British Airways Pension Investment Management Ltd.
Co-operative Insurance Society
Local Authority Pension Fund Forum
Railway Pension Investments Ltd.
Stichting Corporate Governance Onderzoek voor Pensioenfondsen (SCGOP)
Shell Pensions Management Services Ltd.
Universities Superannuation Scheme Ltd.

6 December 2002

U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
e-mail address:

Attention: Jonathan G. Katz, Secretary

    Re: File Nos. S7-36-02 and S7-38-02
    Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies and Proxy Voting by Investment Advisers

Ladies and Gentlemen:

We represent some of the largest institutional shareholders in Europe1 and are jointly submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments in respect of the Commission's proposals to require disclosure of proxy voting policies, proxy voting records and conflicts of interest by registered management investment companies and investment advisers (the "Proposed Voting Disclosure Rules"). We appreciate the opportunity to participate in this important undertaking and intend our comments to be helpful to the Commission in its efforts to increase transparency with respect to the actions of institutional investors.

Our respective trustees and directors have mandated their fund managers to take into account material corporate governance issues (which, for many, also includes corporate social responsibility issues) in order to better safeguard and enhance the long-term value of our members' assets. Given that a significant portion of our members' assets are invested in the United States, and the growing convergence of capital markets globally, we have a strong interest in promoting good governance and corporate responsibility practice in that market.

We are writing to express our strong support for the Proposed Voting Disclosure Rules. We agree with the Commission that "increasing transparency of proxy voting by mutual funds ... would enable fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies, which could have a dramatic impact on shareholder value" and recognise, with the Commission, the ability of investment advisers to "affect the outcome of shareholder votes and to substantially influence the governance of companies."2

This letter seeks first to explain the benefits that we have experienced as a result of greater transparency from investment managers, then to explain our reaction to the voiced objections to the Proposed Voting Disclosure Rules, and finally to highlight why the Commission needs to bolster the proposed rules to better address conflicts of interest on the part of fund managers.

I. Mandatory Disclosure is Necessary to Promote Transparency

We recognise, with you, that institutional investors are, directly, "in a position to have a significant effect on the future of corporations and the value of securities held by ... clients."3 We also agree with you that "requiring greater transparency of proxy voting by funds may encourage funds to become more engaged in corporate governance of issuers held in their portfolios, which may benefit all investors and not just fund shareholders." 4 We support transparent voting policies because we believe they benefit investors directly, as a result of improved corporate performance with respect to shares held, and indirectly, by raising the bar across the market with respect to good governance practice.

Only a limited number of funds disclose either their proxy voting policies and procedures, or their proxy voting records.5 Similarly, while some advisers may have adopted voting policies and procedures and disclosed those policies to their clients, this practice is not uniform.6 Because voting information may be otherwise unavailable to investors, we believe that it is entirely appropriate for the Commission to mandate this disclosure.

Indeed, in the United Kingdom, the availability of this disclosure has been a critical factor in our ability to hold our own fund managers accountable in an informed manner.7

It is important that this disclosure requirement apply uniformly to all public companies. Whilst the media and others tend to focus on the big companies, there are many smaller companies who may have significant governance issues, and who should not be allowed to pass under the radar screen of their institutional investors.

II. Arguments Against Disclosure by the Fund Industry Lack Merit

We have listened with interest to the various arguments for why disclosure should not be mandated. These arguments include:

  • disclosure is not necessary since investors are not interested in voting policies or records;

  • disclosure could make investment managers responsive to special interest groups;

  • disclosure would be costly; and

  • disclosure would put at risk relationships with company management and destroy the possibility of quiet but effective "behind the scenes" tactics.

Although some of these arguments may have superficial appeal, none have substantive merit.

    A. Investors Are Entitled to Transparency

While we agree with the investment company industry that "issues of corporate governance and fund activism should be considered investment issues and factored into the process of making decisions concerning the fund's underlying investment decisions," it simply does not follow that the actual decisions made should remain hidden from clients.8 The fact that the industry is unwilling to revisit the decision that it should not report its voting record, reached in the early 1970s, is not a source of comfort. Indeed, it is rather troubling since it could indicate that it is the only sector that has not considered its role in the recent corporate governance failures, the costs of which our members, and US investors, continue to experience.

