timely manner. We have attached background memorandum concerning this matter.

There have been several similar incidents.

In most cases, upon commenting, the SEC first reviewed Mr. Cunningham's activities, instead of looking at the facts surrounding the matters cited. We note this behavior may explain why the SEC does not receive more timely information from industry insiders concerning inappropriate activities.

Structure of the Review

We note that:

"As part of this process, the Commission has asked the Division to consult with all interested parties, including representatives of pension funds, shareholder advocacy groups, and representatives from the business and legal communities. The Commission has requested that the Division provide its recommendations to the Commission by July 15 of this year."

This is an aggressive schedule given the nature of the task. To enhance the Division's ability to "consult with all interested parties," we suggest using E-Conference technology to obtain public input.6 According to one E-Conference organizer,

"The e-conferences that are sponsored by the World Bank Institute CSR program are an integral component of our distance learning strategy. These global dialogues have proven to be an important step in sharing knowledge and bringing together leaders at the local and global level. For each e-conference, expert external moderators provide relevant and up-to-date background readings and guidance leading to focused, high-quality discussions. These then translate into action-plans working toward tangible change in client countries."

We also suggest the Commission seek input from the following specific groups:

  1. The Interfaith Center for Corporate Responsibility

  2. The Treasurer of the State of California

  3. The Board of Pensions of the United Methodist Church

  4. The Federal Reserve Board

  5. Domini Social Investments


  7. The Global Reporting Initiative

  8. Office of Investment of the AFL-CIO

  9. The Center for Fiduciary Studies, The University of Pittsburgh

Review In the Public Interest

Faulty corporate governance practices mask a company's true value. This misallocates capital by moving investment dollars from deserving companies to unworthy companies. The changes to proxy rules and regulations suggested below are intended to make it more difficult for corporate management to unfairly transfer value from shareholders to management.

The Corporate Governance issue

The Commission's review seeks to address the following topics:

    * shareholder proposals;
    * the corporate director nomination process;
    * elections of directors;
    * the solicitation of proxies for director elections;
    * contests for corporate control; and
    * the disclosure and other requirements imposed on large shareholders and groups of shareholders.

We consider each of these issues below.

Shareholder proposals.

The shareholder proposal rule sets the policy for shareholder access to management's proxy card. Currently,

  • Shareholders must have $2,000 in stock held continuously for a year.

  • Proposals are limited to 500 words.

  • There are 13 grounds for omission.

  • To be resubmitted, shareholder proposals must receive a minimum of 3% of votes cast in year one, 6% in year two and 10% in year three.

To help encourage shareholder participation in the management of corporate affairs, we suggest the Commission have a flat, "3% of the vote" resubmission rule for the first three years of a proposal's life (3 for 3). We suggest the Commission put this "3 for 3" rule into place for a five year trial period (3 for 3 for 5).

We also suggest the Commission modify shareholder access rules to make it easier for index investors (persons investing in, say, S&P 500 Index funds) to have access to management's proxy card so that they can take a more active role in corporate governance.

We suggest, at this time, the Commission focus on allowing equal access only for the nomination and election of Board members. The scope and scale of director responsibilities allows them to deal with multiple issues impacting

corporate operations. Given this, directors have a clear ability to impact all aspects of corporate governance.

The current system for shareholder proposals in other areas of corporate governance, assuming the Commission makes the modifications suggested above, works.

The corporate director nomination process, the elections of directors and the solicitation of proxies for director elections.

Prior to the creation and adoption of high speed, massively networked public computer systems, allowing shareholders to place issues on a companies' proxy statement was a costly proposition, unfair to public companies and corporations, since they would have had to incur substantial costs in order to insure shareholder access. This is, however, no longer the case.

We suggest, for the benefit of shareholders, public companies should be required to conduct Board elections on-line, via the Internet. Candidates could be nominated by shareholders on-line and a fair, efficient candidate screening procedure could be established.

Board elections could be conducted on-line, using a secure, tamper resistant, management-independent website. Votes would be tabulated in real time. Many investment advisors and shareholders currently use sites like to vote proxies. Internet technology was specifically designed for this type of problem.

This Board member nomination and vote tabulation system would have to be tied to a shareholder accounting system to determine the number of shares held by the person or institution nominating a candidate. Further, this system might "permit shareholders or groups of shareholders holding more than a certain nominal percentage of a company's stock to nominate candidates for director." Once nominated, information on the candidate and the shareholders or groups of shareholders nominating that person could be easily incorporated into on-line proxy material.

