-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FkRRDkDz4PQLA2iXSD/LKus2tDUQ/pt56vtRNrwibSbNZHHsX4yA8wCwtHsgulck IPRS8HI8BST77LMv/hv6ww== 0000909012-10-000190.txt : 20100305 0000909012-10-000190.hdr.sgml : 20100305 20100305164427 ACCESSION NUMBER: 0000909012-10-000190 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20091231 FILED AS OF DATE: 20100305 DATE AS OF CHANGE: 20100305 EFFECTIVENESS DATE: 20100305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNERSTONE TOTAL RETURN FUND INC CENTRAL INDEX KEY: 0000033934 IRS NUMBER: 132727013 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02363 FILM NUMBER: 10661263 BUSINESS ADDRESS: STREET 1: ULTIMUS FUND SOLUTIONS, LLC STREET 2: 260 MADISON AVENUE, 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: (646) 881-4985 MAIL ADDRESS: STREET 1: ULTIMUS FUND SOLUTIONS, LLC STREET 2: 260 MADISON AVENUE, 8TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: EIS FUND INC DATE OF NAME CHANGE: 20020109 FORMER COMPANY: FORMER CONFORMED NAME: EXCELSIOR INCOME SHARES INC DATE OF NAME CHANGE: 19920703 N-CSR 1 t305755.txt CRF OMB APPROVAL OMB Number: 3235-0570 Expires: August 31, 2011 Estimated average burden hours per response: 18.9 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-02363 --------- CORNERSTONE TOTAL RETURN FUND, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 260 MADISON AVENUE, 8th FLOOR NEW YORK, NEW YORK 10016 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Frank J. Maresca - -------------------------------------------------------------------------------- ULTIMUS FUND SOLUTIONS, LLC, 260 MADISON AVENUE, 8th FLOOR NEW YORK, NEW YORK 10016 (Name and address of agent for service) Registrant's telephone number, including area code: 646-881-4985 ---------------- Date of fiscal year end: DECEMBER 31, 2009 --------------------------------------------- Date of reporting period: DECEMBER 31, 2009 --------------------------------------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. ================================================================================ DIRECTORS AND CORPORATE OFFICERS Ralph W. Bradshaw Chairman of the Board of Directors and President Thomas H. Lenagh Director Edwin Meese III Director Scott B. Rogers Director Andrew A. Strauss Director Glenn W. Wilcox, Sr. Director Gary A. Bentz Chief Compliance Officer, Secretary, and Assistant Treasurer William A. Clark Vice President Frank J. Maresca Treasurer STOCK TRANSFER AGENT INVESTMENT MANAGER AND REGISTRAR Cornerstone Advisors, Inc. American Stock One West Pack Square Trust Co. Suite 1650 59 Maiden Lane Asheville, NC 28801 New York, NY 28801 ADMINISTRATOR INDEPENDENT REGISTERED Ultimus Fund Solutions, LLC PUBLIC ACCOUNTING FIRM 260 Madison Avenue Tait, Weller & Baker LLP 8th Floor 1818 Market Street New York, NY 10016 Suite 2400 Philadelphia, PA 19103 CUSTODIAN LEGAL COUNSEL JPMorgan Chase Bank, N.A. Blank Rome LLP Bank, N.A. 14201 North Dallas Pkwy. 405 Lexington Second Floor New York, NY 10174 Dallas, TX 75254 EXECUTIVE OFFICES 260 Madison Avenue 8th Floor New York, NY 10016 For shareholder inquiries, registered shareholders should call (800) 937-5449. For general inquiries, please call (513) 326-3597. CRF LISTED ALTERNEXT ================================================================================ CORNERSTONE TOTAL RETURN FUND, INC. DECEMBER 31, 2009 This update contains the following two documents: o Letter from the Funds o Annual Report to Shareholders ================================================================================ LETTER FROM THE FUND'S PRESIDENT January 27, 2010 Dear Fellow Shareholders: Following is the annual report for Cornerstone Total Return Fund, Inc., (the "Fund"), for the year ended December 31, 2009. At the end of the year, the Fund's net assets were $20.4 million and the Net Asset Value per share was $7.19. The share price closed at $10.29. After reflecting the reinvestment of monthly distributions totaling $1.90 per share, the Fund achieved a total investment return at market value of 66.98% for the year ended December 31, 2009. ECONOMIC AND MARKET SUMMARY The economy and financial markets reached bottom at the end of March, and both have managed a partial recovery during the rest of the year. Economic health has shown consistent improvement in the last three quarters. Gross Domestic Product ("GDP") measured (5.5%), (0.7%), and 2.2% for the first three quarters respectively. Economists are expecting even stronger positive growth in the 4th quarter. However, many of the systemic problems that created the most severe recession in half a century still remain to one degree or another. Most observers agree that the strong, though controversial intervention by the government in the form of the Troubled Asset Relief Program, the government stimulus package, and other programs to subsidize the severely damaged real estate markets over the last year has averted a full blown depression. The programs aimed at supporting the residential real estate market, originally set to expire in 2009, have been extended into 2010. The Fed's program to purchase of $1.25 trillion of mortgage-backed securities was extended through March 2010, and the tax credit program for first-time homebuyers was extended into the first half of 2010. Both of these programs have aided the crippled residential real estate industry in making a tentative recovery. There are, however, significant headwinds remaining. Residential foreclosures reached a record 2.8 million in 2009, and there are more to come in 2010. Separately, the commercial real estate industry, approximately one-third the size of the residential market, is headed for a round of mid-term loan renewals in the next 24 months in an environment where commercial real estate prices are down over (40%) since October 2007. Given the tenuous state of economic recovery, there remains significant uncertainty regarding the ability of the economy to sustain a continued recovery in the absence of federal assistance. The equity markets, which are typically leading indicators, have been more robust in their recovery. The major market indices and most sectors of the financial markets have shown very strong growth following the lows at the end of the first quarter. However, a significant part of this growth has been fueled from two sources, first, a natural reaction to what was later perceived as a panic-driven, over-sold market in 2008 and the first quarter of 2009, and second, the effects of various forms of government stimulus which propped up consumers and businesses through deficit spending. By the end of the year following a strong run, equity valuations seem to have reached a plateau. Although earnings and productivity recovered in many business sectors, it has been observed that these results owe more to very strong cost control measures, through reduction of inventories and personnel layoffs, rather than renewed consumer demand. It remains unclear whether the economy can sustain these positive trends after government stimulus is withdrawn. For the time being, the Federal Reserve has been aggressive in its monetary policy. Short-term interest rates have remained near zero with the federal funds rate set between 0% and 0.25%. Although many have voiced concern over the latent inflationary pressures of the excess liquidity resulting from the Fed's policies, inflation has remained subdued, and the Fed has indicated that it does not anticipate a change in monetary policy until the recovery shows signs of sustaining itself through normal economic activity. - -------------------------------------------------------------------------------- ii LETTER FROM THE FUND'S PRESIDENT (CONTINUED) MANAGED DISTRIBUTION POLICY The Fund has maintained its policy of regular distributions to shareholders which continues to be popular with investors. These distributions are not tied to the Fund's investment income and capital gains and do not represent yield or investment return on the Fund's portfolio. The policy of maintaining regular monthly distributions is designed to enhance shareholder value by increasing liquidity for individual investors and providing greater flexibility to manage their investment in the Fund. As always, shareholders have the option of taking their distributions in cash or reinvesting them in shares of the Fund pursuant to the Fund's reinvestment plan. Pursuant to the Fund's distribution policy, the monthly distribution amount for the year 2010 was reset to $0.1213 per share. The Board of Directors approved a distribution percentage of 21% of net assets for the calendar year 2010; under this policy this annual percentage rate was applied to the Fund's NAV at the end of October, 2009 in order to determine the monthly distribution amount for 2010. The Board of Directors believes that the Fund's distribution policy maintains a stable, high rate of distribution for shareholders. As always, the monthly distributions are reviewed and approved periodically by the Board throughout the year and are subject to change at the discretion of the Board. In addition, shareholders should read the disclosure notes in the Fund's report for details on the Fund's distribution policy and reinvestment plan. As in previous years, shareholders receive a final determination of the total distribution attributable to income, capital gains, or return-of-capital after the end of each year. The allocation among these categories may vary greatly from year to year. In any given year, there can be no guarantee that the Fund's investment returns will exceed the amount of the distributions. To the extent that the amount of distributions taken in cash exceeds the total net investment returns of the Fund, the assets of the Fund will decline. If the total net investment returns exceed the amount of cash distributions, the assets of the Fund will increase. Either way, the Fund's individual shareholders have complete flexibility to take their distributions in cash or to reinvest in Fund shares through the Fund's reinvestment plan, and they can change this election as often as they desire. Under the managed distribution policy, the Fund makes monthly distributions to shareholders at a rate that may include periodic distributions of its net income and net capital gains, ("Net Earnings"), or from return-of-capital. For any fiscal year where total cash distributions exceeded Net Earnings (the "Excess"), the Excess would decrease the Fund's total assets and, as a result, would have the likely effect of increasing the Fund's expense ratio. There is a risk that the total Net Earnings from the Fund's portfolio would not be great enough to offset the amount of cash distributions paid to Fund shareholders. If this were to be the case, the Fund's assets would be depleted, and there is no guarantee that the Fund would be able to replace the assets. In addition, in order to make such distributions, the Fund may have to sell a portion of its investment portfolio at a time when independent investment judgment might not dictate such action. Furthermore, such assets used to make distributions will not be available for investment pursuant to the Fund's investment objective. OUTLOOK The Federal Reserve, the Treasury, and most economists have consistently noted that the economy is still frail and that the recovery in 2010 will be slow. Financial institutions will face continued challenges in dealing with remaining over-valued assets, continuing residential real estate foreclosures, and forthcoming - -------------------------------------------------------------------------------- iii LETTER FROM THE FUND'S PRESIDENT (CONCLUDED) commercial property loan renewals. Economists are predicting GDP growth in 2010 between 2% and 3%. After the substantial recovery in the financial markets during 2009, many now expect a correction in the range of 5% to 10% before continuing in recovery. Investors are still holding a tremendous amount of cash, but most will probably remain on the sidelines until employment, typically a lagging indicator, shows signs of improvement. Unemployment, which currently stands at 10%, is expected to move upward during the 1st quarter of 2010 before growth in employment begins to turn positive sometime within the next six months. Recovery to nominal full employment is expected to take another eighteen to twenty-four months. Businesses need to begin rehiring personnel and restocking seriously depleted inventories before investors have full confidence in self-sustaining growth. We hope and anticipate that these trends will become established by the middle of 2010. As you know, the Fund's holdings represent a widely diversified portfolio of predominantly large-cap companies. We believe the large-cap sector tends to show a greater degree of defensive strength than other sectors of the market during periods of adverse market activity. In addition to this, the investment manager attempts to enhance portfolio performance by taking advantage of temporary and occasional pricing inefficiencies in certain securities. The availability and magnitude of such opportunities are unpredictable, and their effect on possible portfolio performance may vary considerably from year to year. We remain confident that the Fund's portfolio is well-structured to weather the current market volatility and to participate in the recovery when it occurs. The Fund's