Association for Investment Management and Research
U.S. Advocacy Committee
13 December 2002
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20459
Re: Proxy Voting by Investment Advisers-File No. S7-38-02;
Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies-File No. S7-36-02
Dear Mr. Katz:
The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to comment on the SEC's proposals addressing proxy voting by investment advisers and the disclosure of proxy voting policies and records by registered management investment companies. The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.
I. Proxy Voting by Investment Advisers
We support the requirements in the proxy voting proposals for investment advisers that would require advisers to adopt and implement proxy voting policies and procedures, disclose information about them to clients, tell clients how to obtain information about how the adviser has voted their shares, and to keep certain records related to proxy voting. As proposed, the written policies would describe how the adviser addresses material conflicts between its interests and those of its clients, and how it resolves the conflicts in the best interests of the client. They also would identify the personnel responsible for monitoring corporate actions, the bases on which decisions are made to vote the proxies, and the personnel involved in making the voting decisions.
As noted below, current standards and guidelines for CFA charterholders and AIMR members already address and recommend procedures relating to these requirements, as proposed.
The AIMR Code and Standards (Code and Standards), with which CFA charterholders must comply, in order to remain in good standing and retain the right to use the CFA designation, speak to the standard required of fiduciaries who engage in proxy voting. For example, Standard IV B.1 specifically requires AIMR members to act for the benefit of their clients and place their clients' interests before their own.
Interpretations of this Standard, as contained in the AIMR Standard of Practice Handbook (8th ed.) specifically provide that
Certain fiduciaries are obligated to vote proxies in an informed and responsible manner. A fiduciary who fails to vote, casts a vote without considering the impact of the question, or votes blindly with management on non routine issues (e.g., a change in firm capitalization) may violate the fiduciary's duty of loyalty....The investment manager can avoid liability only if the management agreement or the plan document itself specifically precludes the investment manager from voting proxies. Accurate proxy voting records must be maintained, and the plan sponsor should be able to review not only voting procedures with respect to plan stock but also the actions that are taken in individual proxy voting situations....
Procedures for complying with this Standard provide that members should establish policies and procedures with respect to proxy voting, and vote proxies in the best interests of the clients or beneficiaries.
But the attention to proxy voting does not stop there. An AIMR topical study on Corporate Governance (contained in the Standards of Practice Handbook, and provided with this letter as Attachment A) extensively addresses proxy voting, and provides recommendations for approaching and analyzing issues that arise in this area. This study recognizes that when managers are given the responsibility for voting proxies, they must adopt appropriate procedures to ensure that the relevant issues are properly analyzed before voting, and that they must become thoroughly familiar with the issues raised in the proxies.
Recognizing that many proxies are not "routine," the Standards of Practice Handbook sets out the basic elements of a proxy voting policy. Included are detailed recommendations for creating and administering a proxy policy.
First, in creating a proxy policy, a policy-making body (the board, managing directors, or a committee) or an individual should be designated to recommend a proxy policy and to monitor its implementation. This policy-maker is charged with, among other things:
- Developing initial, specific guidelines and instituting a regular review process, including review of new or controversial proxy issues;
- Verifying that any decisions about how to vote is in accord with the investment interests, stated objectives, and particular preferences, if stated or known, of the investor, participants, or beneficiaries of an account;
- Providing a review mechanism for any unusual proposals, such as an opposition slate of directors, corporate restructuring related to hostile takeovers, or any proposals that appear not to be in the best interests of shareholders;
- Providing a process for deciding whether a vote against management should be preceded or followed by a letter, telephone call, in-person discussion with corporate personnel, and/or action to be taken with other concerned firms and organizations; and
- Deciding how and when to report to clients and sponsors the positions taken during the proxy season.
In addition, a basic element of a proxy voting policy requires the identification of major proxy issues by particular accounts, which takes into account preferences stated by beneficiaries, participants, or individuals for whom funds are held in trust. A suggested approach is to state the pros and cons of issues and evaluate specific proxy proposals against the history and productivity of current management, as well as the conceptual reasons for or against the proposal.
Second, a proxy voting policy must address the administration elements, including who has the authority and responsibility for voting proxies. Other elements include:
- Developing a system to monitor any delegation of proxy voting responsibility to others;
- Providing for record keeping, including the need to maintain a record of stock held, keeping a record of how proxies are voted and why, and noting any apparent conflicts of interest and how they are handled;
- Avoiding or minimizing conflicts of interest. This section particularly notes that corporate directors and managers who may serve on the boards of public and private funds, plan sponsors, analysts and investment management staff who may invest in stock also held in management accounts, and others with direct interest in the outcome of voting (investment banking, credit or loan obligations, corporate finance) may be vulnerable to conflicts of interest; and
- Providing periodic review sessions at least annually to
- Reacquaint staff handling or voting proxies with the overall policy,
- Reevaluate any previous decisions that deviate from guidelines,
- Discuss current proxy issues, and
- Recommend action on any current "hot issues" or unusual proposals.
We appreciate the proposal's flexible approach that would allow investment advisers to fashion its proxy voting policies and procedures in accordance with the nature of its business and the types of portfolio securities it manages. We believe that mandating a specific standard or language might defeat the objective of providing meaningful information, and result in too broad or "boilerplate" provisions.
II. Disclosure of Proxy Voting Policies and Records by Investment Companies
Like investment advisers, registered investment companies would have to disclose its policies and procedures for voting proxies. Unlike the proposal for investment advisers, however, the proposal relating to investment companies would require the nature, format, and scope of the information to be disclosed to the public. Specifically, it would require a fund to disclose how it actually voted proxies, including a statement of whether it voted with or against management. This information would be made public through semi-annual filings with the SEC.
We appreciate and support the SEC's efforts to provide additional disclosure to the investing public on the proxy voting process. While the typical approach in the past was to vote with management, today so many securities are held in large blocks that can wield significant influence in the proxy voting process. On a public policy basis, we believe that having in place policies and procedures will allow a potential client to evaluate how a fund manager handles proxy voting, and helps shore up the integrity of the entire proxy voting process. We believe that disclosure of these policies and procedures is appropriate, as long as there is no specific requirement to reveal, prior to the completion of the proxy voting process, how the fund manager intends to vote on particular issues. Finally, we recommend that the SEC consider an approach where investment companies would be subject to an ERISA-type standard, whereby it would be required to cast its vote in keeping with the economic benefits and interests of the fund's shareholders.
We strongly support the SEC's proxy voting proposal for investment advisers. As discussed above, AIMR's Standards of Practice have long recognized the fiduciary obligations inherent in the proxy voting process, and have established standards and guidelines for implementing and overseeing proxy policies and procedures, much in keeping with the SEC's proposal.
If we can provide additional information, please do not hesitate to contact Deborah Lamb at 770.971.7010, email@example.com or Linda Rittenhouse at 434.951.5333, firstname.lastname@example.org.
|/s/ Deborah A. Lamb
Deborah A. Lamb
Chair, U.S. Advocacy Committee
|/s/ Linda L. Rittenhouse
Linda L. Rittenhouse
Staff, AIMR Advocacy
Cc: Members of the U.S. Advocacy Committee
Rebecca T. McNally, CFA, PhD.,
Vice President-AIMR Professional Standards and Advocacy
|1 || With headquarters in Charlottesville, VA and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional association of 61,000 financial analysts, portfolio managers, and other investment professionals in 114 countries of which 48,800 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 117 affiliated societies and chapters in 37 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which had more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.