We also suggest that the Commission enact new rules giving shareholders the power to place on the proxy ballot proposals to remove a director or directors, subject to the qualification tests outlined above ($2,000 in stock held continuously for a year, 500 word proposals, "3 for 3").

Contests for corporate control

We have outlined a two-tier process to implement our suggestions:

  1. Open Board member nominations, subject to certain qualification tests.

  2. Board member nominee screening by management.

To minimize the possibility that outsiders will use this process to create a new takeover techniques, we suggest the Commission require full disclosure of all nominee interests, including any interests that could conflict with those of shareholders. In addition, should shareholders discover that this process has been used as a takeover device, we suggest the Commission put into place a series of strict monetary and criminal penalties. This set of penalties would include forfeiture of corporate control.

Disclosure and other requirements imposed on large shareholders and groups of shareholders.

We suggest the Commission capture proxy voting information submitted on-line. The SEC would have to maintain a database of raw proxy voting information that it would then process and make available to the public. The

Commission would do this by matching proxy voting shareholder identifiers and control numbers to specific shareholders and investment advisors, summarizing the data, and posting it on a website. Note that, to ensure privacy, the identity of the owner of the security would not have to be revealed. Only the identity of company issuing the proxy, and the specific votes would have to be revealed.

Having the SEC maintain a database of raw proxy voting information would clearly serve the public interest. A proxy voting information database would lower information search costs by making it easier for the public to review proxy voting activity at a specific company. Under current proposals, to obtain information on voting behavior with respect to one company, say, IBM, a shareholder or a member of the public would have to request information from each shareholder or investment advisory company separately. Given the number of shareholders and advisors, this would be a very time consuming process.

Given these time savings, we believe having the SEC create a proxy voting record data base and data retrieval facility will be in the public interest.

We also suggest the Commission offer manuals describing policies and procedures the Commission believes are best on-line Board member nomination and proxy voting practices for public companies in a separate set of documents.

Disclosing Information on Proxy Votes

Corporate governance issues tend to be long term in nature. In other words, except under aggravated circumstances, changes in shareholder value attributable to corporate governance factors take, relatively, a long time to be reflected in market value. Thus, attention and patience, two skills always in short supply, are required of shareholders. We believe our proposal, by making it easier for investors to collect and evaluate information on critical aspects of management behaviour, will increase both. We agree with the Commission when it states that " `sunshine' on (proxy) votes will lead (market participants) to pay greater attention to their fiduciary obligations" and when it states that "fully informed shareholders will serve as a check on management." It is our belief that proxy voting has economic value.

While we generally support the review proposed in the release, we suggest the Commission carefully review the experience of the Federal Financial Institution Examination Council (FFIEC) with respect to the implementation of the Home Mortgage Disclosure Act. HMDA requires banks and other financial institutions to report statistics on every home mortgage loan application received. The law requires the FFIEC collect millions of records7, and has resulted in no appreciable damage to banking operations. In fact, the law, by encouraging financial institutions to make loans to previously underserved but credit worthy borrowers, opened a new market, resulted in increased profitability.8

We believe this review is necessary and proper. Providing a record of proxy votes by company and proxy line item will help investors determine management's position on important matters related to corporate governance. These issues directly affect shareholder value. Thus, a review of rules and regulations will have utility.

We believe the experience of the FFIEC in enhancing the quality, utility and clarity of data collected from financial institutions under CRA and HMDA provides an experience base the Commission can use to enhance the quality, utility, and clarity of proxy voting information to be collected. When CRA and HMDA data was initially collected, it was flawed. The data collection process was viewed as problematic. There were questions about the quality and clarity of the information. Subsequent collection efforts resulted in clearer, more useful data.

Cost-Benefit Analysis

We note that the 2003 budget for data collection and management efforts relating to the collection of HMDA data is $2,500,000. This fact supports the creation of an SEC maintained proxy voting database and data collection system.

We do not believe the effects of the proposed rule and rule amendments on small entities would be economically significant.


We believe the proposed rule and regulation review, by potentially strengthening the property rights of all shareholders, will increase transparency and fairness in our capital markets. We believe the proposed review economically significant and positive.

We cite the following:

"Well-functioning markets require accurate information to allocate capital and other resources, and market participants must have confidence that our predominately voluntary system of exchange is transparent and fair. Although business transactions are governed by laws and contracts, if even a modest fraction of those transactions had to be adjudicated, our courts would be swamped into immobility. Thus, our market system depends critically on trust--trust in the word of our colleagues and trust in the word of those with whom we do business. Falsification and fraud are highly destructive to free-market capitalism and, more broadly, to the underpinnings of our society...