Board of Directors, its officers, and its investment manager are very conscious of the fact that investors have placed their trust in us. Thank you for your support. We know you have a choice, and we look forward to continuing our service to you in the future. Sincerely, /s/ RALPH W. BRADSHAW - --------------------- Ralph W. Bradshaw President IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WHICH MAY CONCERN, AMONG OTHER THINGS, DOMESTICAND FOREIGN MARKETS, INDUSTRY AND ECONOMIC TRENDS AND DEVELOPMENTS AND GOVERNMENT REGULATION AND THEIR POTENTIAL IMPACT ON THE FUND'S INVESTMENT PORTFOLIO. THESE STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES AND ACTUAL TRENDS, DEVELOPMENTS AND REGULATIONS IN THE FUTURE AND THEIR IMPACT ON THE FUND COULD BE MATERIALLY DIFFERENT FROM THOSE PROJECTED, ANTICIPATED OR IMPLIED. THE FUND HAS NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS. THIS LETTER FROM THE FUND'S PRESIDENT IS NOT A PART OF THE ANNUAL REPORT TO SHAREHOLDERS THAT FOLLOWS. - -------------------------------------------------------------------------------- iv CONTENTS Portfolio Summary 1 Summary Schedule of Investments 2 Statement of Assets and Liabilities 4 Statement of Operations 5 Statement of Changes in Net Assets 6 Financial Highlights 7 Notes to Financial Statements 8 Report of Independent Registered Public Accounting Firm 14 Results of Meeting of Stockholders 15 Tax Information 16 Additional Information Regarding the Fund's Directors and Corporate Officers 17 Description of Dividend Reinvestment Plan 20 Proxy Voting and Portfolio Holdings Information 22 Privacy Policy Notice 22 Summary of General Information 23 Shareholder Information 23 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. PORTFOLIO SUMMARY - AS OF DECEMBER 31, 2009 (UNAUDITED) - -------------------------------------------------------------------------------- SECTOR ALLOCATION Percent of Sector Net Assets - -------------------------------------------------------------------------------- Information Technology 18.7 - -------------------------------------------------------------------------------- Financials 11.7 - -------------------------------------------------------------------------------- Healthcare 11.4 - -------------------------------------------------------------------------------- Energy 10.7 - -------------------------------------------------------------------------------- Consumer Staples 10.6 - -------------------------------------------------------------------------------- Closed-End Funds 10.0 - -------------------------------------------------------------------------------- Industrials 8.6 - -------------------------------------------------------------------------------- Consumer Discretionary 8.5 - -------------------------------------------------------------------------------- Utilities 3.5 - -------------------------------------------------------------------------------- Materials 3.4 - -------------------------------------------------------------------------------- Telecommunication Services 2.8 - -------------------------------------------------------------------------------- Other 0.1 - -------------------------------------------------------------------------------- TOP TEN HOLDINGS, BY ISSUER Percent of Holding Sector Net Assets - -------------------------------------------------------------------------------- 1. Exxon Mobil Corporation Energy 3.3 - -------------------------------------------------------------------------------- 2. Google, Inc. - Class A Information Technology 3.0 - -------------------------------------------------------------------------------- 3. Adams Express Company (The) Closed-End Funds 2.9 - -------------------------------------------------------------------------------- 4. JPMorgan Chase & Company Financials 2.5 - -------------------------------------------------------------------------------- 5. Wal-Mart Stores, Inc. Consumer Staples 2.4 - -------------------------------------------------------------------------------- 6. Microsoft Corporation Information Technology 2.1 - -------------------------------------------------------------------------------- 7. Apple, Inc. Information Technology 2.1 - -------------------------------------------------------------------------------- 8. Procter & Gamble Company (The) Consumer Staples 1.9 - -------------------------------------------------------------------------------- 9. General Electric Company Industrials 1.8 - -------------------------------------------------------------------------------- 10. Johnson & Johnson Healthcare 1.7 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 - -------------------------------------------------------------------------------- No. of Description Shares Value - -------------------------------------------------------------------------------- EQUITY SECURITIES - 99.98% CLOSED-END FUNDS - 9.99% CORE - 5.66% Adams Express Company (The) (a) 59,400 $ 599,940 Liberty All-Star Equity Fund 37,000 160,210 Liberty All-Star Growth Fund 86,075 289,212 Other Core (b) 104,136 ------------ 1,153,498 ------------ DEVELOPED MARKET - 0.33% Total Developed Market (b) 68,120 ------------ HIGH CURRENT YIELD (LEVERAGED) - 0.11% Total High Current Yield (Leveraged) (b) 23,440 ------------ INCOME & PREFERRED STOCK - 0.25% Total Income & Preferred Stock (b) 51,750 ------------ OPTION ARBITRAGE/OPTIONS STRATEGIES - 1.37% NFJ Dividend, Interest & Premium Strategy Fund 19,000 280,250 ------------ REAL ESTATE - 0.46% Total Real Estate (b) 93,450 ------------ SECTOR EQUITY - 1.50% H&Q Healthcare Investors 14,400 170,928 Other Sector Equity (b) 134,310 ------------ 305,238 ------------ U.S. MORTGAGE - 0.31% Total U.S. Mortgage (b) 62,939 ------------ TOTAL CLOSED-END FUNDS 2,038,685 ------------ CONSUMER DISCRETIONARY - 8.53% DIRECTV Group, Inc. (The) - Class A * 4,000 133,400 Home Depot, Inc. (The) 5,000 144,650 NIKE, Inc. - Class B 2,500 165,175 Walt Disney Company (The) ^ 5,000 161,250 Other Consumer Discretionary ^ (b) 1,135,702 ------------ 1,740,177 ------------ No. of Description Shares Value - -------------------------------------------------------------------------------- CONSUMER STAPLES - 10.55% Coca-Cola Company (The) 5,000 $ 285,000 Philip Morris International, Inc. 3,500 168,665 Procter & Gamble Company (The) 6,472 392,397 Walgreen Company 4,100 150,552 Wal-Mart Stores, Inc. 9,000 481,050 Other Consumer Staples ^ (b) 674,617 ------------ 2,152,281 ------------ ENERGY - 10.70% Chevron Corporation 3,500 269,465 Devon Energy Corporation ^ 2,500 183,750 Exxon Mobil Corporation ^ 10,000 681,900 Occidental Petroleum Corporation 4,000 325,400 Schlumberger Ltd. ^ 3,000 195,270 Other Energy (b) 526,460 ------------ 2,182,245 ------------ FINANCIALS - 11.75% Bank of America Corporation 10,521 158,446 Goldman Sachs Group, Inc. (The) 1,500 253,260 JPMorgan Chase & Company 12,200 508,374 Travelers Companies, Inc. (The) 3,092 154,167 Wells Fargo & Company 11,000 296,890 Other Financials ^ (b) 1,025,666 ------------ 2,396,803 ------------ HEALTHCARE - 11.39% Abbott Laboratories 3,000 161,970 Amgen, Inc. * 3,000 169,710 Baxter International, Inc. 2,500 146,700 Johnson & Johnson 5,500 354,255 McKesson Corporation 2,500 156,250 Medtronic, Inc. 4,500 197,910 Pfizer, Inc. 14,462 263,064 Other Health Care ^ (b) 874,565 ------------ 2,324,424 ------------ INDUSTRIALS - 8.62% General Electric Company 24,000 363,120 Illinois Tool Works, Inc. 3,500 167,965 - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 2 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC SUMMARY SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 (CONCLUDED) - -------------------------------------------------------------------------------- No. of Description Shares Value - -------------------------------------------------------------------------------- INDUSTRIALS (CONTINUED) Lockheed Martin Corporation 2,500 $ 188,375 Union Pacific Corporation 2,500 159,750 Other Industrials (b) 879,524 ------------ 1,758,734 ------------ INFORMATION TECHNOLOGY - 18.66% Apple, Inc. * 2,000 421,719 Cisco Systems, Inc. * 13,000 311,220 Google, Inc. - Class A * 1,000 619,980 Hewlett-Packard Company 5,000 257,550 Intel Corporation 16,000 326,400 International Business Machines Corporation 2,200 287,980 Microsoft Corporation 14,000 426,860 Oracle Corporation 12,600 309,204 QUALCOMM, Inc. 3,800 175,788 Other Information Technology ^ (b) 669,142 ------------ 3,805,843 ------------ MATERIALS - 3.41% E.I. Du Pont de Nemours & Company 4,800 161,616 Freeport-McMoRan Copper & Gold, Inc. 2,500 200,725 Monsanto Company 2,000 163,500 Other Materials (b) 168,900 ------------ 694,741 ------------ REAL ESTATE INVESTMENT TRUST - 0.01% Total Real Estate Investment Trust ^ (b) 1,277 ------------ TELECOMMUNICATION SERVICES - 2.84% AT&T, Inc. 11,089 310,825 Verizon Communications, Inc. 7,500 248,475 Other Telecommunication Services (b) 21,050 ------------ 580,350 ------------ UTILITIES - 3.53% Other Utilities ^ (b) 721,061 ------------ TOTAL EQUITY SECURITIES (cost - $21,147,954) 20,396,621 ------------ No. of Description Shares Value - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 12.73% MONEY MARKET SECURITY - 2.19% JPMorgan U.S. Government Money Market Fund 446,588 $ 446,588 ------------ Principal Amount (000's) --------- REPURCHASE AGREEMENTS - 10.54% J.P. Morgan Securities Inc.+++ (Agreement dated 12/31/2009 to be repurchased at $2,142,166) $ 2,142 2,142,128 ------------ J.P. Morgan Securities Inc.+ (Agreement dated 12/31/2009 to be repurchased at $6,881) 7 6,881 ------------ TOTAL SHORT-TERM INVESTMENTS (cost - $2,595,597) 2,595,597 ------------ TOTAL INVESTMENTS - 112.71% (cost - $23,743,551) 22,992,218 ------------ LIABILITIES IN EXCESS OF OTHER ASSETS - (12.71)% (2,592,279) ------------ NET ASSETS - 100.00% $ 20,399,939 ============ - ---------- (a) Affiliated investment. The Fund holds 2.94% (based on net assets) of Adams Express Company. A Director of the Fund also serves as a director to such company. During the year ended December 31, 2009 the Fund had no purchases but sold 13,600 shares of this security. (b) Represents issuers not identified as a top 50 holding in terms of market value and issues or issuers not exceeding 1% of net assets individually or in the aggregate, respectively, as December 31, 2009. * Non-income producing security. ^ Security or a portion thereof is out on loan. + The maturity date for all repurchase agreements held was January 4, 2010, with interest rates ranging from 0.01% to 0.16% and collateralized by $2,218,562 in U.S. Treasury Notes maturing August 15, 2018. Stated interest rate, before rebate earned by borrower of securities on loan. ++ Represents investment purchased with collateral received for securities on loan. - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 3
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 2009 - -------------------------------------------------------------------------------- ASSETS Investments, at value, including collateral for securities on loan of $2,142,128: Unaffiliated issuers (cost - $23,050,861)(1) $ 22,392,278 Affiliated issuer (cost - $692,690) 599,940 ------------ Total investments (cost - $23,743,551) 22,992,218 Receivables: Securities sold 121,567 Dividends 36,939 Prepaid expenses 1,829 ------------ Total Assets 23,152,553 ------------ LIABILITIES Payables: Upon return of securities loaned 2,142,128 Dividends 397,102 Securities purchased 124,090 Investment management fees 22,352 Directors' fees 13,480 Other accrued expenses 53,462 ------------ Total Liabilities 2,752,614 ------------ NET ASSETS (applicable to 2,838,558 shares of common stock outstanding) $ 20,399,939 ============ NET ASSET VALUE PER SHARE ($20,399,939 (division) 2,838,558) $ 7.19 ============ NET ASSETS CONSISTS OF Common stock, $0.001 par value; 2,838,558 shares issued and outstanding (100,000,000 shares authorized) $ 2,839 Paid-in capital 25,072,311 Accumulated net realized loss on investments (3,923,878) Net unrealized depreciation in value of investments (751,333) ------------ Net assets applicable to shares outstanding $ 20,399,939 ============ - ---------- (1) Includes securities out on loan to brokers with a market value of $2,079,502. - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 4
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2009 - -------------------------------------------------------------------------------- INVESTMENT INCOME Income: Dividends (including $9,983 earned from affiliated issuers) $ 490,586 Securities lending 2,003 ----------- Total Investment Income 492,589 ----------- Expenses: Legal and audit fees 223,718 Investment management fees 195,144 Directors' fees 59,908 Accounting fees 36,013 Administration fees 31,009 Transfer agent fees 27,657 Printing 26,500 Custodian fees 10,001 Insurance 5,455 Stock exchange listing fees 5,001 Miscellaneous 4,456 ----------- Total Expenses 624,862 Less: Management fee waivers (62,127) Less: Fees paid indirectly (23,773) ----------- Net Expenses 538,962 ----------- Net Investment Loss (46,373) ----------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS Net realized gain from unaffilated investments and foreign currency 76,630 Net realized loss from affilated investments (89,026) Net change in unrealized depreciation in value of investments and foreign currency 3,681,512 ----------- Net realized and unrealized gain on investments and foreign currency 3,669,116 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,622,743 =========== - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 5
