One Freedom Valley Drive
Oaks, PA 19456
December 4, 2002
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: Proposed Rule: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies (SEC File No. S7-36-02)
Dear Mr. Katz:
On behalf of the Board of Trustees of Armada Funds ("Armada Funds"), I am writing to comment on the proposed form amendments requiring proxy voting disclosure by mutual funds (Release Nos. 33-8131; 34-46518; and IC-25739, September 20, 2002 (the "Release")).
The Armada Funds consist of 33 portfolios with total assets approximating $16 billion. Seven of the nine trustees are independent trustees. We believe that the proposed form amendments requiring disclosure of a fund's actual proxy voting record should be eliminated because (a) the costs of implementing this portion of the proposal far outweigh the meager benefits, (b) if this portion of the proposal is implemented, it will result in mutual funds being besieged by special interest groups that are seeking to advance their social or political agenda without thought to the potential harm or benefit to fund shareholders, and (c) the implementation of this portion of the proposal may have the unintended consequences of causing funds to disengage from proxy voting decisions, thus concentrating voting power in a few proxy organizations. We also believe that funds should not be required to publicize explanations of any particular proxy vote, whether or not such vote is inconsistent with the fund's stated proxy voting policies. Our reasons for these positions are set forth more fully below.
I. Funds Should Not Be Required to Disclose Their Actual Proxy Voting Record
A. The Costs Outweigh the Benefits
The first reason that we oppose disclosure of a fund's proxy voting record is that the costs of implementing this portion of the proposal will far outweigh the benefits. The vast majority of fund shareholders do not desire to see a fund's actual proxy voting record and the information is not necessary for the vast majority of investors to make an informed investment decision. Moreover, the Commission has grossly underestimated the costs of implementing this portion of the proposal, including by failing to consider the costs that funds will have to incur in order to respond to both inquiries from journalists and shareholders and intense public relations campaigns instituted by public interest groups that do not necessarily have the best interests of the particular fund's shareholders in mind.
1. Disclosure of a fund's proxy voting record offers little in the way of benefits to the vast majority of shareholders.
Shareholders have not requested that funds disclose their proxy voting record and, in the vast majority of cases, are not interested in seeing it. The only people interested in such information appear to be various special interest groups that are not fund shareholders; yet it is the funds' shareholders that will have to bear the costs of compliance.
Investors generally base their investment decisions on cost and performance, neither of which is revealed in any significant way by a fund's proxy voting record, as proxy voting is but one of a multitude of considerations that portfolio managers make each day that may affect a fund's net asset value. Moreover, the data required to be disclosed under the proposed form amendments will involve information about proxy votes relating to hundreds of companies for each fund, most of which will involve mundane matters and be of little interest even to the few investors that would otherwise pay attention to such matters.
The fact that high visibility, politicized public pension funds and funds that advertise themselves as public interest or social funds find that some of their investors are interested in their voting record is not surprising, but for most funds this would be a waste of time and effort. As mentioned above, most shareholders invest in funds to obtain effective money management. The relevant question for these shareholders is whether the fund is producing good returns for its shareholders at a relatively low expense.1 The vast majority of shareholders who do not care how their proxies are voted should not have to foot the bill for the tiny number that do. Social and public interest funds are already available for those individual investors that are concerned with how their fund votes on such issues.
2. The cost of disclosing funds' actual proxy voting records will be much higher than estimated by the Commission.
In the Release, the Commission estimates that compliance with the proxy vote disclosure requirements will be approximately $15 million annually. We believe that this is a gross underestimate of the costs of implementing this proposal, which will of necessity require extra staff, software, legal advice, and postage for effective compliance.
Other costs to fund shareholders that have not been considered by the Commission are the costs of any attempts at front-running by other shareholders of portfolio companies and the potential for a decrease in the price of portfolio securities if it becomes known that a fund has voted against a company's management. For example, attempts at front-running may occur if other investors in a portfolio company decide that a fund's failure to vote with company management signals that the fund may soon sell the securities. If the fund does decide to dispose of the securities it will do so at a loss, as these other investors have already engaged in a sell-off of the company's securities. Disclosure of a fund's vote against management may have a negative impact on the price of the company's stock by fueling rumors that the fund is bearish on the stock or on the company's management. Since funds generally do not sell their stocks quickly, the funds will most likely hold on to the plunging shares, decreasing each fund's respective net asset value and negatively impacting their shareholders.
Given the lack of benefit most shareholders will receive from making the required disclosure, we believe that the cost of implementing the proposal far outweigh any benefits that may be gained.
B. Disclosure of Funds' Actual Proxy Voting Records may be Counter-Productive
In response to the expense and pressure mutual funds will experience as discussed in Section A above, it is possible that funds will begin to disavow their responsibility to take an active role in trying to shape company policies. Many funds will simply say that they do not believe that their role is to second-guess management, so that generally their policy is to vote with management, and if they do not like the company, to sell their shares. The disengagement by funds in the corporate governance process is exactly the opposite of what the Commission intended when it proposed the form amendments.
Moreover, the proposed proxy voting disclosure may also have another unintended effect - concentrating proxy voting power in the hands of proxy-research organizations. These organizations provide funds with research services relating to proxy votes and make voting recommendations to funds. Although the ultimate voting decision will still be up to the fund, funds (perhaps most especially large funds and index funds that cannot easily dispose of their holdings) may rely more and more on these services so that their votes will not be questioned. Since there are very few companies that make proxy voting recommendations, voting power will effectively be concentrated in the hands of a few entities.
II. Funds Should Not Be Required to Explain Votes That Are Inconsistent With Their Stated Proxy Voting Policies
The Release also proposes form amendments that would require a fund to disclose in its annual and semi-annual reports to shareholders information regarding any proxy votes that are inconsistent with the fund's stated proxy voting policies and procedures. We do not believe that this disclosure is necessary. Proxy voting policies and procedures must of necessity be general principles, not strict rules. Requiring such disclosure will most likely result in funds creating policies that use so much equivocal language as to be worthless. Moreover, investors do not need to receive explanations of particular proxy votes any more than they need to receive explanations of other particular investment decisions made by fund managers.
* * *
In closing and on behalf of the Board, we would like to thank you for this opportunity to comment.
/s/ Robert D. Neary
Robert D. Neary
Chairman of the Board and
cc: Other Trustees
John G. Breen
John F. Durkott
Robert J. Farling
Richard W. Furst
Gerald L. Gherlein
Herbert R. Martens, Jr.
Kathleen A. Obert
J. William Pullen
|1 || Studies show that mutual fund investors quite readily invest in funds that have produced superior returns in the past. See Richard A. Ippolito, Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry, 35 J.L. & Econ. 45, 67 (1992). Although investors may not punish poor performance by withdrawing from underperforming funds, see id. at 61-62, it seems even more unlikely that investors would switch funds in response to an "unfavorable" voting record.