Alliance Fund Distributors, Inc.
1345 Avenue of the Americas
New York, NY 10105
Tel: (212) 969-2156
Fax: (212) 969-2290
Senior Vice President
December 5, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Mr. Katz:
On behalf of Alliance Capital Management L.P. ("Alliance"), I take this opportunity to comment on the Securities and Exchange Commission's ("SEC") proposed rule - Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies (the "Proposed Proxy Rule"). Alliance provides investment management services for many of the largest U.S. pension plans, institutional investors and high net worth individuals worldwide. Alliance is also one of the largest mutual fund sponsors, with a diverse family of globally distributed mutual fund portfolios. As of October 31, 2002, Alliance had approximately $382 billion of assets under management. As of September 30, 2002, Alliance managed retirement assets for many of the nation's largest public and private employee benefit plans (including 43 of the nation's FORTUNE 100 companies), for public employee retirement funds in 44 states, for investment companies and for foundations, endowments, banks and insurance companies worldwide. Alliance serves as investment manager for 55 registered investment companies, comprising 141 separate investment portfolios with more than 7.5 million shareholder accounts. In addition, Alliance serves as subadviser for numerous registered investment companies and provides private client investment management services through its Regent Investor Services division.
For the reasons set forth below, we strongly oppose the Proposed Proxy Rule. We believe that while, on its surface, the Proposed Proxy Rule may seem well intentioned, it is based primarily on a misimpression as to the seriousness with which funds and advisers currently take their fiduciary responsibility to vote proxies. Furthermore, it would impose significant manpower burdens on funds and costs on fund shareholders with little or no discernable benefit to shareholders. We urge the SEC to reconsider its proposal to better take into account the broad interests of fund shareholders.
In summary, our objections to the Proposed Proxy Rule are as follows:
- The Proposed Proxy Rule is premised on the SEC's misimpression that funds and their investment advisers are "passive investors"... "reluctant to challenge corporate management..." and not "sufficiently engaged" in matters of corporate governance and that the Proposed Proxy Rule is necessary to "encourage funds to become more engaged in corporate governance". We believe there is little factual basis for these statements, which were made by the SEC in the release accompanying the Proposed Proxy Rule (the "Proposing Release"). Both the Alliance Mutual Funds and Alliance, the investment adviser to the Alliance Mutual Funds, take matters of corporate governance seriously and have a robust proxy voting process. At Alliance, we recognize (and believe our competitors recognize as well) our fiduciary duty to vote proxies for the benefit of Fund shareholders (and, contrary to statements made in the Proposing Release, to vote these proxies in a manner best situated to maximize shareholder value in the funds we manage). We believe the Proposed Proxy Rule is overbroad, unduly burdensome and not necessary to insure that funds and their advisers properly exercise this duty;
- The Proposed Proxy Rule assumes that fund shareholders desire and will find this information useful. We understand that some special interests groups have made this claim, and further recognize that the SEC is now receiving a number of substantially identical form letters in support of the Proposed Proxy Rule. We urge the SEC to independently and objectively access the needs and desires of actual fund shareholders. We have seen no evidence that any of the over 7.5 million shareholders in the Alliance Mutual Funds desire this information; and
- The cost to fund shareholders of the Proposed Proxy Rule is significant and is not justified by any discernable benefit to shareholders. Disclosure of Alliance's complete proxy voting policy would add approximately 20 pages to each Fund SAI and updates or changes to that policy will result in complex-wide Rule 497 filings. Disclosure of a fund's proxy voting record on Form-CSR would required a listing, for the average equity fund (approximately 100 portfolio securities), of eight columns of detailed data for over 500 proposals per year. Because Form-CSR is subject to the certification requirements of the Sarbanes-Oxley Act of 2002, this disclosure will be required to undergo the certification support process required by Sarbanes-Oxley, leading to additional costs and burdens. Finally, it is unclear to us how disclosure of the rationale for votes which are submitted contrary to the voting policy would achieve the SEC's stated objective of controlling conflicts of interest. In fact, we believe it will have unintended negative consequences. We further believe that this disclosure will result in additional costs to fund shareholders, again with little or no benefit to shareholders.
