498 Seventh Avenue
New York, New York 10018
Robert G. Zack
Senior Vice President and
December 2, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies
Release Nos. 33-8131, 34-46518, IC-25739; File No. S7-36-02;
Proxy Voting by Investment Advisers
Release Nos. IA-2059; File No. S7-38-02
Dear Mr. Katz:
OppenheimerFunds, Inc. submits these comments on the above-referenced proposals by the Securities and Exchange Commission (the "Commission") to require registered management investment companies to provide disclosure about how they vote proxies relating to portfolio securities they hold and to require investment advisers to disclose their proxy voting procedures and policies to their clients. OppenheimerFunds, Inc. is the investment manager for the more than sixty investment companies comprising the Oppenheimer family of mutual funds, which have more than $120 billion in assets and more than 7 million shareholder accounts.
OppenheimerFunds, Inc. strongly supports reasonable rules and regulations to promote good corporate governance and transparency. However, each proposal must be evaluated on its own merits to assure that the overall goal of promoting good corporate governance is not subverted by unnecessary costs and burdens and provisions that do not provide meaningful information to or protection of an issuer's shareholders. While we support certain aspects of the Commission's proposals on proxy voting, we believe that some provisions of the proposed rules will not necessarily benefit mutual fund investors and, in fact, may harm their interests.
The Oppenheimer mutual funds hold thousands of portfolio securities. Voting the proxies of those portfolio companies is a substantial fiduciary responsibility as well as a daunting operational task, given the number of proposals that each proxy statement typically contains. The Boards of Directors/Trustees of the Oppenheimer funds recognize the importance of that fiduciary duty but also recognize that a fund board simply cannot handle the physical process of overseeing the day-to-day operational aspects of proxy voting. Therefore, as is typical in our industry, the four Boards of Directors/Trustees of the Oppenheimer funds have adopted proxy voting procedures and delegated to OppenheimerFunds, Inc. the responsibility for handling the proxy voting process, under the terms of our investment advisory agreements with the funds our company manages. In fact, one of those boards has established a proxy voting committee to oversee the development of detailed proxy voting policies that guide the voting process.
As the investment manager and delegee of that function, OppenheimerFunds, Inc. takes its fiduciary and contractual responsibilities very seriously and has implemented procedures to assure the voting of portfolio proxies in accordance with the policies established by the four Boards of Directors/Trustees of the Oppenheimer funds. What is very surprising, and disappointing, is that the Commission's proposal completely ignores the important role that the boards of directors/trustees of investment companies play in overseeing the proxy voting process, whether the boards handle the voting directly or by overseeing the actions of the investment advisor. The proposal does not cite any evidence of any lapse by fund boards or investment advisors in carrying out those responsibilities as a justification for the proposals.
We support the principal that investment advisers and other fiduciaries should be held accountable for their actions. We support the enactment of rules and regulations that require investment advisers to act in the best interests of their clients and to require meaningful disclosures to fund shareholders of policies and information about the funds they invest in. For that reason, we support in general the portions of the proposal that would (1) require that investment advisers adopt policies and procedures designed to insure that proxies are voted in the best interests of shareholders of the funds they manage, and (2) require funds to make available their proxy voting guidelines, in the Statement of Additional Information or on a website, or in response to requests by shareholders, so that those shareholders who are interested in that information may have access to it.
However, we believe that other aspects of the proposal, specifically those that would require the public disclosure of proxy votes on specific issues, do not fairly balance the interests and needs of shareholders with the costs of providing information that would be of interest primarily to special interest groups who would most likely want that information to further a specific agenda that is of little interest to fund shareholders. As the Commission knows, this proposal was not the result of demands by shareholders of investment companies. We believe that shareholders of funds have little interest in such information and note that over the last three years, our records show that we have received one request by a shareholder about portfolio proxy voting - and in that case to urge us to vote against his company's board of directors because of his dissatisfaction on an employment matter. That does not reflect an overwhelming demand by the shareholders of our funds for this type of disclosure, form letters to the Commission on this issue from special interest groups notwithstanding.
Nothing prevents a fund group from disclosing this type of information voluntarily. However, the goal of good corporate governance does not justify singling out funds for this type of costly, burdensome disclosure requirement. The Commission's proposal does not impose the obligations of disclosure and compliance (and their attendant costs) on other fiduciaries that are not registered investment advisers or registered investment management companies but that have discretionary authority to vote the proxies of issuers held for their clients, including banks, broker-dealers and pension plan fiduciaries, among others. That would be an inequitable result.
One of the most troubling aspects of the approach the Commission has taken in the proposal is the suggestion that public disclosure of proxy votes will somehow address potential conflicts of interest on the part of investment advisers to investment companies. However, the Investment Company Act of 1940 has long provided a highly effective mechanism to accomplish that end, by requiring the fund's independent directors to deal with those issues. The proposal's approach to this issue may be read to imply that boards are not capable of dealing with this type of potential conflict, or that boards have somehow failed to do so, without citing any evidence to support those contentions. We believe that this approach undermines the role of the independent directors in overseeing fund policies and is unwarranted.
Disclosing particular proxy votes will subject funds and their investment advisers to increased pressure from the management of issuers seeking to sway the voting process, depriving funds of the anonymity that has been an effective tool in effecting good corporate policies and practices among portfolio companies. The proposal would not, however, subject other institutional shareholders to the same requirements. Another serious concern is that disclosure of voting on particular issues will subject funds and their investment advisers to the pressure of the special interest groups who are the principal proponents of this proposal, requiring management to deal with the pressures of entities that in many cases are not even shareholders of the funds whose votes they seek to influence. Politicizing what should be a fiduciary decision by investment advisers and funds is unwise and unfair, and certainly not in the interests of fund shareholders.
