John C. Bogle
P.O. Box 2600
Valley Forge, PA 19482
December 4, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-36-02
I am writing to comment on the Commission's proposed rule on "Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies."
My experience in the mutual fund industry is considerable. It began in 1949 at Princeton University with the research and writing of my senior thesis on mutual funds. When I graduated in 1951, I joined Wellington Management Company, investment adviser to Wellington Fund (founded in 1928), and became its chief executive in 1967. Dismissed from my job in early 1974, I founded The Vanguard Group eight months later, and served as its chairman and chief executive through early 1996, and for the next two years as senior chairman. Since the start of 1999, I have served as President of Vanguard's Bogle Financial Markets Research Center unit.
I no longer serve either as an officer or director of Vanguard, and I do not presume to speak for the firm. Rather, my comments on the proposed rule reflect the principles and values that I did my best to manifest in the creation of Vanguard, then as now the only mutual fund group which is truly "mutual." Since its inception, our management company, The Vanguard Group, Inc., has been 100% owned by the mutual fund members of the Vanguard Group and provides them with administrative, investment management, and distribution services on an "at-cost" basis. This unique shareholder-owner structure, the low costs it engenders, and our focus on funds designed to track or generally reflect indexes of the bond and stock markets have together largely accounted for the firm's substantial and steady growth over the years. Since Vanguard's inception on September 24, 1974, our fund assets have grown from $1.4 billion to $568 billion currently.
The company that I created 28 years ago was designed to come as close as possible to measuring up to essential principle spelled out in the preamble to the Investment Company Act of 1940: Mutual funds should be organized, operated, and managed in the interest of their shareholders, rather than in the interest of their directors, officers, investment advisers, or distributors. Vanguard's founding principles stand for the simple proposition that it is the duty of an agent to faithfully serve his principal. By having the mutual funds and their management company operate, in substance, as a single entity, Vanguard represents the simplest possible manifestation of this agent-principal relationship. Our directors, officers, and staff are the agents; our fund shareholders are the principals. It is our responsibility to act solely on their behalf. Put another way, at Vanguard the shareholder is king.
Viewed in this light, it would seem self-evident that each Vanguard fund shareholder has the right to know how the shares of the corporations in his or her portfolio are voted. Such shareholders are, in substance, partial owners of those portfolio securities, and to deny them that information would stand on its head the common understanding of the principal-agency relationship. But the same principle holds for conventional fund organizations, in which the management company (the agent) is owned by a group separate from those who own the funds themselves (the principals). Therefore I strongly support the proposed requirement that all mutual funds report to their shareholder/owners on how the shares of each portfolio company are voted.
I also support the mandatory disclosure of the policies and procedures that a fund uses to determine how to vote proxies, the procedures a fund uses when a vote presents a conflict of interest between shareholders and management, and the provision, without charge to shareholders, of all proxy-related information on the fund's website.
* * * *
Given the long-standing standards of principal-agent relationships, the fiduciary principle I have set forth seems beyond reasonable controversy. Nonetheless, when funds are required to report their votes, difficult business issues exist. I do not make light of them. Votes against management may jeopardize the retention of clients of 401(k) and pension accounts of the managers. Publicity-accurate or inaccurate-may draw attention to particularly controversial votes. Information costs may be somewhat higher than those postulated in the Commission's Release. (However, my own long experience gives me high confidence that such costs would be a mere "drop in the bucket" relative to revenues of some $75 billion paid by fund shareholders in the form of management fees, administrative costs, and sales commissions in 2001.1)
The Corporate Board recently published an article authored by Professor Alan R. Palmiter of Wake Forest University School of Law, presenting a comprehensive analysis of the arguments advanced in favor of the funds keeping their governance views secret. After carefully weighing both sides of the issue, the author found that industry objections to disclosure "do not stand up well to the light of day," and that disclosure "would be a salutary step." He is correct. I am attaching a copy of Professor Palmiter's article for the Commission's reference.2
Finally, I would urge the Commission to be extremely skeptical of some of the industry's claims. If fund managers claim disclosure would be "too expensive," they should be required to present their own cost analysis. If they claim it is more effective to work "behind the scenes" with corporate management, they should be required to present a documented record of the number of contacts actually made with each corporate management, the individuals involved for both the fund manager and the corporation, the number of shares owned by the fund, the issues discussed, and their resolution. Without these details, such self-serving statements lack credibility.
In my long experience, I have seen no evidence whatsoever that the business issues surrounding disclosure of mutual fund proxy votes are sufficiently substantial to justify abrogating the principal-agency relationship that so clearly requires the disclosure of this information.
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In 1940, 61 years ago, Congress concluded that mutual funds "are affected with a national public interest." Then, funds owned less than 1% of the shares of all U.S. corporations. Today, funds own some 26% of all U.S. stocks,3 and their impact on the national public interest is far greater than ever before. In my college thesis, I noted with approval that the SEC, in its 1940 Report to the Congress, called on mutual funds to serve "the useful role of representatives of the great number of inarticulate and ineffective individual investors in corporations in which investment companies are also interested." This industry has waited far too long to honor that vital role-a role that is not only useful, but one that is required under traditional principles of trusteeship.
By their long forbearance and lassitude on corporate governance issues, mutual funds bear no small share of the responsibility for the recent failures we have witnessed in corporate governance and accounting oversight that were among the major forces that created the recent stock market bubble and the bear market that followed. If the owners of our corporations don't care about governance, who is there to assume that responsibility? The time has long since come for mutual funds to cease their passivity as corporate owners, and to assume the important responsibilities of corporate citizenship.
Despite the complex business issues involved when fund proxy votes are disclosed, the interest of fund investors must come first. Fiduciary duty must return to the fore. Responsibility, accountability, and transparency are not only more important than ever before, but, with the onset of the Information Age, more readily available. It is high time for sunlight to illumine the past darkness surrounding how mutual fund agents vote the shares they own on behalf of their shareholder principals, the first necessary step in finally having mutual funds recognize their obligations of ownership.
It is not just my opinion, borne of my long experience, that the interests of fund owners must come first. It is precisely what the Investment Company Act of 1940 says. And that is why I urge the Commission to approve the principles embodied in the proposed rule on disclosure of proxy votes and voting policies by mutual funds.
John C. Bogle
|1|| The Investment Company Institute's "Mutual Fund Costs, 1980-1998" (September 1999) calculated asset-weighted expenses of 1.32% for stock funds, 1.24% for bond funds, and 0.51% for money market funds, with an average of 1.09% of all industry assets. Applied to average fund assets of $7.0 trillion in 2001 yields a revenue total of $76 billion.
|2|| "Mutual Fund Voting: Why Not Disclose?" The Corporate Board, November/December 2001
|3|| This percentage is higher than the Commission's. The market capitalization of all U.S. stocks (the Wilshire Total Stock Market Index) on October 31, 2002, was $10.2 trillion; mutual fund holdings of U.S. stocks on that date was $2.7 trillion.