We are dismayed that the SEC believes that registered investment companies and their investment advisers do not take their fiduciary responsibility to vote proxies seriously. We have seen no evidence supporting the assertions made by the SEC to this effect in the Proposing Release. As the SEC is aware, under applicable state and ERISA fiduciary law principles, proxy voting rights are assets of the fiduciary client and investment advisers exercising these voting decisions do so as fiduciaries. In the context of registered investment companies, fiduciary law principles require that investment advisers vote proxies in a manner deemed to be in the best interests of the funds which are their clients. 1
The Alliance Mutual Funds have delegated to Alliance the responsibility to vote proxies for issuers held in the funds' portfolios. To implement this responsibility, Alliance has developed a detailed, rigorous and multifaceted proxy voting process. A process which, by its very depth and detail, belies the notion that proxy voting is a matter of little interest. We suspect that if the SEC were to conduct additional fact finding, it would find that many funds and their advisers have similarly rigorous processes. At Alliance, this process is reviewed with each Fund's Board of Directors periodically2. Alliance has established a Proxy Voting Committee comprised of several representatives from senior management. The Proxy Voting Committee establishes the Adviser's proxy voting guidelines and might be called upon from time to time to set guidelines on new issues or to resolve differences of opinion on particular proposals before multiple clients.
While Alliance has established broad general proxy voting guidelines, our policy is to analyze vote proposals based on input from portfolio managers and research analysts and the interests of our clients3. In many, if not in a majority of cases, a determination may be made to support management's recommendations with respect to a specific proposal. Contrary to the undertone of the Proposing Release, and to the suggestions of certain interest groups championing the Proposed Proxy Rule, a decision to vote in favor of management as to a particular issue is not prima fascia evidence that one is following the "Wall Street Rule" and is not assertive in exercising their voting responsibilities. We simply see no evidence to support the SEC's statements that funds and their advisers are lax in this area. We point out that one reason we may choose to invest in a company is a belief in the quality of its management and therefore submit that a decision to vote with management should not be surprising to either the SEC or to others. Before the SEC proceeds to rulemaking, particularly rulemaking which would impose the costs and burdens of the Proposed Proxy Rule, we urge the SEC to conduct additional fact-finding to ascertain whether this is an area that requires additional rulemaking.
Alliance serves as investment adviser to 141 separate portfolios, with over 7.5 million shareholder accounts. To the best of our knowledge, we are not aware of ever having received a request from any fund shareholder for information regarding how a fund has voted its proxies. Based on this lack of real expressed interest among our actual shareholder base, the cost to shareholders of complying with the Proposed Proxy Rule (detailed below) seems impossible to justify.
III. The Proposed Proxy Rule Is Unduly Costly and Burdensome and Not Justified by any Benefit to Shareholders.
- Disclosure of the Proxy Voting Policy in the Fund's SAI - We estimate that full disclosure of Alliance's Proxy Voting Policy will add 20 pages of detailed disclosure to each SAI. This will cause each fund to incur additional production and printing costs as well as legal fees. As this policy is updated and amended, the SAI for each fund will be required to be updated and amended, presumably via Rule 497 filings, resulting in additional regulatory burdens and costs (production, printing and legal).
- Disclosure of Proxy Voting Record on Form-CSR - We estimate that there are typically 5 proposals for each issuer's shareholder meeting. A typical equity fund may hold approximately 100 security positions. Many diversified funds of course hold well in excess of 100 issues and many proxies for foreign issuers typically include far more than 5 proposals. However, using an assumption of 100 portfolio holdings per fund, the Proposed Proxy Rule would require a typical equity fund to provide 8 detailed items of information for approximately 500 proposals. Each fund will be required to prepare and update this list twice a year. Since production of such a lengthy list will be extremely time consuming, it can be expected that most funds will seek to outsource this process, at a cost to shareholders.4 Even with such outsourcing, management will be required to review this list and verify it. In addition, since Form-CSR is subject to the certification requirements of the Sarbanes-Oxley Act of 2002, each fund will be required to institute a certification support process (including a disclosure control and procedures process) to support the generation of this list. This will be extremely time consuming and burdensome.
- Disclosure of Votes Contrary to Policy in the Annual and Semi-Annual Report - the practical usefulness of this requirement is, at best, questionable. The premise of this requirement is that in circumstances where a vote is submitted contrary to the policy, a "heightened risk exists that a conflict of interest may be present" and that such disclosure is necessary to "deter voting decisions that are not in the best interests of shareholders".5 First, we note that state and ERISA fiduciary law principles require that fiduciaries act in the best interests of their clients when exercising their client's voting rights. As such, the decision of how one votes a proxy for any account must take into account relevant facts and circumstances not only of each issuer and each proposal, but also of the fiduciary clients on whose behalf the votes are being submitted. Often, votes will be caste in a consistent manner over a number of client accounts. Often, however, there may be split votes.
