MessageFrom: Nell Minow [nminow@thecorporatelibrary.com] Sent: Tuesday, December 03, 2002 5:31 PM To: rule-comments@sec.gov Subject: Files No. S7-38-02 and S7-36-02 December 3, 2002 Mr. Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549-0609 Re: File Nos. S7-36-02 and S7-38-02 Dear Secretary Katz: The Corporate Library, at www.thecorporatelibrary.com, serves as a central repository for research, study and critical thinking about the nature of the modern global corporation, with a special focus on corporate governance and the relationships among company management, boards of directors and shareholders. The Corporate Library was founded during the summer of 1999 by Nell Minow and Robert A.G. Monks, long-time partners in Lens Investment Management and Institutional Shareholders Services, and co-authors of Power and Accountability and the textbook, Corporate Governance. We write in strong support of the Commission’s proposed rules requiring disclosure by investment advisers and mutual funds of proxy voting policies and, in the case of mutual funds, actual proxy votes. These measures will bring much-needed transparency and accountability to the mutual fund and investment advisory marketplace and will ensure that investors have access to information about proxy voting policies, just as they do to information about investment policies, risks and fees. The disclosure requirements will also help restore investor confidence in financial intermediaries and allay concerns regarding conflicts of interest. We start with the premise that investment advisers, including advisers to whom mutual fund boards of directors have delegated proxy voting responsibilities, must cast votes in a manner consistent with the best interests of their clients or the mutual fund shareholders. The Commission affirmed that duty in the proposing releases. However, clients and shareholders simply have no way to monitor whether these fiduciary obligations are being upheld absent a disclosure requirement. Given the powerful commercial conflicts of interest and the fact that in many circumstances issuing companies do know how the institutions are voting while the people for whom they are acting as proxy do not, there is no other way to ensure that votes are cast to promote the best interests of beneficial holders. In 1988, the Department of Labor issued an interpretive letter holding that voting rights were assets of ERISA benefit plans and that plan fiduciaries such as investment managers to whom power over plan assets has been delegated were required to cast votes in the best interests of plan participants and beneficiaries. Since that time, ERISA fiduciaries have developed and implemented proxy voting policies designed to enhance the value of plan investments and deal with conflicts of interest, contributing to a robust dialogue between shareholders and companies on corporate governance, a rise in the level of support for shareholder proposals and, in some cases, significant changes in corporate practices. We are concerned that mutual funds and investment advisers that are not ERISA fiduciaries continue to lag in this area. It is difficult to overstate the importance of mutual funds, which hold approximately 19% of all publicly- traded equity securities and which are for many individual investors the primary, if not sole, vehicle through which funds are invested for retirement. In the proposing release applicable to mutual funds, the Commission emphasized the role they could play in shaping corporate behavior, “As major shareholders, mutual funds may play a vital role in monitoring the stewardship of the companies in which they invest.” (Release No. 34-46518) In the past, too often instead of playing this role, mutual funds have acted as enablers of abusive behavior. The need for mutual funds and advisers to provide leadership is particularly acute now, with investor confidence eroded by accounting scandals, excessive executive compensation and other corporate malfeasance. It has become clear, however, that conflicts of interest may prevent mutual funds and advisers from assuming that leadership role in the capital markets. We believe that such conflicts may lead mutual funds and advisers to cast votes that are not in the best interests of their shareholders and clients. As the Commission noted in both proposing releases, investment advisers, including mutual fund advisers, may have business interests that diverge from those of clients and shareholders. For example, an adviser may be seeking to provide services such as asset management or employee benefit plan administration to a company that is soliciting proxies from the advisor. These interests provide an incentive for mutual funds and advisers to support the company’s management regardless of the merits of the proposal at issue. Disclosure of proxy votes, especially those that are inconsistent with proxy voting policies, will help ensure that advisers and mutual funds do not give in to the temptation to subordinate client and shareholder interests to their own business interests. Disclosure of proxy voting policies and procedures will also give investors a basis for distinguishing among mutual funds and advisers. Currently, although a few socially responsible investment funds disclose their policies and actual proxy votes, the vast majority of funds and advisers disclose neither. Investors are increasingly aware of the importance of responsible proxy voting and corporate governance, as evidenced by the large volume of comments received electronically by the Commission to date in support of these proposed rules. Many investors believe that poor corporate governance is an investment risk, and wish to evaluate mutual funds and advisers on how they manage this risk. For that reason, it is essential that the proxy voting policies be made available to prospective customers or shareholders. Then, when choosing between two otherwise similar investment firms, they will have an important basis for making a distinction. This disclosure could be effected at next to no cost by requiring that both proxy voting policies and procedures and instructions on how to receive information regarding actual proxy votes be posted on a web site. Furthermore, we believe that it is important that the disclosures cover not just the firm’s reactive policies, but their active policies as well. Fund managers should have to disclose not just how they respond to proxies sent out by management but also their policies on participating in shareholder litigation, filing shareholder proposals, submitting nominees to the board, and exercise of any other rights of share ownership. We strongly support the findings of the UK Treasury Department’s Myners Report endorsing the assumption that shareholder activism is appropriate for fiduciaries, and believe that fund managers should address this issue in their public disclosures. The objections raised by the mutual fund industry are unpersuasive and do not provide a basis for failing to adopt, or watering down, the proposed rules. The argument that compliance will be too costly is belied by the fact that some funds, including small ones, already provide this information. Indeed, a few have submitted comment letters attesting that the disclosure can be provided in a cost-effective manner. Some contend that disclosure of a vote against an issuer’s management would cause the price of the issuer’s stock to plummet, thereby harming the client or fund shareholder. However, the disclosure would apply to proxy voting policies and not to individual votes unless they are inconsistent with those policies. Even if individual votes were disclosed, given the probable delay between votes and their disclosure (unless a fund or adviser elects to adopt the kind of “real-time” disclosure used by CalPERS), such an effect is extremely unlikely. The markets would learn of a high vote against a management proposal, or in favor of a shareholder proposal, through the media or even a company’s 10-Q filing before disclosure would be made pursuant to the proposed rules. In conclusion, we want to express our thanks to the Commission for this very significant reform effort. Almost all of the attention on the corporate scandals of 2002 has been on the “supply side” of corporate governance, and on improving the standards and disclosure for corporate directors and managers and their service providers. But no matter how much disclosure is made, it will have no impact unless there is a shareholder base that is both capable of and motivated to act on it. We believe that this proposed rule is as important to restoring investor confidence as any of the reforms coming out of Sarbanes-Oxley or the exchanges. Thank you for the opportunity to comment on these vitally important proposed rules. We would be pleased to be of assistance to the Commission in this matter. Sincerely, Nell Minow Editor Beth M. Young Director of Special Projects The Corporate Library 45 Exchange Street, Suite 200 Portland ME 04104 (207)874-6921