As pension fund professionals, we have no doubt that trustees are better equipped to perform their fiduciary duties when they have access to data on how their investment managers vote. Clients of investment advisers do not need investment managers to cover proxy voting as a "back office" function; it is a vital part of investment decision-making that merits specific consideration. We agree with the Commission that "sunshine" on voting policies and practices will lead advisers "to pay greater attention to their fiduciary obligations" which can only be in the ultimate interests of shareholders.9

Given what leading Commission officials have said on this theme, we will not labour the fundamental principle at issue.10 We do note the obvious public support for this rule, as evidenced by the numerous comment letters submitted to the Commission on this issue.

    B. Transparency Helps Trustees and Investment Managers Become More Skilled At Dealing With Corporate Governance and Other "Non-Traditional" Risks

It is understandable that investment managers who have not previously disclosed their voting records may be anxious about the attention of special interest groups.11 Our experience, however, with investment managers in the United Kingdom, is that managers are more than able to explain, in a fully professional manner, why they cannot respond to non-fiduciary concerns. Indeed, the refusal to disclose itself creates concerns about inappropriate influence being brought to bear (albeit from corporations).12

Moreover, when investment managers know that they will have to disclose their voting record, they will inevitably put more effort into ensuring that proxy voting is done in as professional a manner as their other, more traditional roles. In our experience of dealing with a range of investment managers over many years, there is a learning curve that they and we have had to climb with regards to corporate governance and other "non-traditional" investment considerations. Transparency is one driver for ensuring continuous learning and improvement. This concept has been accepted in the United Kingdom by the Investment Management Association and the other trade bodies that recently launched new guidelines for proxy voting and activism. These guidelines make it clear that transparency is a critical part of the way forward.13

    C. The Costs of Disclosure Are Negligible

Numerous commentators have responded to the fund industry's claims regarding the costs of disclosure.14 The Commission itself concluded that the cost of the additional disclosures, with respect to the proposed rules regarding fund disclosure, would only be approximately $2,408 per investment company per year.15 Similarly, our experience leads us to believe that voting records can be provided at minimal costs.

    D. Disclosure Builds More Meaningful Relationships
    and Thus Genuine Influence With Company Management

We have some sympathy with the individual investment manager who wants to vote and engage seriously but who is concerned that by adopting a voluntary disclosure policy, and breaking current industry norms, important client relationships will be put at risk given the prevalence of complex commercial relationships between financial institutions and companies and lingering attitudes about "shareholder activists". However, by mandating voting disclosure, and moving towards a climate which encourages genuine engagement and transparent voting, many corporate managers will consider, even more seriously than before, the informed comments of an influential institutional investor when delivered in a timely and constructive manner.

In the United Kingdom, for example, institutional investors have played an important role as advocates of good corporate governance through engagement and voting disclosure has been a crucial part of that process. By encouraging similar disclosure in the United States, we believe you are empowering institutional investors to become agents for change, and a resource for companies, in respect of governance practices.

III. The Proposed Rules Regarding Fund Disclosure Should Be Modified to
Require Specific Disclosure of Conflicts of Interest

As drafted, the proposed rules regarding fund disclosure (the "Fund Disclosure Proposal") fail to effectively address conflicts of interest that arise when fund managers have a financial interest in the way in which they vote. Given that such conflicts of interest are notoriously difficult to "prove", disclosure is the only effective option to enable shareholders to monitor potential conflicts of interest and business risks. More importantly, the very act of disclosure will encourage investment managers to find effective ways to manage the challenge (for example, by delegating voting decisions to another investment manager).

We are reassured that the Commission has itself recognised the significant potential for serious conflicts of interest.16 For example, an opponent of fund disclosure, Fidelity, earned US$2 million in 1999 for helping Tyco run US$2.8 billion worth of 401(k) and other benefit funds.17 Fees for managing these funds were paid directly by the company. During that period, Fidelity was also a major investor in Tyco.18 The potential for conflicts of interest is such circumstances could not be clearer, and concerns have been greatly exacerbated by Fidelity's refusal to disclose its voting record.19 This problem is not limited to the United States. A recent UK government-commissioned study, concluded that: "[investment] managers remain unnecessarily reluctant to take an activist stance in relation to corporate underperformance, even when this would be in their clients' financial interest".20