Our proxy voting policy sets forth broad general principles as to how proxies may be voted. But these principles cannot be applied outside of the context of the facts relevant to the particular issuer. We believe that a vote contrary to the voting policy therefore provides no basis for the assertion that a heightened risk of a conflict of interest exists. For example, many firms' proxy voting policies provide that proxies generally will be voted in favor of the election of directors6. However, in a particular case, the fund or the adviser may become disenchanted with management or feel that management has been lax in taking necessary action to maximize shareholder value. In such a case, a vote against the re-election of directors (which would be a vote contrary to the general principles of the policy) is not an indication of a conflict of interest but an indication of a proper exercise of fiduciary responsibility. This is not an isolated example. Guidelines by definition are established on a base-case scenario, they describe how a vote will be cast in a "plain vanilla" situation. Votes are cast contrary to the guidelines not because a conflict exists, but because there are particular facts, typically relating to the issuer, which warrant deviation from the guidelines. As a result, in our view, the entire premise for imposing the disclosure and cost burden on funds and their shareholders is false.
In addition, such disclosure will not generally be helpful to shareholders. This disclosure would likely take one of two forms. Take the case where a vote was submitted against the re-election of directors, contrary to the policy guidelines. The disclosure may be short and state that the adviser believed the directors were unwilling to take the steps necessary to maximize shareholder value. We fail to see the utility of that disclosure. The disclosure may be long and detailed -- setting forth all the reason for the adviser's conclusion -- in this example, citing all the actions which the directors did or did not take, all the discussions between the adviser and the issuer's management and all the other factors which led to the conclusion that the directors were unwilling to take the steps necessary to maximize shareholder value. This disclosure will be long and detailed and result in substantial costs and burdens. In addition, depending on the nature of the specific proposal in question, part of the adviser's decision-making process as to how to cast a vote may rely on its proprietary research and work product7. We fail to see how this information will be useful to the typical fund shareholder.
IV. The Proposed Proxy Rule May Have Unintended Negative Consequences.
- Funds Would Lose the Ability to Vote Confidentially - The Proposed Proxy Rules would deny mutual funds the ability to employ confidential voting. To our knowledge, funds will be the only class of investors to be denied confidential voting across-the-board. Confidential voting is a mechanism which funds and advisers may use to avoid conflicts of interest. It enables funds and advisers to resist pressure from the management of issuers and/or other parties. Denying funds the ability to employ confidential voting will subject them to the very conflicts which the Proposed Proxy Rule is designed to prevent, such as retaliatory actions by corporate management if a fund votes against management.
- The Proposed Proxy Rule May Result in the Politicization of the Proxy Process- as discussed above, we take our proxy voting responsibilities seriously, believe that mutual funds in general and their advisers do as well, and have not seen evidence to the contrary. We are concerned that forcing funds and advisers to routinely disclose their proxy votes in the manner proposed will not benefit fund shareholders, who seem not to want this disclosure, but will enable outside special interest groups to use this disclosure to advance their own political agendas at the expense of fund shareholders. These groups are not regulated by the SEC and will be free to use, and more importantly abuse or misuse, this information. We are concerned that these groups may take votes and reasons for votes out of context or present incomplete or inaccurate representations as to a fund's voting record and rationale. Certainly, funds, if they become aware of these situations, may engage these groups in a public debate, attempting to set the record straight. This debate, however, will cost time and money, to the detriment of fund shareholders.
In conclusion, we urge the SEC to reconsider the Proposed Proxy Rule. We believe the Proposed Proxy Rule, if adopted, would impose significant manpower burdens on funds and costs on fund shareholders with little or no discernable benefit to shareholders.
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|1|| Contrary to statements in the Proposing Release, we believe that the interests of investors who are not fund shareholders are not an appropriate consideration when voting proxies on behalf of a fund.
|2|| This review is typically done annually.
|3|| These interests take into account factors such as specific client objectives and investment guidelines.
|4|| As the SEC is aware, managements of investment companies and their advisers have been focusing substantial resources on complying with recent resource intensive Congressional and SEC initiatives, such as the Patriot Act and the certification process and other requirement emanating from the Sarbanes-Oxley Act of 2002. Given this already heavy resource expenditure, many funds will conclude that outsourcing the generation of this expansive proxy voting list to be the only practical means of accomplishing this task.
|5|| As noted, we are unaware of any evidence that funds are voting proxies in a manner that is not in the best interests of shareholders and that regulation is necessary to control these "conflicts of interest".
|6|| As noted, this should not be surprising. Absent particular circumstances, one of the reasons an adviser will make an investment in an issuer is because it approves of management.
|7|| Decisions regarding mergers and acquisitions, for example, are often made based in part on an internal assessment of the ability of the surviving company to succeed. Detailed disclosure as to the basis for that decision may result in the disclosure of proprietary information and work product.