Domini Social Investments
March 31, 2003
Office of Management and Budget
Mr. Jonathan G. Katz, Secretary
Re: RIN 3235-AI64/SEC File No. S7-36-02
Dear SEC Desk Officer and Secretary Katz:
Domini Social Investments is very pleased to submit the following comments, in response to the OMB's request for information related to the Paperwork Reduction Act of 1995, and the cost and burdens of compliance with SEC Final Rule 30b1-4 [17 CFR 270.30b1-4], concerning proxy voting guidelines and vote disclosures by registered management investment companies.1 We strongly support the SEC's final rule and believe that the Commission has done excellent work in striking a fair balance between necessary disclosure and cost. As one of a handful of firms that currently provides this information to the public, we can attest that the costs and administrative burdens of proxy voting disclosure have been minimal.
Domini Social Investments LLC is a registered investment adviser under the Investment Company Act of 1940. We manage more than $1.3 billion in assets for mutual fund and institutional investors who seek to create positive change in society by integrating social and environmental criteria into their investment strategies. We manage the Domini Social Equity Fund (Ticker: DSEFX), the nation's oldest and largest socially and environmentally screened index fund.
In 1999 Domini became the first mutual fund manager in America to publicly disclose its proxy voting record. We began public dissemination of our proxy voting guidelines in 1992, with the Domini Social Equity Fund's first semi-annual report to shareholders. We publish on an annual basis comprehensive proxy voting guidelines so that our Funds' shareholders will know how we are voting their shares on important issues of corporate governance and social and environmental responsibility. We decided to embrace proxy-voting transparency because we agree with the Commission that proxy voting is a fiduciary responsibility of a fund's investment adviser, and that this duty must therefore be discharged "in a manner consistent with the best interests of the fund and its shareholders." Domini filed a Petition for Rulemaking (File No. 4-439) on November 27, 2001, calling on the Commission to adopt a rule mandating that mutual funds disclose their proxy-voting policies and procedures as well as their actual proxy votes.2
It is difficult to overstate the importance of this reform. More than half the households in America, approximately 95 million individuals, invest in mutual funds. Mutual funds hold approximately 18% of all publicly traded U.S. corporate equity,3 and exercise significant influence over corporate governance and corporate policy through their proxy voting practices. We agree with the Commission that "investors in mutual funds have a fundamental right to know how the fund casts proxy votes on shareholders' behalf."4 Proxy voting transparency will protect America's investors by allowing them to make more informed investment decisions. For the first time, individual investors will be able to monitor the seriousness with which their fund managers take this important fiduciary duty. They will also be able to monitor potential conflicts of interest when they arise - when, for example, a fund manager seeks to manage the retirement assets of a company in its portfolio.
Investor oversight of fund proxy voting practices should also prompt mutual funds to play a more active role in promoting sound corporate governance and improved corporate accountability on the part of companies whose shares they own. Transparency should have positive effects upon corporate governance and policy and, ultimately, upon shareholder value.
We strongly believe that these important benefits cannot be fully realized without full disclosure of fund voting records, and believe Form N-PX to be an efficient and cost-effective way of providing this information. Disclosure of a fund's proxy voting policies and procedures is important, but without disclosure of the actual votes cast investors will have no way of monitoring how these policies are enacted in the real world. Without full disclosure of a fund's proxy voting record, it will be impossible to determine whether the fund is actually voting in accordance with its guidelines, or if it is simply rubberstamping management's recommendations. Without full disclosure, there will be limited incentives on fund managers to ensure that their voting guidelines are being stringently followed.
It is important to note that these rules went through a public comment period that generated an unprecedented number of comments - more than 8,000 - the overwhelming majority of which expressed strong support for the rules. To the extent that these rules impose burdens that may ultimately be carried by mutual fund investors, we do not believe it is reasonable to argue that these investors do not value this information. It should also be noted in this context that the expense ratios of funds that currently disclose proxy voting records are not higher than those of funds in general,5 despite the fact that several of these fund managers, including Domini, disclose their votes on an ongoing basis throughout the year. The final rule would only require that funds disclose their voting records once a year.
The SEC has modified this rule from its original proposal in a number of important respects in order to reduce the costs and administrative burdens of compliance. Proxy voting records will now be disclosed on an annual, not a semi-annual basis. Funds will be given the flexibility to disclose this information on their website, or by linking to EDGAR. Funds will not be required to provide investors with hard copies of their voting records. The Commission has also eliminated the requirement to disclose votes that are inconsistent with their guidelines in their annual and semi-annual reports to shareholders. Disclosure of fund voting policies and procedures in the Fund's Statement of Additional Information ("SAI") will also reduce potential costs, as the SAI is not typeset and is only distributed to investors upon request. Our experience is that very few investors request the SAI on an annual basis.
All of these changes should make an already well-thought out rule even more cost-effective.
At Domini, we have disclosed our proxy votes on our website since April of 1999. The Domini Social Equity Fund is a 400 company index fund. We post votes for each company in our Fund's portfolio approximately two weeks prior to each annual meeting. This web page is maintained for us by a third party voting service. Although there were startup costs involved in programming and design of the web page, ongoing maintenance costs have been insignificant (Domini's proxy voting guidelines and proxy votes may be viewed at: www.domini.com/shareholder-advocacy/Proxy-Voting/index.htm). Based on our experience, the Commission's cost estimates of compliance with this rule are reasonable. In addition, the Commission's cost estimates of disclosure on Form N-CSR, which would have been more costly than Form N-PX, were consistent with the mutual fund industry's estimates.6
For any mutual fund firm that does not currently disclose its votes, there will be some initial startup costs. However, any fund that is conscientiously voting its proxies must maintain internal records of its votes, and must have a system in place to ensure that these votes are being cast consistent with the fund's policies and procedures. The rule does not require funds to capture any additional data. Disclosure on Form N-PX will merely require funds to sort the data they are already maintaining, and post it to the web. Once funds have gone through this process once, we would expect these startup costs to drop significantly.
We believe this rule will go a long way towards restoring confidence in America's corporate leadership and the integrity of financial markets by making corporations more accountable to their shareowners and other stakeholders. Not incidentally, this disclosure should also strengthen investor confidence in the mutual fund industry. The Commission has made a number of significant changes from the proposed rule that will enable funds to comply in an efficient and cost-effective manner while still providing their investors with the critical information they need to make fully informed investment decisions. We do not believe that the rule imposes any costs or burdens that are not clearly justified by the significant benefits the rule will provide. We hope that these comments are helpful, and welcome the opportunity to speak with you further about this important reform.