Equally troubling is the proposal's understatement of the substantial burden and cost -likely to be borne by shareholders - of publicly disclosing each vote and votes that are "inconsistent" with a fund's policies. For example, we currently employ an outside proxy voting service to handle the physical process of voting the proxies for the funds we advise in accordance with detailed guidelines and instructions, and we review the voting by those services to assure that they have complied with those instructions. However, in many cases on specific types of issues, portfolio managers may request that proxies of a particular issuer be voted on a matter in a way that may vary from those guidelines, because the manager believes it to be in the best interests of the fund to do so. Some voting guidelines allow flexibility in evaluating particular issues, but the Commission's proposal would appear to require the fund to disclose the exercise of such flexibility as "inconsistent" with the guideline, and the required explanation of that vote would likely be more confusing to shareholders than helpful information. To require that in each of those cases an explanation be drafted and disclosed, other than to the fund board of directors/trustees, will involve the hiring of additional staff to determine whether a particular vote is "inconsistent" with what may be a very flexible guideline, to draft those disclosures and to have management review those drafts.
We do support the proposal to require funds to make available to their shareholders a description of their proxy voting policies and procedures. We also support the proposal to require investment advisers to disclose to their clients a description of their proxy voting policies and procedures, and to furnish a copy of those policies and procedures to their clients on request; in the case of an investment company, that disclosure would be made to the fund's board of directors/trustees. We also believe that the Statement of Additional Information is the appropriate place for such disclosure in the case of open-end funds, rather than the prospectus. Because this information does not bear on the investment policies and risks of an investment company, it is simply not material investment information that most investors would want to know before making an investment decision about a fund. The information would, in many cases, add several additional pages to the Prospectus, and the additional cost of printing and mailing charges is not justified given the nature of this information. Its inclusion in the prospectus would overwhelm the more important description of investment policies and risks, and would not be consonant with the Commission's goal of prospectus simplification.
While we support the requirement that advisers be required to keep a copy of their proxy voting policies and procedures and proxy votes cast, we recommend that the Commission modify some of the other proposed record-keeping requirements. Funds that use outside proxy voting services typically have their proxies sent to those services directly and would have to expend additional amounts to have the proxies returned to the fund or the adviser. Moreover, the proxies of domestic registered issuers are available on EDGAR for examination. Additionally, advisers should not be required to make and maintain records of oral communications related to proxy voting. Aside form the practical problems that would be entailed in isolating and recording such information, it would be of little use in enforcing the basic premise and policy of the proposals - disclosure of proxy voting policies.
We strongly oppose the requirement that investment companies be required to file on a semi-annual basis with the Commission (and thus make public) a record of each matter the fund was entitled to vote upon with respect to every voting security held by the fund and to furnish those records to shareholders on request. Based upon our own records and experience, we do not believe that the information is material to shareholders in making an investment decision. Funds are not required to make available to shareholders or the public every other type of operational detail of their day-to-day business, such as what broker was used to purchase which security on what day at what price. To require that information to be made public not only would jeopardize the confidentiality of a fund's investment process but would also subject a fund and its adviser to extraordinary burdens. If such investment information is not required to be disclosed, there is even less rationale for requiring the disclosure of particular proxy votes, where confidentiality of the voting process may play an important part in the ability of funds to exercise their ability to effect changes for the sake of good corporate governance.
It is quite hard to believe, and the Commission so acknowledges in the proposals, that a typical shareholder will want to take the time to pore over the proxy voting records of a fund having hundreds of portfolio securities - unless, of course, that shareholder has a special political or corporate policy agenda. It is not simply not appropriate to impose costs and burdens on mutual funds to benefit special interest groups. The type of information that would be required to be disclosed under the Commission's proposal, such as the ticker symbol of the portfolio security, the CUSIP number, etc., is unlikely to be useful (or understandable) information for the typical fund shareholder but will be very helpful to the special interest groups that can readily take advantage of this type of information to pressure fund management on proxy issues. Fund managers need to spend their time overseeing the investment of shareholders' money, not responding to pressure tactics by special interest groups that will attempt to use public pressure as a bludgeon to advance their agenda, as occurred in Boston earlier this year at the doorstep of one fund organization. In the interests of fairness and sound rule-making, the Commission must not politicize the proxy voting process at the expense of fund shareholders.
We urge the Commission to re-think the approach taken in certain aspects of this rulemaking proposal, to recognize the central role of the independent directors/trustees in the process of overseeing a fund's proxy voting procedures and the resolution of any potential conflicts of interest on the part of a fund's investment adviser in that process. We support the concept of disclosure of proxy policies and procedures by advisers and funds, but we urge the Commission to eliminate from the proposal the requirements for the disclosure of proxy votes by funds and their advisers, because (1) that process would be unnecessary disclosure that has little relevance to investors seeking information about investment risks and goals, (2) carrying out that requirement would be burdensome and costly to funds, and (3) such disclosure requirements would potentially be harmful to fund shareholders, by opening up the proxy voting process to the pressures of special interest groups that have little concern for the investment manager's fiduciary responsibility to all shareholders of a fund. The undersigned would be happy to respond to any questions about these comments.
Robert G. Zack
Senior Vice President and