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- For the Year Ended December 31, 2009 2008 ------------ ------------ DECREASE IN NET ASSETS Operations: Net investment income/(loss) $ (46,373) $ 334,663 Net realized loss from investments (12,396) (2,308,252) Net change in unrealized appreciation/(depreciation) in value of investments 3,681,512 (12,967,513) ------------ ------------ Net increase/(decrease) in net assets resulting from operations 3,622,743 (14,941,102) ------------ ------------ Dividends and distributions to shareholders: Net investment income -- (334,663) Return-of-capital (5,317,678) (10,218,473) ------------ ------------ Total dividends and distributions to shareholders (5,317,678) (10,553,136) ------------ ------------ Common stock transactions: Cash in lieu of fractional shares from the reverse stock split -- (542) Proceeds from 64,854 and 102,212 shares newly issued in reinvestment of dividends and distributions, respectively 590,254 1,588,319 ------------ ------------ Total common stock transactions 590,254 1,587,777 ------------ ------------ Total decrease in net assets (1,104,681) (23,906,461) ------------ ------------ NET ASSETS Beginning of year 21,504,620 45,411,081 ------------ ------------ End of year $ 20,399,939 $ 21,504,620 ============ ============ - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 6
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data for each year indicated. This information has been derived from information provided in the financial statements and market price data for the Fund's shares. - -------------------------------------------------------------------------------- For the Years Ended December 31,* --------------------------------------------------------------------- 2009 2008 2007 2006 2005 -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of year $ 7.75 $ 17.00 $ 20.28 $ 21.82 $ 25.56 -------- -------- -------- -------- -------- Net investment income/(loss) # (0.02) 0.12 0.14 0.18 0.12 Net realized and unrealized gain/(loss) on investments and foreign currency related transactions 1.31 (5.64) 0.64 2.50 0.36 -------- -------- -------- -------- -------- Net increase/(decrease) in net assets resulting from operations and foreign currency related transactions 1.29 (5.52) 0.78 2.68 0.48 -------- -------- -------- -------- -------- Dividends and distributions to shareholders: Net investment income -- (0.12) (0.14) (0.18) (0.12) Net realized capital gains -- -- (0.06) -- -- Return-of-capital (1.90) (3.77) (4.08) (4.04) (4.10) -------- -------- -------- -------- -------- Total dividends and distributions to shareholders (1.90) (3.89) (4.28) (4.22) (4.22) -------- -------- -------- -------- -------- Common stock transactions: Anti-dilutive effect due to shares issued in reinvestment of dividends and distributions 0.05 0.16 0.22 -- -- -------- -------- -------- -------- -------- Net asset value, end of year $ 7.19 $ 7.75 $ 17.00 $ 20.28 $ 21.82 ======== ======== ======== ======== ======== Market value, end of year $ 10.29 $ 7.60 $ 19.60 $ 39.24 $ 29.30 ======== ======== ======== ======== ======== Total investment return (a) 66.98% (49.30)% (40.97)% 64.15% (2.07)% ======== ======== ======== ======== ======== RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000 omitted) $ 20,400 $ 21,505 $ 45,411 $ 52,379 $ 54,194 Ratio of expenses to average net assets, net of fee waivers, if any (b) 2.76% 1.67% 1.49% 1.44% 1.47% Ratio of expenses to average net assets, excluding fee waivers, if any (c) 3.20% 1.94% 1.53% 1.50% 1.52% Ratio of expenses to average net assets, net of fee waivers, if any (c) 2.88% 1.77% 1.52% 1.50% 1.50% Ratio of net investment income/(loss) to average net assets (0.24)% 0.98% 0.74% 0.82% 0.53% Portfolio turnover rate 13.24% 15.61% 11.00% 11.29% 9.84% - -------------------------------------------------------------------------------- * Effective December 23, 2008, a reverse stock split of 1:2 occurred. All per share amounts have been restated according to the terms of the split. # Based on average shares outstanding. (a) Total investment return at market value is based on the changes in market price of a share during the period and assumes reinvestment of dividends and distributions, if any, at actual prices pursuant to the Fund's dividend reinvestment plan. Total investment return does not reflect brokerage commissions. (b) Expenses are net of fees paid indirectly. (c) Expenses exclude the reduction for fees paid indirectly. - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 7
- -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE A. ORGANIZATION Cornerstone Total Return Fund, Inc. (the "Fund") was incorporated in New York on March 16, 1973 and commenced investment operations on May 15, 1973. Its investment objective is to seek capital appreciation with current income as a secondary objective by investing primarily in U.S. and non-U.S. companies. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end, diversified management investment company. NOTE B. SIGNIFICANT ACCOUNTING POLICIES MANAGEMENT ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make certain estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. SUBSEQUENT EVENTS: The Fund has evaluated the need for additional disclosures and/or adjustments resulting from subsequent events through February 24, 2010, the date the financial statements were issued. Based on this evaluation, no additional disclosures or adjustments were required to the financial statements as of December 31, 2009. PORTFOLIO VALUATION: Investments are stated at value in the accompanying financial statements. Readily marketable portfolio securities listed on the NYSE are valued, except as indicated below, at the last sale price reflected on the consolidated tape at the close of the NYSE on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices on such day. If no bid or asked prices are quoted on such day or if market prices may be unreliable because of events occurring after the close of trading, then the security is valued by such method as the Board of Directors shall determine in good faith to reflect its fair market value. Readily marketable securities not listed on the NYSE but listed on other domestic or foreign securities exchanges are valued in a like manner. Portfolio securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined as reflected on the consolidated tape at the close of the exchange representing the principal market for such securities. Securities trading on the Nasdaq Stock Market, Inc. ("NASDAQ") are valued at the closing price. Readily marketable securities traded in the over-the counter market, including listed securities whose primary market is believed by Cornerstone Advisors, Inc. (the "Investment Manager" or "Cornerstone") to be over-the-counter, are valued at the mean of the current bid and asked prices as reported by the NASDAQ or, in the case of securities not reported by the NASDAQ or a comparable source, as the Board of Directors deem appropriate to reflect their fair market value. Where securities are traded on more than one exchange and also over-the-counter, the securities will generally be valued using the quotations the Board of Directors believes reflect most closely the value of such securities. At December 31, 2009, the Fund held no securities valued in good faith by the Board of Directors. The net asset value per share of the Fund is calculated weekly and on the last business day of the month with the exception of those days on which the NYSE Alternext US LLC is closed. The Fund is exposed to financial market risks, including the valuations of its investment portfolio. For the year ended December 31, 2009, the Fund did not engage in derivative instruments and other hedging activities. Repurchase Agreements: The Fund has agreed to purchase securities from financial institutions subject to the seller's agreement to repurchase them at an agreed-upon time and price ("repurchase agreements"). The financial institutions with whom the Fund enters into repurchase agreements are banks and broker/dealers, which Cornerstone considers creditworthy. The seller under a - -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- repurchase agreement will be required to maintain the value of the securities as collateral, subject to the agreement at not less than the repurchase price plus accrued interest. Cornerstone monitors the mark-to-market of the value of the collateral, and, if necessary, requires the seller to maintain additional securities, so that the value of the collateral is not less than the repurchase price. Default by or bankruptcy of the seller would, however, expose the Fund to possible loss because of adverse market action or delays in connection with the disposition of the underlying securities. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Interest income is recorded on an accrual basis; dividend income is recorded on the ex-dividend date. TAXES: No provision is made for U.S. federal income or excise taxes as it is the Fund's intention to continue to qualify as a regulated investment company and to make the requisite distributions to its shareholders which will be sufficient to relieve it from all or substantially all U.S. federal income and excise taxes. The Accounting for Uncertainty in Income Taxes Topic of the FASB Accounting Standards Codification defines the threshold for recognizing the benefits of tax-return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not criterion, based on the largest benefit that is more than 50 percent likely to be realized. The Fund's policy is to classify interest and penalties associated with underpayment of federal and state income taxes, if any, as income tax expense on its Statement of Operations. As of December 31, 2009, the Fund does not have any interest or penalties associated with the under-payment of any income taxes. Management reviewed any uncertain tax positions for open tax years 2006 through 2009. The Fund has had discussions with the Internal Revenue Service's New York Regional Office regarding a technical tax issue relating to whether the Fund's historic dividend reinvestment plan may have resulted in a violation of certain Subchapter M requirements of the Internal Revenue Code for certain prior tax years. The Fund and the Internal Revenue Service have reached a tentative agreement to resolve this matter through the issuance of a closing letter that, if finalized in its current form, will avoid material negative tax impact to the Fund. Pursuant to this tentative agreement, the Investment Manager will be responsible for paying any amount owing to the Internal Revenue Service. There was no material impact to the financial statements or, other than as described herein, the disclosures thereto as a result of the adoption of this pronouncement. DISTRIBUTIONS TO SHAREHOLDERS: Effective January 2002, the Fund initiated a fixed, monthly distribution to shareholders. On November 29, 2006, this distribution policy was updated to provide for the annual resetting of the monthly distribution amount per share based on the Fund's net asset value on the last business day in each October. The terms of the distribution policy will be reviewed and approved at least annually by the Fund's Board of Directors and can be modified at their discretion. To the extent that these distributions exceed the current earnings of the Fund, the balance will be generated from sales of portfolio securities held by the Fund, which will either be short-term or long-term capital gains or a tax-free return-of-capital. To the extent these distributions are not represented by net investment income and capital gains, they will not represent yield or investment return on the Fund's investment portfolio. The Fund plans to maintain this distribution policy even if regulatory requirements would make part of a return-of-capital, necessary to maintain the distribution, taxable to shareholders and to disclose that portion of the distribution that is classified as ordinary income. Although it has no current intention to do so, the Board may terminate this distribution policy at any time and such termination may have an adverse effect on the market price for the Fund's common shares. The Fund determines annually whether to distribute any - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- net realized long-term capital gains in excess of net realized short-term capital losses, including capital loss carryovers, if any. To the extent that the Fund's taxable income in any calendar year exceeds the aggregate amount distributed pursuant to this distribution policy, an additional distribution may be made to avoid the payment of a 4% U.S. federal excise tax, and to the extent that the aggregate amount distributed in any calendar year exceeds the Fund's taxable income, the amount of that excess may constitute a return-of-capital for tax purposes. A return-of-capital distribution reduces the cost basis of an investor's shares in the Fund. Dividends and distributions to shareholders are recorded by the Fund on the ex-dividend date. MANAGED DISTRIBUTION RISK: Under the managed distribution policy, the Fund makes monthly distributions to shareholders at a rate that may include periodic distributions of its net income and net capital gains, ("Net Earnings"), or from return-of-capital. For any fiscal year where total cash distributions exceeded Net Earnings (the "Excess"), the Excess would decrease the Fund's total assets and, as a result, would have the likely effect of increasing the Fund's expense ratio. There is a risk that the total Net Earnings from the Fund's portfolio would not be great enough to offset the amount of cash distributions paid to Fund shareholders. If this were to be the case, the Fund's assets would be depleted, and there is no guarantee that the Fund would be able to replace the assets. In addition, in order to make such distributions, the Fund may have to sell a portion of its investment portfolio at a time when independent investment judgment might not dictate such action. Furthermore, such assets used to make distributions will not be available for investment pursuant to the Fund's investment objective. NOTE C. FAIR VALUE As required by the Fair Value Measurement and Disclosures Topic of the FASB Accounting Standards Codification, the Fund has performed an analysis of all assets and liabilities measured at fair value to determine the significance and character of all inputs to their fair value determination. