SEC Adopts Rules Mandating Proxy Voting Disclosures by Investment Advisors

February 10, 2003

On February 3, 2003 the Securities and Exchange Commission (ASEC@) issued final rules pertaining to the voting of proxies on portfolio securities.  These rules become effective on March 5, 2003 and investment advisors must comply with these rules by August 6, 2003.  These rules require all investment advisers registered with the SEC that have voting authority over client portfolio securities to adopt proxy voting policies and procedures, disclose them to clients, and provide clients with the means to obtain information about how the adviser has voted their proxies. Registered investment advisers are also be required to keep historical records of how they voted client proxies.

Among the concerns brought to the SEC’s attention in the last several years was the AFL-CIO’s belief that at least one large fund group supported the reelection of an Enron director at Lockheed Martin and the offshore redomestication of companies like Tyco International, both of which the labor union was against.  Several years ago, too, then SEC Commissioner Paul R. Carey commented that fund advisors may vote to please company directors in order to get or retain corporate pension fund business management.  As a result, the SEC now requires that investors be made aware of how investment advisers vote proxies, not only to monitor conflicts of interest, but also to monitor the activities of mutual funds in the corporate governance arena.

Under new Rule 206(4)-6 under the Investment Advisers Act of 1940, registered investment advisory firms that exercise explicit or implicit voting authority over client proxies would have to:

* adopt written policies and procedures that are reasonably designed to ensure that client proxies are voted in the best interests of clients,

* provide their clients with a concise summary of its proxy voting procedures and provide copies of such procedures upon request, and

* disclose to clients how they may obtain information on how the adviser voted their proxies. 

These proxy voting policies and procedures must address how an investment adviser will resolve material conflicts of interests with its clients.  For example, the policy may provide that the investment adviser (i) disclose any conflict to clients and obtain their consents before voting or (ii) seek the recommendation of an independent third party before voting.

A proxy voting policy may also contain an investment adviser’s general policies and procedures, as well as policies with respect to voting on specific types of issues.  For example, a general policy might include (i) the extent to which an investment adviser delegates its proxy voting decisions to a specific person, (ii) a policy relating to matters that may substantially affect the rights or privileges of the holders of securities to be voted; and (iii) the extent to which the fund will support or give weight to the views of management.  Policies on specific issues may include, for example, (i) a statement that proxies will generally be voted with management on routine matters (such as approval of auditors or election of directors), (ii) a statement that non-routine proposals (such as mergers and acquisitions, restructurings or changes in capitalization) will be determined on a case-by-case basis or (iii) a statement that certain corporate governance proposals (such as poison pills or golden parachutes) will generally be voted against.

An investment adviser will be prohibited from exercising voting power with respect to client securities unless the adviser is in compliance with the new rule.

Under an amendment to existing Rule 204-2, the books and records rule, investment advisers would be required to maintain records of their proxy voting activities.  These records include:

* a copy of all proxy voting policies and procedures,

* a copy of each proxy statement that the investment advisor receives regarding client securities,

* a record of each vote cast by the investment advisor on behalf of a client,

* a copy of any document created by the adviser that was material to making a decision about how to vote proxies on behalf of a client or that memorialized the basis for that decision, and
a copy of each written client request for information on how the adviser voted proxies on behalf of the client and a copy of any written response to any such client request (whether the request was written or oral).

These records will therefore be available for review by the SEC as part of its investment adviser examination and inspection program.

For additional information on this topic, you may contact Howard A. Neuman or Carol Spawn Desmond.