December 6, 2002
Via Electronic Mail
Mr. Jonathan G. Katz
Re: Proposed Rules: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies (Release Nos. 33-8131, 34-46518, IC-25739; File No. S7-36-02)
Dear Mr. Katz:
On behalf of Fidelity Management & Research Company, I am writing in response to the above-captioned Release, which proposes new regulations under the Investment Company Act of 1940 to require the public disclosure not only of mutual fund proxy voting policies but also of the proxy votes cast by each mutual fund on every agenda item of every meeting of shareholders of every company whose voting securities are held in a fund's portfolio. Fidelity is the investment manager for over 260 registered investment companies in the Fidelity Group of Funds with aggregate assets in excess of $680 billion.
Fidelity takes seriously its responsibilities to manage the Fidelity Group of Funds to advance the best interests of its shareholders, and in so doing to place those interests ahead of any other interests. Fidelity believes that fund shareholders' interests are best served by seeking to maximize economic returns for those shareholders in a manner consistent with the relevant investment objectives and policies of the fund in which they invest. All facets of our management of the Fidelity Funds, including the voting of proxies of companies whose shares are held in a fund's portfolio, are based upon the overarching objective of serving the economic interests of fund shareholders, who typically invest in our funds to reach such important goals as financial security in their retirement, paying for the college education of their children or purchasing a home.
In a number of instances, proposals presented at shareholder meetings may implicate corporate governance concerns. These concerns are present, for example, in proposals relating to equity-based compensation plans; anti-takeover devices such as poison pill plans, staggered boards, or golden parachutes; or other proposals that would curtail or erode shareholders' rights, such as the issuance of classes of common stock with differential voting rights or elimination of the right of shareholders to call a special meeting. Fidelity votes on such matters in accordance with a detailed set of proxy voting guidelines, adopted and periodically revised by the Funds' Board of Trustees. Fidelity reports regularly to the Funds' Board of Trustees with regard to its proxy voting under the guidelines.
Many proposals at shareholder meetings, however, do not trigger any special corporate governance concerns, but instead call for a decision by shareholders on economic or business issues. Proposed mergers or acquisitions are examples. On these types of proposals, Fidelity's proxy vote reflects an investment decision, essentially indistinguishable from the investment decisions made every day by Fidelity portfolio managers in buying, selling or holding a fund's portfolio securities. For this reason, portfolio managers are free to decide for their respective funds how proxy votes should be cast on these types of proposals, since the decisions are part and parcel of the investment decision-making process entrusted to them.
Fidelity wholeheartedly agrees with the views expressed by the Investment Company Institute in its letter of December 6, 2002. With respect to the proposed rules, Fidelity supports a requirement that funds disclose their proxy voting guidelines. Fidelity, in fact, has already done so, and (as the Commission noted in the Release) has posted those guidelines on its website. For four fundamental reasons, however, Fidelity strenuously objects, as has the ICI, to the Commission's proposal to require that proxy votes themselves be disclosed:
First, such disclosure would impose inordinate burdens and costs without advancing any real interests of fund shareholders that cannot be advanced through disclosure of proxy voting policies.
Second, compelling this disclosure seriously undermines the important, and carefully designed, role established by the 1940 Act and rules thereunder for a fund's board of directors, especially the independent directors, to monitor and respond to any potential or actual conflict of interest of the fund's investment adviser.
Third, since public disclosure cannot be limited to a fund's shareholders, compelling disclosure of proxy votes would have the pernicious result of assisting individuals and special interest groups whose agendas and interests deviate from - and often conflict with - the interests of fund shareholders who invest for economic reasons, rather than political or social ones.
Fourth, the proposal would strip mutual funds of a right that companies, in accordance with principles of good corporate governance, are increasingly extending to their shareholders - the right to cast confidential proxy votes and thereby minimize the potential for coercion or retaliatory action by management when votes are cast in opposition to management's recommendations.
I. Disclosure of Specific Proxy Votes Will Impose Inordinate Burdens and Costs
In recent years, the Fidelity Funds annually have cast proxy votes at shareholder meetings of over 4,500 portfolio companies. The Fidelity Funds consistently cast proxy votes at or near 100% of the shareholder meetings of U.S. companies every year.1 If the Commission adopts its voting record disclosure rule in proposed form - requiring that each fund provide separate vote-by-vote disclosure for every shareholder meeting of every company whose shares are held in a fund's portfolio, we estimate that Fidelity Funds investing in equity securities (over 180 funds), collectively, will be required to report in excess of 330,000 separate items of information in their Form N-CSR filings. This is based upon an estimate that:
Any assessment of the burdens and costs arising from the Commission's proposal must also take into account additional steps involving the development, administration, and regular re-evaluation of the adequacy of disclosure controls necessary for certifications required under the Commission's rules implementing (and, in significant respects as applied to mutual funds, going well beyond) provisions of Sarbanes-Oxley. We estimate that the Commission's proposal to require fund-by-fund, vote-by-vote disclosure of proxy votes cast at shareholder meetings will spawn over 13,500 additional pages of redundant data to be filed on Form N-CSRs on an annual basis by the Fidelity Funds - all of which must flow through the filters of disclosure controls that Congress, in enacting Sarbanes-Oxley, contemplated would apply only to the annual reports on Form 10-K and quarterly reports on 10-Q filed by publicly-traded operating companies.
