In September 2002, the SEC proposed a series of new rules, rule amendments, new forms and form amendments to require investment
companies and investment advisers to disclose proxy voting policies and voting records. Late last month, the SEC adopted these
proposals.
The Fund Rules require an open-end investment company[fn1] to disclose in its statement of additional information the policies and procedures that it uses to determine how to vote
proxies relating to portfolio securities. The Fund Rules also require an investment company to file with the SEC and make
available to its shareholders, a record of how it voted proxies relating to portfolio securities and to disclose how shareholders
can obtain information regarding proxy voting.
The Adviser Rules require any registered investment adviser that has voting authority over client proxies, to adopt written
policies and procedures reasonably designed to ensure that the adviser votes the proxies in the best interests of its clients.
The Adviser Rules also require the adviser to disclose information to its clients about the policies and procedures it has
adopted and how clients can obtain information regarding how the adviser has voted their proxies. The Adviser Rules also impose
new recordkeeping requirements.
Investment Companies
Proxy Voting Policies and Procedures
The Fund Rules require an open-end investment company that files any initial registration statement or annual update post-effective
amendment on or after July 1, 2003 to include the required disclosure about proxy voting policies and procedures. The Fund
Rules require a closed-end investment company that files an annual report on Form N-CSR on or after July 1, 2003 to include
the same disclosure.
Statement of Additional Information and Form N-CSR Disclosure
The Fund Rules specify that an investment company has the flexibility to determine the appropriate content for its disclosure
relating to its proxy voting policies and procedures. However, the SEC expects that policies and procedures will include both
general policies, and policies relating to voting on specific types of proposals. The disclosure must include the procedures
used when a vote presents a conflict of interest between shareholders and the adviser, underwriter or an affiliate. The disclosure
also must include any policies and procedures of the adviser or any third party that are used to determine how to vote proxies.
The SEC noted that an investment company that relies on multiple sets of policies and procedures (such as an investment company
that has multiple sub-advisers that each apply its own set of policies and procedures) would be required to provide a description
of each set of policies and procedures. An investment company may include the actual policies and procedures in the SAI or
N-CSR, rather than providing a description of them.
An operating investment company that does not currently have written policies and procedures relating to proxy voting should
formalize its policies and procedures and obtain any necessary Board approvals in enough time to include the required disclosures
in the first annual update to its registration statement occurring on or after July 1, 2003. An investment company that currently
has written policies and procedures should review those procedures to determine whether they need to be amended and approved
by the Board on the same time schedule. For an investment company that anticipates relying on policies and procedures of its
advisers, sub-advisers or other third parties, this process may be complicated.
Shareholder Reports Disclosure
The Fund Rules require that an investment company include a particular disclosure in any annual or semi-annual report that
is sent to shareholders after the new description of the proxy voting policies is included in the SAI or N-CSR, as discussed
above. The shareholder report must disclose that a description of the proxy voting policies and procedures is available: (i)
by calling a toll-free number; (ii) on the investment company’s website, if applicable; and (iii) on the SEC’s website. If
a request for the policies and procedures is received, the requested description must be sent within three business days by
a prompt method of delivery.
Proxy Voting Record
New Rule 30b1-4 and Form N-PX
The Fund Rules require an investment company to file its proxy voting record with the SEC on new Form N-PX no later than August
31 of each year, for the twelve-month period ending June 30 of the current year. The Fund Rules mandate that every investment
company must make its first filing on Form N-PX by August 31, 2004, for the period July 1, 2003 to June 30, 2004. The following
information will be required disclosures on Form N-PX for each matter for which an investment company, or one of its series,
was entitled to vote at a shareholder meeting held during the twelve-month reporting period:
- The name of the security’s issuer;
- The security’s exchange ticker symbol;
- The CUSIP number of the security;
- The shareholder meeting date;
- A brief description of the matter voted on;
- Whether the matter was proposed by the issuer or by a shareholder of the security;
- Whether the investment company, or series, cast its vote on the matter;
- How the investment company, or series, cast its vote;
- Whether the investment company, or series, cast its vote for or against management.