Above all, we must bear in mind that the critical issue should be how to strengthen the legal base of free market capitalism: the property rights of shareholders and other owners of capital. Fraud and deception are thefts of property. In my judgment, more generally, unless the laws governing how markets and corporations function are perceived as fair, our economic system cannot achieve its full potential. "

Testimony of Chairman Alan Greenspan, Chairman of the Federal Reserve Board, Federal Reserve Board's semiannual monetary policy report to the Congress. Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. July 16, 2002

We agree.

Thank you.


William Michael Cunningham
For William Michael Cunningham and Creative Investment Research

800 Marquette Avenue, Suite 1050 · Minneapolis, Minnesota 55402 · 612-333-7651


DATE: Thursday, February 14, 2002
TO:Mike Troutman, Dave Lecander, Janet Sergot, Beverly Riegel
FROM: Bill Cunningham
RE: 2001 Proxy Voting Activity

This memorandum summarizes 2001 proxy voting activity for the ELCA Board of Pensions.

In 2001, the Board voted on 1395 issues impacting 401 companies. These votes conformed to proxy voting guidelines. In 1041 matters, we voted in favor of shareholder resolutions. We voted against 349 items. We abstained from voting on 5 matters. We voted against management 261 times. A complete report on proxy voting activities in 2001 is available.

Proxies from 86 companies were not voted in 2001. In 2000, proxies from 30 companies were not voted. In 1999, The Board did not vote 43 proxies.

For 2001, in some cases, vendor systems failure prevented staff from determining the economic impact of the subject proxy proposal. In other cases, changes in corporate annual meetings following events related to September 11, 2001 prohibited staff from filing timely votes.

More importantly, certain factors related to administrative staff, including staff turnover, have negatively impacted our proxy voting activities. After attempting to solve the problem with currently assigned administrative staff, I notified Dave Lecander (my supervisor) and Beverly Riegel (administrative staff supervisor) of the problem. Attached are several email messages sent in 2001 concerning this issue. The first email is dated May 11, 2001. The final email is dated July 29, 2001.9 In addition, to protect the Board and to help insure that administrative tasks relating to proxy voting be carried out professionally, I suggested another administrative staff person (Jeanne Hammerly) be assigned to assist or replace the person currently handling this task (Julie Kaplan).10

-----Original Message-----

From: Bill Cunningham
Sent: Friday, May 11, 2001 10:29 AM
To: Julie Kaplin
Cc: Bev Riegel; Dave Lecander
Subject: Missed proxy votes

We missed the following international proxy votes:

Taiwan Semiconductor Mfc.
Koninklijke Nederlandsche Petroleum Maatschappij

Julie, you've been posting the domestic proxy voting date on the international proxy materials. This is incorrect. International proxies have specific cut off dates that are listed on the bottom of each ballot. Please post this cut off date on international proxy forms forwarded to me. Thanks.

William Michael Cunningham
Manager, Social Purpose Investing & Customer Education
Board of Pensions
800 Marquette Ave.
Suite 1050
Minneapolis, MN 55402
612-752-4268 phone

-----Original Message-----

From: Bill Cunningham
Sent: Tuesday, June 05, 2001 6:53 PM
To: Julie Kaplin
Cc: Bev Riegel
Subject: Missed Proxy Vote

I discovered the proxy for Nabors Industries today stuck inside the proxy documentation for Converse Technology. The Nabors meeting took place today, so we missed voting. Julie, you'll want to make sure to separate the proxies documents in the future.


William Michael Cunningham
Manager, Social Purpose Investing & Customer Education
Board of Pensions
800 Marquette Ave.
Suite 1050
Minneapolis, MN 55402
612-752-4268 phone

-----Original Message-----
From: Bill Cunningham
Sent: Thursday, June 07, 2001 11:11 AM
To: Bev Riegel
Subject: RE: Missed Proxy Vote
Sensitivity: Private

As I have indicated, the administrative support for proxy voting has gone thru a number of iterations. We have had at least four admins involved in the process over the past year: Julie, Tina, Myhang, and LJ. This one of the key issues here. In addition, as I have mentioned several times, Julie seems to have an issue working in a diverse environment. This does not help matters and may now be impacting her (and my) work. Placing a proxy ballot box in my office is fine, if you think this will help.

The short term solution is to carefully monitor the situation, as I have, noting every problem as it occurs. Perhaps we want to do a trial run of the proxy voting report out of IRRC to determine how many proxies have been voted to date and the number of missed votes.