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories. o Level 1 - quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement. o Level 2 - quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers. o Level 3 - model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Fund's own assumptions that market participants would use to price the asset or liability based on the best available information. The following is a summary of the inputs used as of December 31, 2009 in valuing the Fund's investments carried at value: INVESTMENTS IN OTHER FINANCIAL VALUATION INPUTS SECURITIES INSTRUMENTS* - -------------------------------------------------------------------------------- Level 1 - Quoted Prices Equity Investments $20,396,621 -- Short-Term Investments 2,595,597 -- Level 2 - Other Significant Observable Inputs -- -- Level 3 - Significant Unobservable Inputs -- -- ----------- ----------- Total $22,992,218 -- =========== =========== - ------ * Other financial instruments include futures, forwards and swap contracts. - -------------------------------------------------------------------------------- 10 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- The Fund did not have any assets or liabilities that were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2009. NEW ACCOUNTING PRONOUNCEMENT: In January 2010, the FASB Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about Fair Value Measurements". ASU 2010-06 amends FASB Accounting Standards Codification Topic, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. Certain disclosures required by ASU No. 2010-06 are effective for interim and annual reporting periods beginning after December 15, 2009, and other required disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Management is currently evaluating the impact ASU No. 2010-06 will have on its financial statement disclosures. NOTE D. AGREEMENTS Certain officers of the Fund are also officers of Cornerstone or Ultimus Fund Solutions, LLC ("Ultimus"). Such officers are paid no fees by the Fund for serving as officers of the Fund. INVESTMENT MANAGEMENT AGREEMENT Cornerstone serves as the Fund's Investment Manager with respect to all investments. As compensation for its investment management services, Cornerstone receives from the Fund, an annual fee, calculated weekly and paid monthly, equal to 1.00% of the Fund's average weekly net assets. During the year ended December 31, 2009, Cornerstone voluntarily agreed to waive its management fees from the Fund to the extent that the Fund's net monthly operating expenses (including basic legal fees but excluding other legal and extraordinary expenses) exceed a monthly rate of 0.125% of average net assets. For the year ended December 31, 2009, Cornerstone earned $195,144 for investment management services, of which it waived $62,127. Effective July 1, 2009 the Investment Manager discontinued such undertaking. Included in the Statement of Operations, under the caption Fees paid indirectly, are expense offsets of $23,773 arising from credits earned on portfolio transactions executed with brokers, pursuant to directed brokerage arrangements. ADMINISTRATION AGREEMENT Under the terms of the Administration Agreement, Ultimus supplies executive, administrative and regulatory services for the Fund. Ultimus supervises the preparation of reports to stockholders for the Fund, reports to and filings with the Securities and Exchange Commission and materials for meetings of the Board of Directors. For these services, the Fund pays Ultimus a monthly fee at an annual rate of 0.100% of its average daily net assets up to $250 million and 0.075% of such assets in excess of $250 million, subject to an annual minimum fee of $50,000. Currently, Ultimus has agreed to discount the annual minimum fee to $30,000. This arrangement will remain in place until an amended fee is agreed upon by the Fund and Ultimus. FUND ACCOUNTING AGREEMENT Under the terms of the Fund Accounting Agreement, Ultimus calculates the net asset value per share and maintains the financial books and records of the Fund. For the performance of these services, the Fund pays Ultimus a base fee of $2,500 per month plus an asset based fee of 0.010% of the first $500 million of average daily net assets and 0.005% of such assets in excess of $500 million. - -------------------------------------------------------------------------------- 11 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE E. AFFILIATED INVESTMENTS Transactions in affiliates for the year ended December 31, 2009 were as follows: ADAMS PETROLEUM & EXPRESS RESOURCES COMPANY CORPORATION --------- ----------- Market value at beginning of year $ 586,190 $ 58,170 ========= ========= Shares at beginning of year 73,000 3,000 Shares purchased during the year -- -- Shares sold during the year (13,600) (3,000) --------- --------- Shares at end of year 59,400 -- ========= ========= Dividend income earned during the year $ 9,743 $ 240 ========= ========= Cost of purchases during the year -- -- Proceeds from sales during the year $ 110,433 $ 57,019 Net realized gain/(loss) during the year $ (45,395) $ (43,631) Market value at end of year $ 599,940 -- NOTE F. INVESTMENT IN SECURITIES For the year ended December 31, 2009, purchases and sales of securities, other than short-term investments, were $6,920,570 and $11,348,120 respectively. NOTE G. SHARES OF COMMON STOCK The Fund has 15,000,000 shares of common stock authorized and 2,838,558 shares outstanding at December 31, 2009. Transactions in common stock for the year ended December 31, 2009 were as follows: Shares at beginning of year 2,773,704 Shares newly issued in reinvestment of dividends and distributions 64,854 --------- Shares at end of year 2,838,558 ========= NOTE H. SHARE REPURCHASE PROGRAM As has been done in the past to enhance shareholder value, pursuant to Section 23 of the Investment Company Act of 1940, as amended, the Fund may again in the future purchase shares of its common stock on the open market from time to time, at such times, and in such amounts as may be deemed advantageous to the Fund. Nothing herein shall be considered a commitment to purchase such shares. The Fund had no repurchases during the year ended December 31, 2009. No limit has been placed on the number of shares to be repurchased by the Fund other than those imposed by federal securities laws. To the extent such purchases are made they will be in accordance with federal securities laws, with shares repurchased held in treasury for future use by the Fund. NOTE I. SECURITIES LENDING To generate additional income, the Fund may lend up to 331/3% of its total assets. The Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn interest on the investment of cash collateral. Loans are subject to termination by the Fund or the borrower at any time, and are, therefore, not considered to be illiquid investments. Loans of securities are required at all times to be secured by collateral equal to at least 100% of the market value of securities on loan. However, in the event of default or bankruptcy of the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. In the event that the borrower fails to return securities, and collateral maintained by the lender is insufficient to cover the value of loaned securities, the borrower is obligated to pay the amount of the shortfall (and interest thereon) to the Fund. However, there can be no assurance the Fund can recover this amount. - -------------------------------------------------------------------------------- 12 - -------------------------------------------------------------------------------- CORNERSTONE TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) - -------------------------------------------------------------------------------- The market value of securities on loan to brokers at December 31, 2009, was $2,079,502. During the year ended December 31, 2009, the Fund earned $2,003 in securities lending income which is included under the caption Securities lending in the Statement of Operations. NOTE J. FEDERAL INCOME TAXES Income and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are primarily due to differing treatments of losses deferred due to wash sales and Post-October losses (as later defined), and excise tax regulations. The tax character of dividends and distributions paid during the years ended December 31, for the Fund were as follows: Ordinary Income Return-of-Capital ----------------------- ------------------------------ 2009 2008 2009 2008 ---- ---- ---- ---- -- $334,663 $5,317,678 $10,218,473 At December 31, 2009 the components of accumulated deficit on a tax basis, for the Fund were as follows: Accumulated net realized loss $(3,905,676) Net unrealized depreciation (769,535) ----------- Total accumulated deficit $(4,675,211) =========== Accounting principles generally accepted in the United States of America require that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. For the year ended December 31, 2009, the Fund decreased net investment loss by $46,373, decreased net realized loss by $1,168,261 and decreased paid capital by $1,214,634. Under current tax law, certain capital losses realized after October 31 within a taxable year may be deferred and treated as occurring on the first day of the following tax year ("Post-October losses"). The Fund incurred no such loss. At December 31, 2009, the Fund had a capital loss carryforward for U.S. federal income tax purposes of $3,905,676, of which $425,706 expires in 2011, $358,321 expires in 2012, $420,772 expires in 2013, $57,090 expires in 2014, $2,382,884 expires in 2016 and $260,903 expires in 2017. At December 31, 2009, the identified cost for federal income tax purposes, as well as the gross unrealized appreciationfrominvestmentsforthosesecuritieshaving an excess of value over cost, gross unrealized depreciation from investments for those securities having an excess of cost over value and the net unrealized appreciation from investments were $23,761,753, $1,478,822, $(2,248,357), and $(769,535), respectively. - -------------------------------------------------------------------------------- 13 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Cornerstone Total Return Fund, Inc. New York, New York We have audited the accompanying statement of assets and liabilities of Cornerstone Total Return Fund, Inc., including the summary schedule of investments as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Cornerstone Total Return Fund, Inc. as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Tait, Weller & Baker LLP Philadelphia, Pennsylvania February 24, 2010 - -------------------------------------------------------------------------------- 14 RESULTS OF MEETING OF STOCKHOLDERS (UNAUDITED) On October 14, 2009, the Annual Meeting of Stockholders of Cornerstone Total Return Fund, Inc. was held and the following matter was voted upon based on 2,813,692 shares of common stock outstanding on August 14, 2009: (1) To approve the re-election of six Trustees until the 2010 Annual Meeting. NAME OF DIRECTORS FOR WITHHOLD - ----------------- --- -------- Ralph W. Bradshaw 2,339,347 80,840 Thomas H. Lenagh 2,338,266 81,921 Edwin Meese III 2,317,330 102,857 Scott B. Rogers 2,342,845 77,342 Andrew A. Strauss 2,332,727 87,460 Glenn W. Wilcox, Sr. 2,338,985 81,202 - -------------------------------------------------------------------------------- 15 2009 TAX INFORMATION (UNAUDITED) Cornerstone Total Return Fund, Inc. (the "Fund") is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise its shareholders within 60 days of the Fund's year end (December 31, 2009) as to the federal tax status of the distributions received by the Fund's stockholders in respect of such fiscal year. The $5,317,678 in distributions paid to shareholders in respect of such year, represented a total return-of-capital. As indicated in this notice, the entire amount of the Fund's distributions for 2009 were comprised of a return-of-capital; accordingly these distributions do not represent yield or investment return on the Fund's portfolio.
