Chapman and Cutler
December 3, 2002
Securities and Exchange Commission
Ladies and Gentlemen:
We are responding to the request of the Securities and Exchange Commission (the "Commission") for comments on Investment Company Act Release No.·25739 (September·20, 2002) (the "Release"), which proposes amendments to various forms to require registered management investment companies to provide disclosure about how they vote proxies relating to portfolio securities they hold. Under the proposed amendments, registered management investment companies would be required to disclose the policies and procedures that they use to determine how to vote proxies relating to portfolio securities and to file and make available to shareholders their proxy voting records. More specifically, the Commission proposes to require management investment companies to (a) disclose in their statements of additional information (with respect to open-end investment companies) and Form N-CSR (with respect to closed-end investment companies) the policies and procedures that they use to determine how to vote proxies relating to securities held in their portfolios; (b) disclose in their shareholder reports the method by which shareholders may obtain a description of the fund's proxy voting policies and procedures; (c) file with the Commission their proxy voting records and make these records available to shareholders; and (d) disclose in their annual and semi-annual shareholder reports information regarding any proxy votes that are inconsistent with their proxy voting policies and procedures. As currently proposed, these requirements would only apply to registered management investment companies. We would like to respond specifically to the Commission's request for comment on whether these disclosure requirements should extend to unit investment trusts ("UITs"). For the reasons discussed below, we concur with the Commission's proposed approach of excluding UITs from the proposed amendments.
As you are aware, unlike management investment companies, unit investment trusts are essentially unmanaged investment vehicles with static portfolios. More specifically, Section 4(2) of the Investment Company Act of 1940 defines a UIT as an investment company organized under a trust indenture, that has no board of directors, and issues only redeemable securities, "each of which represents an undivided interest in a unit of specified securities." By definition, a UIT is an unmanaged investment vehicle and as such, does not have an investment adviser. To qualify as a UIT, the trustee or sponsor must have limited managerial discretion and a relatively unchangeable portfolio of securities. Once assembled, the composition of the UIT's portfolio will change only in extraordinary circumstances.
Because of the static nature of the portfolio of the unit investment trust, federal securities laws essentially do not provide a good mechanism for providing updated information to be sent to unitholders. As noted in the Release, unit investment trusts are not required to transmit annual or semi-annual reports to unitholders. While certain of the proposed disclosure relating to proxy voting policies and procedures could perhaps be reflected in the prospectus, you should note that a trust does not need to maintain an updated prospectus unless the sponsor maintains a secondary market for units of the respective trust (which the sponsor may but is not legally required to do). Accordingly, future changes in the policies and procedures, the actual voting record, and any proxy votes that were inconsistent with the policies and procedures would not be reflected in the prospectuses of such trusts.1
The Commission also requests comments regarding including the disclosure in, among other things, the Form N-SAR or a sponsor's website. While proxy policies and procedures and voting results could be included in the Form N-SAR, we believe that it is unlikely that unitholders would access such information and therefore any benefit from including this information on a form filed with the Commission (such as the Form N-SAR) is remote. With respect to the website, we note that the federal securities laws do not require the sponsor to maintain a website. While the Commission may encourage certain information to be placed on a website if available, to require a trust to develop a website simply to disclose voting procedures appears unduly burdensome. In addition, the website is generally created and maintained by the sponsor of the trusts. Sponsors, however, may leave the business of sponsoring unit investment trusts. Unit investment trusts are therefore generally designed to be self-operating under the supervision of the trustee. The unit investment trust may continue to operate even if there is no longer a sponsor. If the sponsor does indeed choose to no longer be in the business of sponsoring unit investment trusts, the sponsor obviously will no longer maintain a website for the trusts.
While the Commission could require trusts to develop a special mailing to unitholders to provide the proposed information, any such mailings outside normal operations would only serve to increase trust expenses. The costs of these mailings as well as the costs incurred in implementing and maintaining a system that will keep the proxy voting records of each series of the trust will be passed on to the unitholder. In addition, as unit investment trusts vary in size, the costs incurred to implement the foregoing will have a greater impact on the smaller trusts and their unitholders.
Considering that we believe unit investment trusts comprise only a small segment of the investment company industry; the fact that given the static nature of the UIT, the federal securities laws do not really contemplate the need to provide unitholders with updated information and therefore do not provide a mechanism to do so; and the costs incurred in developing a mechanism to provide the proposed disclosure to unitholders as well as to develop a recordkeeping system for the proxy records of each series of the unit investment trust, we agree with the Commission that the proposal should not be extended to unit investment trusts.
Based on the above, we believe that the proposal should be limited to management investment companies and should not encompass UITs. If you have any questions, we would be happy to discuss this with you further. Please feel free to contact Eric·F. Fess at (312)·845-3781 or the undersigned at (312)·845-3864 with any questions or comments you may have.
Very truly yours,