It is important to note that the SEC did not adopt its original proposal requiring an investment company to disclose information
in its shareholder reports regarding any proxy votes that are inconsistent with its proxy policies and procedures. The SEC
also did not require the proxy voting record to be part of the certified Form N-CSR in recognition of the substantial compliance
costs that such a requirement would have triggered. In addition to filing its voting record with the SEC, each investment
company must make its proxy voting record available either upon request or on the investment company’s website, or both.
In anticipation of the start of the first reporting period on July 1, 2003, all investment companies should develop methods
and procedures for maintaining the records necessary to provide required disclosures in N-PX filings. In addition, an investment
company should consider the potential impact of having the record of its proxies voted publicly disclosed on an annual basis.
There may need to be a heightened awareness of the potential or actual scrutiny by an investment company’s shareholders or
industry participants of the investment company’s voting practices, and an investment company will need to analyze the potential
impact of casting certain votes in a particular manner or casting or not casting votes on particular matters. Because the
SEC itself recognized the possibility of unintended consequences, especially relating to the politicization of the proxy voting
process, it directed the staff to monitor the Fund Rules and prepare a report by December 31, 2005, as to any such consequences.
Investment Advisers
New Rule 206(4)-6 Regarding Proxy Voting
The Adviser Rules have made it unlawful for any registered investment adviser to exercise voting authority with respect to
client securities unless: (i) the adviser has adopted and implemented written policies and procedures that are reasonably
designed to ensure that the adviser votes proxies in the best interests of its clients; (ii) the adviser describes its proxy
voting procedures to its clients and provides copies upon request; and (iii) the adviser discloses to its clients how they
may obtain information on how the adviser voted their proxies. Advisers must be in compliance with the Adviser Rules by August
6, 2003.
The Adviser Rules apply to any registered investment adviser that has voting authority, whether implicit or explicit, but
do not apply to an adviser that just gives advice about voting proxies. Consequently, an adviser may avoid being subject to
the new requirements by explicitly disclaiming authority for voting proxies in advisory contracts or through other prominent
disclosure.
The SEC has not mandated specific policies and procedures and has instead specified that there is an expectation that each
adviser will tailor its policies as needed for its circumstances and conflicts of interest. The SEC specifically indicated
that boilerplate language would not be acceptable and noted that nothing prevents an adviser from having multiple policies
and procedures for multiple clients, and that in some circumstances varying policies across different clients may be necessary.
The Adviser Rules require that the policies and procedures must describe how the adviser addresses material conflicts between
its interests and those of its clients. In addition, the SEC specifically noted that a policy of never voting proxies would
not be an acceptable policy or procedure because it would often not be in the best interests of clients to refrain from voting
a proxy.
Any description of the adviser’s policies and procedures that is provided to clients should be a concise summary of the adviser’s
voting process and not a reiteration of the adviser’s policies and procedures themselves and should indicate that the actual
policies and procedures are available upon request.
The Adviser Rules require that an investment adviser will need to have written policies and procedures in place that comply
with the new requirements by August 6, 2003.
Recordkeeping
The Adviser Rules require that beginning on August 6, 2003, an adviser must retain: (i) its proxy voting policies and procedures;
(ii) proxy statements received regarding client securities; (iii) records of votes it cast on behalf of clients; (iv) records
of client requests for proxy voting information; and (v) any documents prepared by the adviser that were material to making
a decision regarding how to vote or memorialized the basis for the voting decision. The records must be retained in an appropriate
office of the adviser for the first two years and in an easily accessible place for an additional three years. However, the
Adviser Rules allow an adviser to rely on proxy statements filed on the SEC’s EDGAR system instead of maintaining its own
copies and the adviser can rely on a third party, such as a proxy voting service, to maintain proxy statements and records
of votes cast by the adviser.
Footnotes:
1: The Fund Rules require a closed-end investment company to make the same disclosure on an annual basis on Form N-CSR. Form
N-CSR was recently adopted by the SEC to be used by investment companies to file certified shareholder reports under the Sarbanes-Oxley
Act of 2002.