SOURCES OF DIVIDENDS AND DISTRIBUTIONS (PER SHARE AMOUNTS) Payment Dates: 1/30/09 2/27/09 3/31/09 4/30/09 5/29/09 6/30/09 -------- -------- -------- -------- -------- -------- Return-of-Capital(1) $ 0.1580 $ 0.1580 $ 0.1580 $ 0.1580 $ 0.1580 $ 0.1580 -------- -------- -------- -------- -------- -------- Payment Dates: 7/31/09 8/31/09 9/30/09 10/30/09 11/30/09 12/31/09 -------- -------- -------- -------- -------- -------- Return-of-Capital(1) $ 0.1580 $ 0.1580 $ 0.1580 $ 0.1580 $ 0.1580 $ 0.1580 -------- -------- -------- -------- -------- --------
- --------- (1) Return-of-capital- This is the per share amount of return-of-capital, or sometimes called nontaxable, distributions reported in Box 3 - under the title "Nondividend distributions" - on Form 1099-DIV. This not be reported as taxable income on your current amount should return. Rather, it should be treated as a reduction in the original cost basis of your investment in the Fund. Shareholders are strongly advised to consult their own tax advisers with respect to the tax consequences of their investment in the Fund. - -------------------------------------------------------------------------------- 16
ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) NUMBER OF PORTFOLIOS IN NAME AND POSITION FUND COMPLEX ADDRESS* POSITION(S) PRINCIPAL OCCUPATION WITH FUND OVERSEEN BY (BIRTH DATE) HELD WITH FUND OVER LAST 5 YEARS SINCE DIRECTORS - ---------------------------------------------------------------------------------------------------------------- Ralph W. Chairman of President, Cornerstone Advisors, Inc.; 2001 3 Bradshaw** the Board of Financial Consultant; President and (Dec. 1950) Directors and Director of Cornerstone Strategic President Value Fund, Inc.; President and Trustee of Cornerstone Progressive Return Fund. Thomas H. Director; Audit, Director of Cornerstone Strategic Value 2002 3 Lenagh Nominating Fund, Inc.; Trustee of Cornerstone (Nov. 1924) and Corporate Progressive Return Fund; Director of Governance Adams Express Company, Petroleum Committee & Resources Corporation and PPGI Member Industries. Edwin Director; Audit, Distinguished Fellow, The Heritage 2001 3 Meese III Nominating Foundation Washington D.C.; (Dec. 1931) and Corporate Distinguished Visiting Fellow at the Governance Hoover Institution, Stanford University; Committee Senior Adviser, Revelation L.P.; Director Member of Cornerstone Strategic Value Fund, Inc.; Trustee of Cornerstone Progressive Return Fund. Scott B. Rogers Director; Audit, Chairman, Board of Health Partners, 2001 3 (July 1955) Nominating Inc.; Chief Executive Officer, Asheville and Corporate Buncombe Community Christian Governance Ministry; and President, ABCCM Committee Doctor's Medical Clinic; Appointee, NC Member Governor's Commission on Welfare to Work; Director of Cornerstone Strategic Value Fund, Inc.; Trustee of Cornerstone Progressive Return Fund.
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ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) (CONTINUED) Number of Portfolios in Name and Position Fund Complex Address* Position(s) Principal Occupation with Fund Overseen by (Birth Date) Held with Fund over Last 5 Years Since Directors - -------------------------------------------------------------------------------------------------------------- Andrew A. Director; Attorney and senior member of Strauss & 2001 3 Strauss Chairman of Associates, P.A., Attorneys, Asheville and (Nov. 1953) Nominating Hendersonville, NC; previous President and Corporate of White Knight Healthcare, Inc. and Governance LMV Leasing, Inc., a wholly owned Committee and subsidiary of Xerox Credit Corporation; Audit Committee Director of Cornerstone Strategic Value Member Fund, Inc.; Trustee of Cornerstone Progressive Return Fund. Glenn W. Director; Chairman of the Board, Tower 2001 3 Wilcox, Sr. Chairman of Associates, Inc.; Chairman of the (Dec. 1931) Audit Committee, Board and Chief Executive Officer of Nominating Wilcox Travel Agency, Inc.; Director of and Corporate Cornerstone Strategic Value Fund, Inc.; Governance Trustee of Cornerstone Progressive Committee Return Fund. Member
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ADDITIONAL INFORMATION REGARDING THE FUND'S DIRECTORS AND CORPORATE OFFICERS (UNAUDITED) (CONCLUDED) Name and Position Address* Position(s) Principal Occupation with Fund (Birth Date) Held with Fund over Last 5 Years Since - --------------------------------------------------------------------------------------------------------------- Gary A. Bentz Chief Compliance Chairman and Chief Financial Officer of 2004, 2008, (June 1956) Officer, Secretary, Cornerstone Advisors, Inc.; previous 2009 and Assistant Director, Vice President and Treasurer of Treasurer the Fund and Cornerstone Strategic Value Fund, Inc., Financial Consultant, C.P.A., Chief Compliance Officer, Secretary, and Assistant Treasurer of Cornerstone Strategic Value Fund, Inc. and Cornerstone Progressive Return Fund. William A. Clark Vice President Director and Stockholder of Cornerstone 2004 (Oct. 1945) Advisors, Inc.; Vice President and former Director of Cornerstone Strategic Value Fund, Inc.; Vice President and former Trustee of Cornerstone Progressive Return Fund; Financial Consultant; former Director of Investors First Fund, Inc. Frank J. Maresca Treasurer Executive Vice President of Ultimus Fund 2009 (Oct. 1958) Solutions, LLC (since March 2009); previous Executive Director, JP Morgan Chase & Co. (since June 2008); previous President of Bear Stearns Funds Management, Inc.; previous Senior Managing Director of Bear Stearns & Co., Inc.; Treasurer of Cornerstone Strategic Value Fund, Inc. and Cornerstone Progressive Return Fund (since May 2009).
- -------------------------------------------------------------------------------- * The mailing address of each Director and/or Officer with respect to the Fund's operation is 260 Madison Ave., New York, NY 10016. ** Designates a director who is an "interested person" of the Fund as defined by the Investment Company Act of 1940, as amended. Mr. Bradshaw is an interested person of the Fund by virtue of his current position with the Investment Advisor of the Fund. - -------------------------------------------------------------------------------- 19 DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) Cornerstone Total Return Fund, Inc. (the "Fund") operates a Dividend Reinvestment Plan (the "Plan"), sponsored and administered by American Stock Transfer & Trust Company (the "Agent"), pursuant to which the Fund's income dividends or capital gains or other distributions (each, a "Distribution" and collectively, "Distributions"), net of any applicable U.S. withholding tax, are reinvested in shares of the Fund. Shareholders automatically participate in the Fund's Plan, unless and until an election is made to withdraw from the Plan on behalf of such participating shareholder. Shareholders who do not wish to have Distributions automatically reinvested should so notify their broker, or if a registered shareholder, the Agent in writing at P.O. Box 922, Wall Street Station, New York, New York 10269-0560. Such written notice must be received by the Agent prior to the record date of the Distribution or the shareholder will receive such Distribution in shares through the Plan. Under the Plan, the Fund's Distributions to shareholders are reinvested in full and fractional shares as described below. When the Fund declares a Distribution the Agent, on the shareholder's behalf, will (i) receive additional authorized shares from the Fund either newly issued or repurchased from shareholders by the Fund and held as treasury stock ("Newly Issued Shares") or (ii) purchase outstanding shares on the open market, on the NYSE Alternext US LLC or elsewhere, with cash allocated to it by the Fund ("Open Market Purchases"). The method for determining the number of shares to be received when Distributions are reinvested will vary depending upon whether the net asset value of the Fund's shares is higher or lower than its market price. If the net asset value of the Fund's shares is lower than its market price, the number of Newly Issued Shares received will be determined by dividing the amount of the Distribution either by the Fund's net asset value per share or by 95% of its market price, whichever is higher. If the net asset value of the Fund's shares is higher than its market price, shares acquired by the Agent in Open Market Purchases will be allocated to the reinvesting shareholders based on the average cost of such Open Market Purchases. Whenever the Fund declares a Distribution and the net asset value of the Fund's shares is higher than its market price, the Agent will apply the amount of such Distribution payable to Plan participants of the Fund in Fund shares (less such Plan participant's pro rata share of brokerage commissions incurred with respect to Open Market Purchases in connection with the reinvestment of such Distribution) to the purchase on the open market of Fund shares for such Plan participant's account. Such purchases will be made on or after the payable date for such Distribution, and in no event more than 30 days after such date except where temporary curtailment or suspension of purchase is necessary to comply with applicable provisions of federal securities laws. The Agent may aggregate a Plan participant's purchases with the purchases of other Plan participants, and the average price (including brokerage commissions) of all shares purchased by the Agent shall be the price per share allocable to each Plan participant. Participants in the Plan may withdraw from the Plan by providing written notice to the Agent at least 30 days prior to the applicable Distribution payment date. When a Participant withdraws from the Plan, or upon suspension or termination of the Plan at the sole discretion of the Fund's Board of Directors, certificates for whole shares credited to his or her account under the Plan will, upon request, be issued. Whether or not a participant requests that certificates for whole shares be issued, a cash payment will be made for any fraction of a share credited to such account. The Agent will maintain all shareholder accounts in the Plan and furnish written confirmations of all transactions in the accounts, including information needed by shareholders for personal and tax records. The Agent will hold shares in the account of the Plan participant in non-certificated form in the name of the participant, and each shareholder's proxy will include those shares purchased pursuant to the Plan. Each participant, nevertheless, has the right - -------------------------------------------------------------------------------- 20 DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (UNAUDITED) (CONCLUDED) to receive certificates for whole shares owned. The Agent will distribute all proxy solicitation materials to participating shareholders. In the case of shareholders, such as banks, brokers or nominees, that hold shares for others who are beneficial owners participating in the Plan, the Agent will administer the Plan on the basis of the number of shares certified from time to time by the record shareholder as representing the total amount of shares registered in the shareholder's name and held for the account of beneficial owners participating in the Plan. Neither the Agent nor the Fund shall have any responsibility or liability beyond the exercise of ordinary care for any action taken or omitted pursuant to the Plan, nor shall they have any duties, responsibilities or liabilities except such as expressly set forth herein. Neither shall they be liable hereunder for any act done in good faith or for any good