File No. S7-36-02From: Richard Mason [Richard@madisonscottsdale.com] Sent: Wednesday, November 27, 2002 11:58 AM To: 'rule-comments@sec.gov' Subject: File No. S7-36-02 Mosaic Funds 550 Science Drive Madison, WI 53711 November 27, 2002 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 RE: File No. S7-36-02; Proposed Proxy Voting Requirements for Registered Investment Companies Dear Mr. Katz: Thank you for the opportunity to comment on File No. S7-36-02, the proposed proxy voting requirements for registered investment companies. Mosaic Funds is a small fund complex consisting of 13 open end mutual funds and less than $300 million under management. At Mosaic, we have been managing mutual funds since the 1970's. To the best of our knowledge, we have never had a shareholder question how we voted the proxies on any securities in our fund portfolios. However, despite the complete lack of importance that our shareholders have attributed to this matter for the last thirty years or so, we have no objection to disclosing our proxy voting policies in our Statements of Additional Information for those whose interest in our funds goes beyond the risks and rewards disclosed in plain English in our prospectuses. We object to the proposed detailed reporting and burdensome recordkeeping requirements contained in the proposal for the following reasons: 1. At Mosaic, if we disagree with the recommendations of the management of a company whose stock is held in our funds, it means we do not have confidence in management and we will generally sell the stock in that company before we have a chance to vote its proxy. Our shareholders do not expect us to be activists. Therefore, we object to the Commission requiring us to devote resources to establishing a bureaucracy of proxy vote reporting and documentation for a matter that historically has never concerned our shareholders and for which we believe our shareholders, if given the choice, would opt for our resources being devoted to lowering expenses instead of complying with this additional regulatory burden. 2. To the Commission or to any shareholder who asks us, Mosaic is currently able to disclose whether we voted for or against management's recommendation on any security held by a Mosaic mutual fund and why we voted in that manner. Since we cannot imagine our shareholders wanting any more information in this regard, we do not understand why the expenses our shareholders pay in connection with the ongoing management of their funds should be devoted to providing information that does not benefit them in the form of the proposed detailed and burdensome disclosures and additional recordkeeping. 3. To the extent the Commission believes denying the secret ballot to investment companies serves to protect mutual fund shareholders from conflicts of interest, then we do not understand why the Commission is not simply proposing investment companies disclose such conflicts to its Board of Directors in the same manner we would be required to disclose other types of conflicts. (For example, we do not object to periodically disclosing to our Boards that: "In accordance with its proxy voting policies, the fund voted its proxy as management recommended for every portfolio security held during the last fiscal year" or "The fund voted its proxy as management recommended for every portfolio security held during the last fiscal year except as follows...") We do not understand what investor protection is afforded by creating a bureaucracy of disclosing every instance where we voted in the manner we claimed we would vote. 4. As a small fund complex, we do not understand why each Mosaic Fund should be treated differently than any other shareholder - and, in particular, much larger shareholders -- by being denied the opportunity for placing a secret ballot. We do not understand why we are being singled out. There are a number of large shareholders with many beneficial owners, e.g. pension plans, insurance companies, common and collective trust funds, hedge funds, etc. that are not being denied voting confidentiality. They are not required to devote resources to developing a detailed voting tracking and reporting system, compensate staff (or pay a third party service provider) to maintain such a system and input the data necessary for filing with the Commission, or use supplies and storage space to produce and store such detailed results of their voting history. We do not understand why our small fund complex must bear the burden and costs of implementing a detailed proxy voting disclosure regimen when so many larger shareholders who own vastly greater amounts of securities and wield vastly greater voting power on behalf of themselves, as institutional investors, and the individual investors for which they act as a fiduciary or otherwise, are not subject to this bureaucratic burden. 5. As a small fund complex, we are fearful that our loss of our confidential voting privilege may subject us to retaliation by management of the companies in which we invest. This retaliation could be in the form of denial of access to company management in the course of our investment research on behalf of our shareholders. We do not have the same leverage that larger shareholders have - most of which are shareholders who are not being denied the secret ballot. 6. The Commission's rationale for requiring disclosure of proxy voting histories appears to be based on the power wielded by large institutional investors. We do not believe that imposing bureaucratic burdens on small mutual funds such as those in the Mosaic family makes sense when so many larger institutional investors would be exempt. If the Commission is truly concerned with the manner by which institutional shareholders are voting their proxies, then we do not understand why the Commission hasn't proposed to require issuers to disclose the voting records of their large and institutional shareholders. If, as stated in the Release, the "time has now arrived" for mutual funds to report and disclose proxy voting records, then it is also time for daylight to shine on the voting records of all other institutional shareholders. 7. We object to keeping copies of each and every proxy we vote on behalf of each and every fund as long as we keep a record of how we voted on any security for each meeting at which proxy votes are cast. Keeping actual copies of all documentation when such information is readily available on the SEC's own EDGAR database or when a single record would provide the same information for several funds serves no purpose other than to enrich our landlord for the extra space we will need for storage. 8. Finally, at a time when Commission leadership has been under fire, we question whether this proposal is more politically motivated than offered in the interests of investor protection. Since this proposal, if adopted, would make it easy for special interest groups to identify how mutual funds are voting issues that concern them - presumably to goad them into changing their proxy voting policies to become shareholder activists - we question whether the proposal is designed to quell criticism of the Commission by special interest groups on other matters. In this respect, we resent being used as a "bone" tossed to special interests. We request the Commission either withdraw this proposal entirely or, at least, reconsider this proposal so that it is limited to reasonable investor protection requirements (i.e. disclosure of proxy voting policies and maintenance of voting records in a reasonable manner), rather than catering to the wants and desires of special interests and activists. Richard Mason General Counsel Mosaic Funds 550 Science Drive Madison, WI 53711 (Direct) 480-443-9537 www.mosaicfunds.com