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November 22, 2002


Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

    RE: File No. S7-36-02
    Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies

Ladies and Gentleman:

This letter responds to the request of the Securities and Exchange Commission for comments on its September 20, 2002, Release entitled Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies. We have focused our comments on the impact the proposed rules will have on the market for third party providers of proxy voting services and the need to expand and diversify such market.

In general, we support the goals the Commission set forth in the Release. In light of the recent corporate scandals that have damaged investor confidence in the financial markets, we believe that increased disclosure by mutual funds and their advisers with respect to proxy voting policies and procedures and specific proxy votes will positively impact the mutual fund industry by enabling individual investors to become more informed and, therefore, more influential on issues relating to corporate governance.

As the Commission states in the Release, "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." While that is one possible effect of greater transparency, we are concerned about other potential consequences that the proposed rules may have if adopted. Specifically, we are concerned that increased disclosure and the associated financial burdens will motivate many mutual funds to seek the services of third party providers of proxy voting services, so-called proxy advisers.

While we recognize that the increased utilization of proxy advisers may provide a more cost-effective solution to the increased disclosure requirements than individual mutual funds are able to develop internally, our concern stems from the fact that the current market for proxy advisers is dominated by one or two major providers. Given the costs attendant to establishing a proxy adviser and coverage of even the most widely held stocks, we are highly skeptical that there will be new market entrants, and we believe that as more mutual funds engage proxy advisers to assist in developing and implementing proxy voting policies and procedures the virtual monopoly enjoyed by the current providers in the proxy adviser market will only grow more powerful. One of the stated policies of the Investment Company Act of 1940 is to prevent the control of investment companies from becoming unduly concentrated. We are not suggesting that a third party entity that provides proxy voting services to a mutual fund controls the mutual fund per se. However, we believe that enormous voting power and influence will be concentrated in the very few proxy advisers currently in operation if the proposed rules are adopted, and that such a concentration of voting power and influence is adverse to the stated goals of the 1940 Act and the investing public, generally.

Institutional Shareholder Services currently dominates the market for proxy voting services. Since its recent merger with ProxyMonitor, formerly ISS's largest competitor, ISS controls a substantial portion of the market; Investor Responsibility Research Center is its only significant competitor. Both ISS and IRRC offer a full range of services related to proxy voting from consulting with respect to a particular proxy vote to a turn-key service in which the proxy adviser assists in the development of proxy voting policies, conducts research with respect to proxy votes and votes on behalf of its client.

It is clear from the text of the Release and from the Commission's open meeting held on September 19, 2002, that the Commission is aware of the existence of proxy advisers and concurs with our view that such services will be in greater demand if the proposed rules are adopted. In fact, the disclosure required by the proposed rules would require a fund to disclose whether it uses a proxy adviser and the policies and procedures of the proxy adviser. However, we believe that the Commission has overlooked the current status of the proxy adviser market and, therefore, has not adequately analyzed the impact of the proposed rules on that market.

In theory, outsourcing proxy voting responsibilities solves some of the problems with which the proposed rules are concerned such as conflicts of interest and failure to expend the time and resources that are required to fulfill the fiduciary duty of voting proxies. For instance, if a mutual fund hires a proxy adviser to consult on its proxy voting policies and to make proxy voting decisions for it, then the chance of a conflict of interest between the mutual fund and the company whose proxy it is voting is seemingly greatly reduced. Further, the current dominant providers of proxy voting services have policies and procedures in place that ensure that the proxy services provided comply with the current fiduciary requirements. However, the mere existence of a self-proclaimed independent third party adviser does not necessarily ensure that conflicts of interest will not be present and that fiduciary obligations will be met. In fact, in a market that is dominated by relatively few, large proxy advisers that have affiliations and ownership interests throughout the financial marketplace, the specter of a conflict of interest looms large. This concern is further exacerbated by the fact that the largest provider, ISS, also provides consulting services to the companies whose securities it votes. We believe that because of the paucity of choices in the proxy adviser market, the proposed rules will have the effect of increasing the likelihood of conflicts of interest and breaches of fiduciary obligations notwithstanding that the conflicts and breaches have been shifted from the mutual funds to the proxy advisers.

We recommend that the Commission take into consideration the potential harm to investors that may result from concentrating so much voting power in the hands of so few proxy advisers. In order to ensure that mutual funds have a diverse choice of proxy advisers and are not restricted by the virtual monopoly that the current providers have in the market, the Commission should take some action concurrent with the adoption of the new disclosure rules to prohibit mutual funds from using proxy advisers that vote, or advise with respect to, more than a modest percentage of any individual company's stock. This, effectively, would require proxy advisers to track the holdings of their clients (say, through Schedule 13F filings) and to make that information available to clients and potential clients to enable the clients to comply with the new rules. Ultimately this would encourage the formation of additional proxy advisers, thereby mitigating the risk of vote concentration and providing mutual funds with a more meaningful opportunity to select proxy advisers based upon the quality of their advice rather than their dominance of the market place.

We appreciate the opportunity to comment on this release. If you have any questions please feel free to contact David Gieg or Brink Dickerson.