faith omissions to act, including, without limitation, failure to terminate a participants account prior to receipt of written notice of his or her death or with respect to prices at which shares are purchased or sold for the participants account and the terms on which such purchases and sales are made, subject to applicable provisions of the federal securities laws. The automatic reinvestment of Distributions will not relieve participants of any federal, state or local income tax that may be payable (or required to be withheld) on such Distributions. The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants with regard to purchases in the Plan. All correspondence concerning the Plan should be directed to the Agent at P.O. Box 922, Wall Street Station, New York, New York 10269-0560. Certain transactions can be performed online at www.amstock.com or by calling the toll free number 877-864-4833. - -------------------------------------------------------------------------------- 21 PROXY VOTING AND PORTFOLIO HOLDINGS INFORMATION (UNAUDITED) Information regarding how Cornerstone Total Return Fund, Inc. (the "Fund") voted proxies related to its portfolio securities during the 12-month period ended June 30 of each year as well as the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities are available by calling (513) 326-3597 or on the website of the Securities and Exchange Commission, http://www.sec.gov. This report incorporates a Summary Schedule of Investments for the Fund. A complete Schedule of Investments for the Fund may be obtained free of charge by contacting the Fund at (513) 326-3597. The Fund files a complete schedule of its portfolio holdings for the first and third quarters of its fiscal year with the SEC on Form N-Q. The Fund's Forms N-Q are available on the SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the SEC's Public Reference Room may be obtained by calling (202) 551-8090. PRIVACY POLICY NOTICE (UNAUDITED) The following is a description of Cornerstone Total Return Fund, Inc.'s (the "Fund") policies regarding disclosure of nonpublic personal information that you provide to the Fund or that the Fund collects from other sources. In the event that you hold shares of the Fund through a broker-dealer or other financial intermediary, the privacy policy of the financial intermediary would govern how your nonpublic personal information would be shared with unaffiliated third parties. Categories of Information the Fund Collects. The Fund collects the following nonpublic personal information about you: 1. Information from the Consumer: this category includes information the Fund receives from you on or in applications or other forms, correspondence, or conversations (such as your name, address phone number, social security number, assets, income and date of birth); and 2. Information about the Consumer's transactions with the Fund and its affiliates: this category includes informationabout your transactions with the Fund, its affiliates, or others (such as your account number and balance, payment history, parties to transactions, cost basis information, and other financial information). CATEGORIES OF INFORMATION THE FUND DISCLOSES. The Fund does not disclose any nonpublic personal information about their current or former shareholders to unaffiliated third parties, except as required or permitted by law. The Fund is permitted by law to disclose all of the information it collects, as described above, to its service providers (such as the Fund's custodian, administrator and transfer agent) to process your transactions and otherwise provide services to you. CONFIDENTIALITY AND SECURITY. The Fund restricts access to your nonpublic personal information to those persons who require such information to provide products or services to you. The Fund maintains physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information. - -------------------------------------------------------------------------------- 22 SUMMARY OF GENERAL INFORMATION (UNAUDITED) Cornerstone Total Return Fund, Inc. is a closed-end, diversified investment company whose shares trade on the NYSE Alternext US LLC. Its investment objective is to seek capital appreciation with current income as a secondary objective by investing primarily in U.S. and non-U.S. companies. The Fund is managed by Cornerstone Advisors, Inc. SHAREHOLDER INFORMATION (UNAUDITED) The Fund is listed on the NYSE Alternext US LLC (symbol "CRF"). The share price is published in: The New York Times (daily) under the designation "Cnrstn TR" and The Wall Street Journal (daily) and Barron's (each Monday) under the designation "CornstnTtlRtn." The net asset value per share is available weekly and may be obtained by contacting the Fund at the general inquiry phone number. - -------------------------------------------------------------------------------- Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that Cornerstone Total Return Fund, Inc. may from time to time purchase shares of its capital stock in the open market. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This report, including the financial statements herein, is sent to the shareholders of the Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in the report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 23 This page intentionally left blank. CORNERSTONE TOTAL RETURN FUND, INC. ITEM 2. CODE OF ETHICS. (a) As of the end of the period covered by this report, the Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer, principal accounting officer, and persons performing similar functions. (c) and (d). During the period covered by this report, there was no amendment to, and no waiver granted from, any provision of the code of ethics that applies to the Registrant's principal executive officer, principal accounting officer, and persons performing similar functions. (f)(1) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit (EX-99.CODE ETH) a copy of its code of ethics that applies to its principal executive officer, principal financial officer, and persons performing similar functions. (f)(3) The Registrant undertakes to provide to any person without charge, upon request, a copy of its code of ethics. This can be accomplished by calling the Registrant at (513) 326-3597. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. a)(1) The registrant's board of directors has determined that it does not have an audit committee financial expert serving on its audit committee. (a)(2) Not applicable (a)(3) At this time, the registrant believes that the experience provided by each member of the audit committee together offer the registrant adequate oversight for the registrant's level of financial complexity. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) through (d). The information in the table below is provided for services rendered to the registrant by its independent registered public accounting firm, Tait, Weller & Baker LLP for the Registrant's fiscal years ended December 31, 2009 and December 31, 2008. 2009 2008 ------- ------- Audit Fees $14,100 $14,100 Audit-related Fees -- -- Tax Fees (1) 3,000 3,000 All Other Fees -- -- ------- ------- Total $17,100 $17,100 ======= ======= (1) Tax services in connection with the registrant's excise tax calculations and review of the registrant's applicable tax returns. (e)(1) Audit Committee Pre-Approval Policies and Procedures. Before the auditor is (i) engaged by the Registrant to render audit, audit related or permissible non-audit services to the Registrant or (ii) with respect to non-audit services to be provided by the auditor to the Registrant's investment adviser or any entity in the investment Registrant complex, if the nature of the services provided relate directly to the operations or financial reporting of the Registrant, either: (a) the Audit Committee shall pre-approve such engagement; or (b) such engagement shall be entered into pursuant to pre-approval policies and procedures established by the Audit Committee. Any such policies and procedures must be detailed as to the particular service and not involve any delegation of the Audit Committee's responsibilities to the Registrant's investment adviser. The Audit Committee may delegate to one or more of its members the authority to grant pre-approvals. The pre-approval policies and procedures shall include the requirement that the decisions of any member to whom authority is delegated under this provision shall be presented to the full Audit Committee at its next scheduled meeting. Under certain limited circumstances, pre-approvals are not required if certain de minimis thresholds are not exceeded, as such thresholds are set forth by the Audit Committee and in accordance with applicable SEC rules and regulations. (e)(2) None of the services provided to the Registrant described in paragraphs (b)-(d) of Item 4 were pre-approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) During the fiscal years ended December 31, 2009 and 2008, aggregate non-audit fees of $3,000 and $3,000, respectively, were billed by Tait, Weller & Baker LLP for services rendered to the Registrant. Investment advisor (not including any sub-advisor whose role is primarily portfolio management and is subcontracted with or overseen by another investment advisor) or any entity controlling, controlled by, or under common control with the investment advisor that provides ongoing services to the Registrant for the Registrant's last two fiscal years (December 31, 2008 and December 31, 2009). (h) No disclosures are required by this Item 4(h). ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. (a) The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934, as amended. Glenn Wilcox (Chair), Edwin Meese, Thomas Lenagh, Andrew Strauss and Scott Rogers are the members of the Registrant's audit committee. (b) Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. (a)
CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 DESCRIPTION NO. OF SHARES VALUE - ------------------------------------------------------------------------------------------------ EQUITY SECURITIES - 99.98% CLOSED-END FUNDS - 9.99% CORE - 5.66% Adams Express Company (The) (a) 59,400 599,940 Liberty All-Star Equity Fund 37,000 160,210 Liberty All-Star Growth Fund 86,075 289,212 Royce Micro-Cap Trust, Inc. * 2,400 17,736 Royce Value Trust, Inc. * 8,000 86,400 ------------ 1,153,498 ------------ DEVELOPED MARKET - 0.33% Japan Equity Fund 13,000 68,120 ------------ HIGH CURRENT YIELD (LEVERAGED) - 0.11% First Trust Strategic High Income Fund 8,000 23,440 ------------ INCOME & PREFERRED STOCK - 0.25% LMP Capital & Income Fund, Inc. 5,000 51,750 ------------ OPTION ARBITRAGE/OPTIONS STRATEGIES - 1.37% NFJ Dividend, Interest & Premium Strategy Fund 19,000 280,250 ------------ REAL ESTATE - 0.46% Alpine Global Premier Properties Fund 15,000 93,450 ------------ SECTOR EQUITY - 1.50% H&Q Healthcare Investors * 14,400 170,928 H&Q Life Sciences Investors * 9,000 84,960 John Hancock Bank and Thrift Opportunity Fund 3,500 49,350 ------------ 305,238 ------------ U.S. MORTGAGE - 0.31% BlackRock Income Trust, Inc. 9,896 62,939 ------------ TOTAL CLOSED-END FUNDS 2,038,685 ------------ CONSUMER DISCRETIONARY - 8.53% Apollo Group, Inc. - Class A ^ * 1,000 60,580 Bed Bath & Beyond, Inc. * 2,500 96,575 Carnival Corporation * 2,500 79,225 See accompanying notes to schedule of investments. CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 (CONTINUED) DESCRIPTION NO. OF SHARES VALUE - ------------------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY (CONTINUED) Comcast Corporation - Class A 2,012 33,922 Comcast Corporation - Special Class A 4,250 68,043 DIRECTV Group, Inc. (The) - Class