We therefore strongly support the principle underlying the Fund Disclosure Proposal that would require funds to disclose the procedures used to address conflicts of interest. Funds would also be required to disclose votes that are inconsistent with their voting procedures in their annual and semi-annual reports to shareholders. We do not, however, believe that this alone is an adequate means to address these conflicts. Clearly, requiring funds to disclose their compliance programs is not the same as requiring disclosure of noncompliance; it is indisputable that the later would be a more effective enforcement tool. Further, a requirement that inconsistencies with voting policies be disclosed is inherently shaped by the voting procedures themselves. A company that has drafted broad voting guidelines will have to disclose fewer inconsistencies than a company with more narrowly-tailored voting principles. As a result, disclosure of inconsistencies will be inconsistent amongst companies. This is particularly unhelpful for investors who want to support standards of good practice as they emerge and who, therefore, need to compare relative performance among companies on this issue as with others. More importantly, it fails to provide a reliable mechanism for monitoring conflicts of interest.

We therefore urge the Commission to focus on disclosure of the conflict itself, since this will be the most effective means of monitoring and containing these conflicts of interest. This approach reflects requirements imposed on investment advisers who, under the proposed rules, would be required to disclose material conflicts of interest to their clients before voting the client's proxy. The approach is also consistent with recent action by the Commission with respect to research analysts and company boards of directors, and there is no reason to think that the need is any less serious in this situation.21

We commend the Commission for seeking to address this critical and long-ignored issue. Specifically, we urge you to mandate transparency on voting and on conflicts of interest. Re-establishing confidence in the US market is of importance to all of us, and we firmly believe that the above actions will play a significant part in helping to achieve this shared goal.

Yours sincerely,

David Gamble
Chief Executive Officer
British Airways Pension Investment Management Ltd

Ian Jones
Head of Corporate Governance
Co-operative Insurance Society

Councillor Bob Sowman
Local Authority Pension Fund Forum
(representing 27 local authority pension funds)

Frank Curtiss
Special Projects Officer
Railway Pension Investments Ltd

Giles Craven
Managing Director
Shell Pensions Management Services Ltd

Jean Frijns
Stichting Corporate Governance Onderzoek voor Pensioenfondsen (SCGOP)
(representing 29 Dutch pension funds)

Peter Moon
Chief Investment Officer
Universities Superannuation Scheme Ltd

1 British Airways Pension Investment Management Ltd (UK), Co-operative Insurance Society (UK), Local Authority Pension Fund Forum representing 27 local authority pension funds (UK), Railway Pension Investments Ltd (UK), SCGOP representing 29 Dutch pension funds who collectively manage more than 80% of the total capital invested by Dutch pension funds- (founding members include pension funds of ABP, PGGM, KPN/TPG and Spoorwegpensioenfonds, KLM, Philips, Shell and Unilever) (Netherlands), Shell Pensions Management Services Ltd (UK), Universities Superannuation Scheme Ltd (UK).