A further issue concerns Julies' creation of ballots in the IRRC program. In certain cases, ballots are missing from the IRRC database. Julie then creates a ballot, selecting the issues to place on the ballot. This is fine, as long as the created ballot matches the real ballot. We need to check. I will check with IRRC to determine why these ballots are missing in the first place.


William Michael Cunningham
Manager, Social Purpose Investing & Customer Education
Board of Pensions
800 Marquette Ave.
Suite 1050
Minneapolis, MN 55402
612-752-4268 phone

-----Original Message-----
From: Bill Cunningham
Sent: Sunday, July 29, 2001 8:02 PM
To: Bev Riegel
Cc: Dave Lecander
Subject: Missed proxy votes

FYI...There are several (5 or 6) proxies that I am, I believe, just getting that we missed voting on. I will provide more detail later.

William Michael Cunningham

1 We refer the Commission to the following, abbreviated listing of market related ethical lapses since 1991:

According to published reports, "the integrity of the entire U.S. Treasury securities auction market was called into question when Salomon Inc. (now Salomon Smith Barney), admitted in August 1991 to serious violations of the auction rules during 1990 and 1991." In essence, the firm attempted to "monopolize" or "corner the market" in a particular U.S. Treasury security.

The National Association of Security Dealers was found by the U.S. Securities and Exchange Commission to be "failing to police wrongdoing the NASDAQ Stock market, the second largest stock market in the world." The Washington Post (August 8, 1996. Page A1.)

According to the Washington Post (August 28, 1996. Page D1), several securities brokers were suspended because they hired others to impersonate them and take the main securities licensing examination, the Series 7 test.

According to some news reports, the failure of Long-Term Capital, an investment partnership started in 1994, was "laid on the kind of capitalism .. where a closed, secretive and incestuous elite held absolute sway over politics, the economy and finance, where banks lent to cronies and crooks, and the state miraculously came to the rescue when the time came to balance (or cook) the books." From "LTCM, a Hedge Fund Above Suspicion," by Ibrahim Warde, Le Monde Diplomatique, November 1998.

2 See "SEC, NY Attorney General, NASD, NASAA, NYSE and State Regulators Announce Historic Agreement To Reform Investment Practices $1.4 Billion Global Settlement Includes Penalties and Funds for Investors." SEC Press Release Number 2002-179. Dated December 20, 2002.
3 We note that one firm, Goldman Sachs, ostensibly fined $110 million by the Commission for allowing undue influence by investment banking interests on securities research, subsequently received $75 million in Federal Government tax credits. The credits were awarded to Goldman Sachs under the New Markets Tax Credit (NMTC) Program run by the CDFI Fund of the U.S. Department of the Treasury. (See:
4 We assume that "employees are `rational cheaters,' who anticipate the consequences of their actions and (engage in illegal behavior) when the marginal benefits exceed costs." See Nagin, Daniel, James Rebitzer, Seth Sanders and Lowell Taylor, "Monitoring, Motivation, and Management: The Determinants of Opportunistic Behavior in a Field Experiment,"The American Economic Review, vol. 92 (September, 2002), pp 850-873.
5 Case Number 98-1459.
6 See: corpgov/csr/econferences/index.html.
7 According to the FFIEC, "In 2002, there were approximately 28 million loan records for calendar year (CY) 2001 reported by 7,631 financial institutions. In 2001, 7,713 financial institutions reported approximately 19 million loan records for CY 2000. In 2000, 7,829 financial institutions reported approximately 23 million loan records for CY 1999. In 1999, 7,836 financial institutions reported approximately 24.7 million loan records for CY 1998. In 1998, 7,925 financial institutions reported approximately 16.4 million loan records for CY 1997." See:
8 This is our view. For a detailed review of the law's impact, see: "The Impact of the Community Reinvestment Act on Bank and Thrift Home Mortgage Lending." March, 2001. Eric Belsky, Gary Fauth, Michael Schill, Anthony Yezer, presented at Changing Financial Markets and Community Development: The Federal Reserve System's Second Community Affairs Research Conference, The Capital Hilton, Washington, D.C., April 5-6, 2001. Available on-line at:
9 After this date, it became apparent that further efforts to correct the problem by replacing administrative personnel would be futile.
10 In my experience, Julie has opinions that prevent her from working professionally with managers who happen to be people of color. Incidents reflecting these opinions have made it difficult for me to work with Julie. In a meeting with Janet Sergot, Manager, Human Resources, held on Tuesday, October 30, 2001, I described specific nonproductive incidents and specific language Julie has used that I found objectionable.