To illustrate the burdens that will be imposed if the proposal is adopted, we undertook to prepare a sample disclosure on Form N-CSR for one fund, the Fidelity Low-Priced Stock Fund, in accordance with the format prescribed by the Commission for the six months ended June 30, 2002. During this period, the Fidelity Low-Priced Stock Fund cast proxy votes on 1,607 agenda items at 500 shareholder meetings. The collection of voting information from our information systems took four hours. Reformatting the data to conform to the specific format mandated by the Commission in the Release accounted for another eight hours. We estimate that at least another two hours would be required to re-confirm that each vote was cast in accordance with the Funds' proxy voting policies. Conservatively estimated, compliance by this one fund alone would take approximately 14 hours to prepare one N-CSR filing.
This estimate, of course, does not begin to take into account the burdens and costs of administering and regularly re-evaluating disclosure controls applied to the process. Nor does it include the time demands and distractions that will be imposed upon the CEO and CFO of the fund in complying with the personal review requirements of the Commission's certification requirements. Further, certain required data are not readily available for meetings of foreign companies (for example, ticker symbols and sponsorship of agenda items), and we therefore expect that funds will incur additional costs to obtain data required to be disclosed in respect of these foreign meetings. At any given time, Fidelity Funds, collectively, may hold voting securities of over 2,000 foreign companies. And, of course, each of Fidelity's funds that invest in equities will be required to file two N-CSR reports containing voting record data each year.2
In light of the foregoing, the Commission's estimate that the vote-by-vote disclosure requirement is likely to give rise to an annual expense of only $1,379 per fund is open to serious question. The Commission's weighing of costs and benefits is especially problematic, given that the Commission is separately proposing (and Fidelity supports) the required disclosure of proxy voting guidelines. Because proxy voting guidelines address matters that implicate corporate governance concerns, it is difficult to conceive how the inordinately burdensome production and disclosure of specific votes can be justified. This is especially so when appropriate consideration is given to the role conferred under the 1940 Act upon a fund's board of directors, particularly the independent directors.
II. The Voting Record Proposal Undermines the Role of a Fund's Board of Directors
The ICI comment letter speaks to the important role performed by fund directors in policing potential conflicts of interest under the 1940 Act. Indeed, Congress reached a fundamental determination in its adoption of that statute. In contrast to the disclosure-based regulatory model for operating companies under the Securities Act of 1933 and Securities Exchange Act of 1934, Congress decided that investment companies should be subject to a body of federal law that sets substantive standards of regulation. Given the external management structure of the fund industry, Congress entrusted to a fund's directors, particularly the independent directors, the responsibility of intervening on matters involving potential conflicts of interest between a fund and its investment adviser. For this reason, fund directors must approve, for example, entry into and renewal of management contracts. The Commission has repeatedly recognized the watchdog role to be performed by directors3 and recently took significant steps to strengthen the role of independent directors by effectively requiring fund boards to have a majority of independent directors. In keeping with this approach, we concur in the ICI's recommendation that the Commission re-fashion its proposed rules to require that a fund's board of directors approve the fund's proxy voting policies, and any amendments to those policies, and regularly monitor adherence by the fund's adviser to those policies. Such an approach will provide an effective way to hold investment advisers accountable in voting proxies.
Fidelity wishes to be clear on this point: The question is not whether a fund's adviser should be accountable for how proxy votes are cast on behalf of the funds under the adviser's management. The real question is how such accountability can be structured to best serve the interests of fund shareholders. This can best be achieved through public disclosure of board-approved proxy voting policies and active board oversight of how proxy voting is, in fact, carried out. Just as fund directors are entrusted with oversight and decision-making with regard to other potential conflicts of interest (including management fees, principal underwriting agreements, fund-paid distribution expenses and use of adviser-affiliated brokers), so too should fund directors be entrusted with oversight and decision-making with regard to the proxy voting process.
III. Public Disclosure of Proxy Votes Will Harm Fund Shareholders' Interests
In the Release, the Commission speaks in conclusory ways of the fiduciary duties of a fund's investment adviser, including the duty of disclosure. Nowhere in the Release does the Commission acknowledge, or seek to address, problems inherent in a non-personal fiduciary relationship, the very type of relationship that characterizes the mutual fund industry. An adviser with a direct, personal fiduciary relationship with an individual client can communicate information directly to that client - and to that client alone. As to those who are not clients, the adviser is bound to maintain the confidentiality of this information.