The total value of our members' assets is approx. US$466 billion

2"Proposed Rule: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies", Release No. 33-8131, 20 Sept. 2002, (the "Fund Disclosure Release") at 3; "Proposed Rule: Proxy Voting by Investment Advisers", Release No. IA-2059, 20 Sept. 2002, (the "Adviser Disclosure Release") at 2.
3 Adviser Disclosure Release at 2.
4 Fund Disclosure Release at 4.
5 Shareholder Action Network - Proxy Voting at (listing 14 mutual fund managers and other institutional investors that currently disclose their proxy voting guidelines and voting records).
6 Adviser Disclosure Release at 3.
7 By way of background, in the United Kingdom, voting, and disclosure of voting policies and procedures, is not mandatory. However, many UK pension funds require their investment advisers to disclose their voting policies and procedures, and increasingly voting records, as part of their mandate. A recent study on institutional investors in the United Kingdom recommended that all pension funds should incorporate the Department of Labor Interpretive Bulletin (29 CFR 2059.94-2) relating to written statements of investment policy, including proxy voting policies or guidelines, into fund management mandates. The study also recommended that these voting and disclosure requirements should be incorporated into UK law. See "Institutional Investment in the United Kingdom: A Review", 6 Mar. 2001, (the "Myners Report") at 14. The Company Law Review, a government-led initiative to revise and update UK corporate law, considered but declined to adopt mandatory voting.
8 "Fund Industry Not In Favor of Mandating Disclosure of Fund's Proxy-Voting Record", BNA Securities Regulation & Law Report, 23 Sept. 2002, at 1527. According to the spokesman for the Investment Company Institute the industry reached this conclusion in the early 1970s.
9 Adviser Disclosure Release at 5.
10 Remarks Before the Council of Institutional Investors' Fall Conference, Chairman Harvey L. Pitt, U.S. Securities and Exchange Commission, New York, New York, 23 Sept. 2002 (stating that "transparency" is the "bedrock" upon which the SEC's policies are founded).
11 "Industry Battles Against Proxy Disclosure",, 24 Sep. 2002 ("the biggest outcry for this has come not from individual investors but from a number of special interest groups. These groups could pressure funds on issues that have nothing to do with fiduciary responsibility to shareholders but pertain more to their own agendas, like environmental concerns or labor issues. That politicizes the proxy voting process when it should be about voting in shareholders' financial interests." (quoting Investment Company Institute spokesman)).
12 Some argue that this resistance itself is evidence of culpability. See Bullard, Mercer, "Are Ballots Too Secret? Fund Advisers Should Tell How They Vote Proxies",, 4 Jan. 2001, at, quoting Sarah Teslik of the Council of Institutional Investors ("[t]he fact that mutual funds resist disclosure suggests their voting is influenced by factors other than the financial interests of the people whose money they are investing, and that they don't want that discovered").
13 See "The Responsibilities of Institutional Shareholders and Agents - Statement of Principles", at (requiring institutional shareholders and investment managers to, inter alia, maintain and publish statements of their policies in respect of active engagement with the companies in which they invest and, in the case of investment managers, report back to the clients on whose behalf they invest). In launching these guidelines, Lindsay Tomlinson of Barclays Global International, Chairman of the Institutional Shareholders' Committee said: "[Publishing engagement policies] will inevitably mean that [institutional investors] will focus more and more on looking at the companies in which they're investing". Transcript of Broadcast of BBC Radio 4, 21 Oct. 2002.
14 See Comment Letter of Fund Democracy, dated 21 Oct. 2002; Comment Letter of the Social Investment Forum, dated 11 Nov. 2002; and Comment Letter of Domini Social Investment LLC, dated 1 Nov. 2002. See also "Fund Industry Not in Favor of Mandating Disclosure of Fund's Proxy-Voting Records," BNA Securities Regulation & Law Report, 23 Sept. 2002 (head of Calvert Funds stating that web-site disclosure is "not an onerous expense" and a "de minimis part of [the] budget").
15 Fund Disclosure Release at 13-14.
16 The proposing release states "in some situations the interests of a mutual fund's shareholders may conflict with those of its investment adviser with respect to proxy voting. This may occur, for example, when a fund's adviser also manages or seeks to manage the retirement plan assets of a company whose securities are held by the fund. In these situations, a fund's adviser may have an incentive to support management recommendations to further its business interests." Fund Disclosure Release at 3.
17 AFL-CIO, What is Fidelity Investments Hiding?, at 1 (quoting Ed Corrao, Fidelity Legal Department, as stating "Fidelity Investments as a matter of policy does not disclose its vote decision with respect to a particular company, meeting or agenda item").
18 As of August 8, 2002 Fidelity was Tyco's second-largest institutional investor, owning 5.3% of Tyco's stock. "Can You Trust Your Fund Company?" Business Week Online, 8 Aug. 2002, at In the same article, John Bogle, founder of Vanguard Group, stated "[i]'s quite clear that [mutual] funds have to be very cautious in voting against their own [401(k)] clients."
19 Fidelity funds were the third-largest holder of Lockheed Martin stock when Frank Savage, a former Enron director, was reelected to Lockheed's board. Fidelity, which services Lockheed's 401(k) plan, declined to disclose how it voted the Lockheed shares it controls, commenting that the mere suggestion of a possible conflict between 401(k) management and proxy votes is "absurd." Hansard, Mutual Funds Feel the Heat From Enron, Investment News, 20 May, 2002, at
20 Myners Report at 2.
21 See "Proposed Rule: Regulation Analyst Certification", SEC Release No. 33-8119, 2 Aug. 2002 (requiring disclosure of whether the analyst received compensation or other payments in connection with his or her specific recommendations or views); "Proposed Rule: Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002," SEC Release No. 33-8138, 22 Oct. 2002 (requiring disclosure of any waivers of a company's code of ethics).