An investment adviser to a mutual fund cannot effectively disclose solely to fund shareholders. Disclosure by mutual funds and their advisers is readily available to competitors, to those who seek to exploit that information for their separate economic gain, and to those individuals and groups whose interests differ from or conflict with the interests of funds and fund shareholders.
It is understandable that special interest groups have pressured the Commission to compel advisers to mutual funds to divulge proxy voting records in order to advance political or social aims or even economic aims that differ from the economic interests of fund shareholders. Those who seek to advance other goals, including social or political goals, are free to invest in specialized funds formed for that purpose. It is the strength of our free market system that such funds are available and in competition with other funds. Further, funds that choose to disclose their proxy voting records are of course free to do so. None of this, however, supplies any basis for a rule to compel all funds (alone among all investors) to divulge their proxy voting records.
We strenuously urge the Commission to consider the tangible, and substantial, harms to funds and their shareholders that are likely to arise from adoption of the voting record disclosure proposal. Fund groups will be subjected to campaigns waged in the media and elsewhere that will have little or no relevance to the advancement of the economic interests of all fund shareholders. The Commission should not underestimate the serious burdens that will be placed on fund advisers in dealing with those whose interests are at odds with fund shareholders. As the recent position taken by TIAA-CREF evidences, the distractions upon management that would be occasioned by compelled disclosure of proxy voting are substantial and real.
It is also specious to assert that the reason that fund advisers oppose disclosure of proxy voting is to conceal the casting of votes that are animated by conflicts of interest, such as an adviser's interest in placating a corporate client whose 401(k) plan it administers. As discussed earlier, a fund's independent directors are far better positioned to carry out close and sustained monitoring of any potential conflicts of interests. Fund directors need not depend solely upon reports of proxy voting activity received from a fund's adviser and need not personally pore over proxy voting records in order to carry out their oversight duties. The directors may, for example, engage an accounting firm or other third party to carry out agreed upon procedures to test adherence by a fund's adviser to board-approved proxy voting guidelines, just as similar testing procedures are carried out with regard to other areas subject to board oversight (for example, brokerage transactions under Rule 17e-1 or compliance practices under Rule 17j-1 Codes of Ethics). Fidelity concurs in the ICI's recommendation that the Commission revise its rule proposal to require that fund directors approve specific provisions in proxy voting guidelines that address potential conflicts of interest. Further, the Commission's rules could specify that fund directors on an annual basis review adherence by the fund's adviser to those voting guidelines.
IV. The Commission's Proposal Would Deprive Mutual Funds of Protections Afforded to All Other Investors
The Commission's proposal would strip mutual funds, alone among all investors, of a protection that is widely acknowledged to promote good corporate governance - the right of shareholders to cast their proxy votes confidentially.4 Increasingly, companies have recognized the importance of this right and have amended their bylaws or charters to extend the right to their shareholders.5 The purpose of confidential voting is to protect shareholders from coercion or retaliation by company management for taking, or planning to take, positions on agenda items in opposition to management's recommendations.
These concerns are as real for mutual funds as they are for any other type of investor. As a leading commentator has noted, institutional investors (including mutual funds) face the prospect that corporate management will refuse to respond to legitimate requests for corporate information needed by institutional investors in assembling the mosaic of their investment analysis.6 Further, as suggested earlier, depriving mutual funds of the right of confidential voting enjoyed by other shareholders will single out mutual funds for public relations campaigns by special interest groups. Depriving mutual funds, and mutual funds alone, of the right to confidential voting will create a perverse, and very real, incentive for fund advisers to delegate voting decisions to third party proxy service companies. While these companies perform a valuable service to their clients, it is a serious mistake in public policy to create an incentive for funds to give up autonomy in proxy voting decisions simply, or primarily, to avoid the ill effects of orchestrated campaigns brought by special interest groups who seek to advance their own agendas at the expense of the funds and their shareholders.
A unilateral decision by the Commission to deprive mutual funds of the right to confidential proxy voting also precludes a fund's directors from exercising their business judgment in deciding when, and under what circumstances, to disclose publicly how the fund has voted on a particular matter. A fund and its board ought to be free to make these judgments as to when public disclosure of a vote may be in the best interests of the fund -- just as other investors retain this discretion as recognized under the Commission's own proxy rules.7
* * * * * *
In sum, we strongly urge the Commission to re-evaluate its ill-conceived proposal to compel mutual funds, alone among all investors, to disclose their proxy voting records. Another approach, calling for disclosure of proxy voting policies and drawing upon the oversight role and responsibilities conferred upon fund boards and independent directors under the 1940 Act, is a far more effective regulatory response. This approach will also avoid the serious harms and onerous burdens that the current rule proposal would impose upon funds and their advisers, to the detriment of the interests of fund shareholders.
Fidelity would be pleased to provide any further information or respond to any questions that the Commission or the staff may have.
cc: The Honorable Chairman Harvey L. Pitt