A * 4,000 133,400 Ford Motor Company * 5,000 50,000 Gap, Inc. (The) 2,500 52,375 Home Depot, Inc. (The) 5,000 144,650 Lowe's Companies, Inc. 5,000 116,950 Mattel, Inc. 1,500 29,970 News Corporation - Class B ^ 2,500 39,800 NIKE, Inc. - Class B 2,500 165,175 Omnicom Group, Inc. 1,000 39,150 Pulte Homes, Inc. * 2,500 25,000 Starbucks Corporation * 2,500 57,650 Target Corporation 1,500 72,555 Time Warner Cable, Inc. * 669 27,690 Time Warner, Inc. 2,666 77,687 TJX Companies, Inc. (The) ^ 2,500 91,375 Viacom, Inc. - Class B * 1,000 29,730 Walt Disney Company (The) ^ 5,000 161,250 Yum! Brands, Inc. 2,500 87,425 ------------ 1,740,177 ------------ CONSUMER STAPLES - 10.55% Altria Group, Inc. 5,000 98,150 Archer-Daniels-Midland Company 1,500 46,965 Coca-Cola Company (The) 5,000 285,000 Coca-Cola Enterprises 2,500 53,000 ConAgra Foods, Inc. 2,500 57,625 General Mills, Inc. ^ 1,500 106,215 H.J. Heinz Company 2,700 115,452 Molson Coors Brewing Company - Class B 1,000 45,160 PepsiCo, Inc. 2,000 121,600 Philip Morris International, Inc. 3,500 168,665 Procter & Gamble Company (The) 6,472 392,397 Sara Lee Corporation 4,100 150,552 Wal-Mart Stores, Inc. 9,000 481,050 ------------ 2,152,281 ------------ ENERGY - 10.70% Anadarko Petroleum Corporation 1,000 62,420 Chevron Corporation 3,500 269,465 Consol Energy, Inc. 1,500 74,700 See accompanying notes to schedule of investments. CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 (CONTINUED) DESCRIPTION NO. OF SHARES VALUE - ------------------------------------------------------------------------------------------------ ENERGY (CONTINUED) Devon Energy Corporation ^ 2,500 $ 183,750 El Paso Corporation 5,000 49,150 EOG Resources, Inc. ^ 1,000 97,300 Exxon Mobil Corporation ^ 10,000 681,900 Halliburton Company 2,500 75,225 National Oilwell Varco, Inc. 1,000 44,090 Occidental Petroleum Corporation 4,000 325,400 Schlumberger Ltd. ^ 3,000 195,270 Southwestern Energy Company * 1,500 72,300 Spectra Energy Corporation 2,500 51,275 ------------ 2,182,245 ------------ FINANCIALS - 11.75% AFLAC, Inc. 1,500 69,375 AON Corporation 2,500 95,850 Bank of America Corporation 10,521 158,446 Bank of New York Mellon Corporation (The) 2,800 78,316 BB&T Corporation ^ 2,000 50,740 Capital One Financial Corporation 2,500 95,850 Chubb Corporation (The) 1,000 49,180 Citigroup, Inc. * 24,000 79,440 Franklin Resources, Inc. 1,000 105,350 Goldman Sachs Group, Inc. (The) 1,500 253,260 Hudson City Bancorp, Inc. 2,500 34,325 JPMorgan Chase & Company 12,200 508,374 MetLife, Inc. 1,500 53,025 Morgan Stanley 2,000 59,200 PNC Financial Services Group, Inc. ^ 1,000 52,790 Prudential Financial, Inc. 1,500 74,640 Travelers Companies, Inc. (The) 3,092 154,167 U.S. Bancorp 3,500 78,785 Unum Group 2,500 48,800 Wells Fargo & Company 11,000 296,890 ------------ 2,396,803 ------------ HEALTH CARE - 11.39% Abbott Laboratories 3,000 161,970 Amgen, Inc. * 3,000 169,710 Baxter International, Inc. 2,500 146,700 Boston Scientific Corporation * 3,000 27,000 Bristol-Myers Squibb Company 4,000 101,000 Celgene Corporation * 1,000 55,680 Cigna Corporation 3,000 105,810 See accompanying notes to schedule of investments. CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 (CONTINUED) DESCRIPTION NO. OF SHARES VALUE - ------------------------------------------------------------------------------------------------ HEALTH CARE (CONTINUED) Eli Lilly & Company ^ 2,500 89,275 Express Scripts, Inc. * 1,200 103,740 Gilead Sciences, Inc. * 2,000 86,560 Johnson & Johnson 5,500 354,255 McKesson Corporation 2,500 156,250 Medco Health Solutions, Inc. * 1,000 63,910 Medtronic, Inc. 4,500 197,910 Merck & Company, Inc. 2,500 91,350 Pfizer, Inc. 14,462 263,064 St. Jude Medical, Inc. * 2,500 91,950 WellPoint, Inc. * 1,000 58,290 ------------ 2,324,424 ------------ INDUSTRIALS - 8.62% 3M Company 1,500 124,005 Deere & Company 1,500 81,135 Emerson Electric Company 2,500 106,500 FedEx Corporation 1,500 125,175 General Dynamics Corporation 1,000 68,170 General Electric Company 24,000 363,120 Honeywell International, Inc. 3,000 117,600 Illinois Tool Works, Inc. 3,500 167,965 Lockheed Martin Corporation 2,500 188,375 Precision Castparts Corporation 1,000 110,350 Republic Services, Inc. 1,125 31,849 Union Pacific Corporation 2,500 159,750 United Parcel Service, Inc. - Class B 2,000 114,740 ------------ 1,758,734 ------------ INFORMATION TECHNOLOGY - 18.66% Agilent Technologies, Inc. * 2,500 77,675 AOL, Inc. * 242 5,642 Apple, Inc. * 2,000 421,719 Automatic Data Processing, Inc. 2,500 107,050 CA, Inc. 2,500 56,150 Cisco Systems, Inc. * 13,000 311,220 Corning, Inc. 3,000 57,930 eBay, Inc. * 2,500 58,850 Google, Inc. - Class A * 1,000 619,980 Hewlett-Packard Company 5,000 257,550 Intel Corporation 16,000 326,400 International Business Machines Corporation 2,200 287,980 Intuit, Inc. * 2,500 76,775 See accompanying notes to schedule of investments. CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 (CONTINUED) DESCRIPTION NO. OF SHARES VALUE - ------------------------------------------------------------------------------------------------ INFORMATION TECHNOLOGY (CONTINUED) Microsoft Corporation 14,000 $ 426,860 Oracle Corporation 12,600 309,204 Paychex, Inc. ^ 2,500 76,600 QUALCOMM, Inc. 3,800 175,788 Texas Instruments, Inc. 2,000 52,120 Western Union Company (The) 2,000 37,700 Xilinx, Inc. 2,500 62,650 ------------ 3,805,843 ------------ MATERIALS - 3.41% Air Products & Chemicals, Inc. 1,500 121,590 E.I. Du Pont de Nemours & Company 4,800 161,616 Freeport-McMoRan Copper & Gold, Inc. 2,500 200,725 Monsanto Company 2,000 163,500 Newmont Mining Corporation 1,000 47,310 ------------ 694,741 ------------ REAL ESTATE INVESTMENT TRUST - 0.01% Simon Property Group, Inc. ^ 16 1,277 ------------ TELECOMMUNICATION SERVICES - 2.84% AT&T, Inc. 11,089 310,825 Qwest Communications International, Inc. 5,000 21,050 Verizon Communications, Inc. 7,500 248,475 ------------ 580,350 ------------ UTILITIES - 3.53% Dominion Resources, Inc. 2,000 77,840 Duke Energy Corporation 6,600 113,586 Exelon Corporation 2,500 122,175 FirstEnergy Corporation 2,500 116,125 FPL Group, Inc. ^ 1,000 52,820 NiSource, Inc. 2,500 38,450 Southern Company (The) ^ 2,500 83,300 Xcel Energy, Inc. 5,500 116,765 ------------ 721,061 ------------ TOTAL EQUITY SECURITIES (cost - $21,147,954) 20,396,621 ------------ SHORT-TERM INVESTMENTS - 12.73% MONEY MARKET SECURITY - 2.19% JPMorgan U.S. Government Money Market Fund 446,588 446,588 ------------ See accompanying notes to schedule of investments. CORNERSTONE TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS - DECEMBER 31, 2009 (CONTINUED) PRINCIPAL AMOUNT (000'S) ----------------- REPURCHASE AGREEMENTS - 10.54% J.P. Morgan Securities, Inc. +++ (Agreement dated 12/31/2009 to be repurchased at $ 2,142,166) $ 2,142 $ 2,142,128 J.P. Morgan Securities, Inc. + (Agreement dated 12/31/2009 to be repurchased at $ 6,881) 7 6,881 ------------ TOTAL SHORT-TERM INVESTMENTS (cost - $2,595,597) 2,595,597 ------------ TOTAL INVESTMENTS - 112.71% (cost - $23,743,551) 22,992,218 LIABILITIES IN EXCESS OF OTHER ASSETS - (12.71)% (2,592,279) ------------ NET ASSETS - 100.00% $ 20,399,939 ============ - ------ (a) Affiliated investment. The Fund holds 0.46% (based on net assets) of Adams Express Company. A trustee of the Fund also serves as a director to such company. During the year ended December 31, 2009 the Fund sold 13,700 shares of this security. There were no purchases during this period. * Non-income producing security. ^ Security or a portion thereof is out on loan. + The maturity date for all repurchase agreements held was January 4, 2010, with interest rates ranging from 0.01% to 0.16% and collateralized by $7,428,035 in U.S. Treasury Notes maturing August 15, 2018. Stated interest rate, before rebate earned by borrower of securities on loan. ++ Represents investment purchased with collateral received for securities on loan.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Cornerstone Total Return Fund, Inc. New York, New York We have audited the accompanying statement of assets and liabilities of Cornerstone Total Return Fund, Inc. (the "Fund"), including the summary schedule of investments as of December 31, 2009, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Cornerstone Total Return Fund, Inc. as of December 31, 2009, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of investments in securities as of December 31, 2009 appearing in Item 6 of this Form N-CSR is presented for the purpose of additional analysis and is not a required part of the basic financial statements. This additional information is the responsibility of the Fund's management. Such information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. TAIT, WELLER & BAKER LLP Philadelphia, Pennsylvania February 24, 2010 ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Registrant and Cornerstone Advisors, Inc. share the same Proxy Voting Policies and Procedures. The respective Proxy Voting Policies and Procedures of the Registrant and Adviser are attached as EXHIBIT99.VOTEREG ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (a)(1) All information contained in this item and its subparts is as of the date of this filing, unless otherwise noted. Ralph W. Bradshaw and William A. Clark are employees of Cornerstone Advisors, Inc. (the Investment Manager) and portfolio managers of the Fund. Mr. Bradshaw has acted as the portfolio manager since 2001. Mr. Clark has acted as the portfolio manager since 2003. Ralph W. Bradshaw's occupation for the last five years is President of Cornerstone Advisors, Inc. and a Financial Consultant. William A. Clark's occupation for the last five years is Director and Stockholder of Cornerstone Advisors, Inc. and Vice President and former Director/Trustee of Cornerstone Total Return Fund, Inc. and Cornerstone Progressive Return Fund. (a)(2)(i) Ralph W. Bradshaw and William A. Clark (a)(2)(ii)(A) Registered Investment Companies - Ralph W. Bradshaw and William A. Clark each manage two other registered closed-end funds (Cornerstone Total Return Fund, Inc. and Cornerstone Progressive Return Fund). As of December 31, 2009, the total assets of Cornerstone Strategic Value Fund, Inc. was $66.0 million. As of December 31, 2009, the total assets of Cornerstone Progressive Return Fund, Inc. was $62.4 million. (a)(2)(ii)(B) Not applicable (a)(2)(ii)(C) Not applicable (a)(2)(iii) None. Ralph W. Bradshaw and William A. Clark manage no accounts where the Advisory Fee is based on the performance of the account. (a)(2)(iv) None. (a)(3) As of the most recent fiscal year end December 31, 2009, the compensation paid to both Ralph W. Bradshaw and William A. Clark was fixed. (a)(4) The dollar range of equity securities owned in the registrant beneficially by each portfolio manager is as follows: for Ralph W. Bradshaw it is in the range of $10,001-$50,000 and for William A. Clark it is in the range of $10,001-$50,000. (b) None. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. None ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors that have been implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing date of this report, the registrant's principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are reasonably designed and are operating effectively to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this report is being prepared, and that the information required in filings on Form N-CSR is recorded, processed, summarized, and reported on a timely basis. (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (a)(1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: EX-99.CODEETH (a)(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2(a)): EX-II.CERT (a)(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act (17 CFR 270.23c-1) sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons: Not applicable (b) Certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)): EX-99.906CERT (99) Proxy Voting Policies of the Registrant and Adviser attached as EX-99.VOTEREG. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CORNERSTONE TOTAL RETURN FUND, INC. ----------------------------------------------------------------- By (Signature and Title)* /S/ RALPH W. BRADSHAW ----------------------------------------------------- Ralph W. Bradshaw, Chairman and President Principal Executive Officer) Date MARCH 5, 2010 ------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ RALPH W. BRADSHAW ----------------------------------------------------- Ralph W. Bradshaw, Chairman and President (Principal Executive Officer) Date MARCH 5, 2010 --------------------------------------- By (Signature and Title)* /S/ FRANK J. MARESCA ----------------------------------------------------- Frank J. Maresca, Treasurer (Principal Financial Officer) Date MARCH 5, 2010 --------------------------------------- * Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 exh99cert.txt EX-99.CERT CERTIFICATIONS I, Ralph W. Bradshaw, certify that: 1. I have reviewed this report on Form N-CSR of Cornerstone Total Return Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2010 /S/ RALPH W. BRADSHAW ------------------------- Ralph W. Bradshaw, Chairman and President (Principal Executive Officer) CERTIFICATIONS I, Frank J. Maresca, certify that: 1. I have reviewed this report on Form N-CSR of Cornerstone Total Return Fund, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2010 /S/ FRANK J. MARESCA -------------------- Frank J. Maresca, Treasurer (Principal Financial Officer) EX-99.906CERT 3 exh906.txt EX-99.906CERT CERTIFICATIONS Ralph W. Bradshaw, Chief Executive Officer, and Frank J. Maresca, Chief Financial Officer, of Cornerstone Total Return Fund, Inc. (the "Registrant"), each certify to the best of his knowledge that: 1. The Registrant's periodic report on Form N-CSR for the period ended December 31, 2009 (the "Form N-CSR") fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER Cornerstone Total Return Fund, Inc. Cornerstone Total Return Fund, Inc. /S/ RALPH W. BRADSHAW /S/ FRANK J. MARESCA - -------------------------------------- -------------------------------------- Ralph W. Bradshaw, President Frank J. Maresca, Treasurer Date: March 5, 2010 Date: March 5, 2010 A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO CORNERSTONE STRATEGIC VALUE FUND, INC. AND WILL BE RETAINED BY CORNERSTONE STRATEGIC VALUE FUND, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. 1350 and is not being filed as part of the Form N-CSR filed with the Commission. EX-99.CODE ETH 4 exh-eth.txt CORNERSTONE PROGRESSIVE RETURN FUND CORNERSTONE STRATEGIC VALUE FUND, INC. CORNERSTONE TOTAL RETURN FUND, INC. CODE OF ETHICS FOR SENIOR OFFICERS PREAMBLE Section 406 of the Sarbanes-Oxley Act of 2002 directs that rules be adopted disclosing whether a company has a code of ethics for senior financial officers. The U.S. Securities and Exchange Commission (the "SEC") has adopted rules requiring annual disclosure of an investment company's code of ethics applicable to the company's principal executive as well as principal financial officers, if such a code has been adopted. In response, Cornerstone Progressive Return Fund, Cornerstone Strategic Value Fund, Inc. and Cornerstone Total Return Fund, Inc. (the "Funds") have each adopted this Code of Ethics. STATEMENT OF POLICY It is the obligation of the senior officers of each Fund to provide full, fair, timely and comprehensible disclosure--financial and otherwise--to the Fund's shareholders, regulatory authorities and the general public. In fulfilling that obligation, senior officers must act ethically, honestly and diligently. This Code is intended to enunciate guidelines to be followed by persons who serve each Fund in senior officer positions. No Code of Ethics can address every situation that a senior officer might face; however, as a guiding principle, senior officers should strive to implement the spirit as well as the letter of applicable laws, rules and regulations, and to provide the type of clear and complete disclosure and information each Fund's shareholders have a right to expect. The purpose of this Code of Ethics (the "Code") is to promote high standards of ethical conduct by Covered Persons (as defined below) in their capacities as officers of the Funds, to instruct them as to what is considered to be inappropriate and unacceptable conduct or activities for officers and to prohibit such conduct or activities. This Code supplements other policies that the Funds and its adviser have adopted or may adopt in the future with which Fund officers are also required to comply (e.g., code of ethics relating to personal trading and conduct). COVERED PERSONS This Code applies to those persons appointed by the each Fund's Board of Directors (or Trustees, as the case may be) as Chief Executive Officer, President, Chief Financial Officer and Chief Accounting Officer, or persons performing similar functions. PROMOTION OF HONEST AND ETHICAL CONDUCT In serving as an officer of a Fund, each Covered Person must maintain high standards of honesty and ethical conduct and must encourage his colleagues who provide services to a Fund, whether directly or indirectly, to do the same. -1- Each Covered Person understands that as an officer of a Fund, he has a duty to act in the best interests of the Fund and its shareholders. The interests of the Covered Person's personal interests should not be allowed to compromise the Covered Person from fulfilling his duties as an officer of the Fund. If a Covered Person believes that his personal interests are likely to materially compromise his objectivity or his ability to perform the duties of his role as an officer of a Fund, he should consult with the Fund's chief legal officer or outside counsel. Under appropriate circumstances, a Covered Person should also consider whether to present the matter to the Directors/Trustees of a Fund or a committee thereof. No Covered Person shall suggest that any person providing, or soliciting to be retained to provide, services to a Fund give a gift or an economic benefit of any kind to him in connection with the person's retention or the provision of services. PROMOTION OF FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE No Covered Person shall create or further the creation of false or misleading information in any SEC filing or report to Fund shareholders. No Covered Person shall conceal or fail to disclose information within the Covered Person's possession legally required to be disclosed or necessary to make the disclosure made not misleading. If a Covered Person shall become aware that information filed with the SEC or made available to the public contains any false or misleading information or omits to disclose necessary information, he shall promptly report it to Fund counsel, who shall advise such Covered Person whether corrective action is necessary or appropriate. Each Covered Person, consistent with his responsibilities, shall exercise appropriate supervision over, and shall assist, Fund service providers in developing financial information and other disclosure that complies with relevant law and presents information in a clear, comprehensible and complete manner. Each Covered Person shall use his best efforts within his area of expertise to assure that Fund reports reveal, rather than conceal, each Fund's financial condition. Each Covered Person shall seek to obtain additional resources if he believes that available resources are inadequate to enable the Fund to provide full, fair and accurate financial information and other disclosure to regulators and Fund shareholders. Each Covered Person shall inquire of other Fund officers and service providers, as appropriate, to assure that information provided is accurate and complete and presented in an understandable format using comprehensible language. Each Covered Person shall diligently perform his services to the Fund, so that information can be gathered and assessed early enough to facilitate timely filings and issuance of reports and required certifications. -2- PROMOTION OF COMPLIANCE WITH APPLICABLE GOVERNMENT LAWS, RULES AND REGULATIONS Each Covered Person shall become and remain knowledgeable concerning the laws and regulations relating to each Fund and their operations and shall act with competence and due care in serving as an officer of a Fund. Each Covered Person with specific responsibility for financial statement disclosure will become and remain knowledgeable concerning relevant auditing standards, generally accepted accounting principles, FASB pronouncements and other accounting and tax literature and developments. Each Covered Person shall devote sufficient time to fulfilling his responsibilities to the Funds. Each Covered Person shall cooperate with each Fund's independent auditors, regulatory agencies and internal auditors in their review or inspection of the Fund and its operations. No Covered Person shall knowingly violate any law or regulation relating to a Fund or their operations or seek to illegally circumvent any such law or regulation. No Covered Person shall engage in any conduct involving dishonesty, fraud, deceit or misrepresentation involving a Fund or its operations. PROMOTING PROMPT INTERNAL REPORTING OF VIOLATIONS Each Covered Person shall promptly report his own violations of this Code and violations by other Covered Persons of which he is aware to the Chairman of the Fund's Audit Committee. Any requests for a waiver from or an amendment to this Code shall be made to the Chairman of the Fund's Audit Committee. All waivers and amendments shall be disclosed as required by law. SANCTIONS Failure to comply with this Code will subject the violator to appropriate sanctions, which will vary based on the nature and severity of the violation. Such sanctions may include censure, suspension or termination of position as an officer of the Fund. Sanctions shall be imposed by the Fund's Audit Committee, subject to review by the entire Board of Directors/Trustees of the Fund. Each Covered Person shall be required to certify annually whether he has complied with this Code. NO RIGHTS CREATED This Code of Ethics is a statement of certain fundamental principles, policies and procedures that govern the Fund's senior officers in the conduct of the Fund's business. It is not intended to and does not create any rights in any employee, investor, supplier, competitor, shareholder or any other person or entity. -3- RECORDKEEPING Each Fund will maintain and preserve for a period of not less than six (6) years from the date such action is taken, the first two (2) years in an easily accessible place, a copy of the information or materials supplied to the Board (i) that provided the basis for any amendment or waiver to this Code and (ii) relating to any violation of the Code and sanctions imposed for such violation, together with a written record of the approval or action taken by the Board. AMENDMENTS The Directors/Trustees will make and approve such changes to this Code of Ethics as they deem necessary or appropriate to effectuate the purposes of this Code. -4- CODE OF ETHICS FOR SENIOR OFFICERS I HEREBY CERTIFY THAT: (1) I have read and I understand the Code of Ethics for Senior Officers adopted by the Cornerstone Progressive Return Fund, Cornerstone Strategic Value Fund, Inc., and the Cornerstone Total Return Fund, Inc. (the "Code of Ethics"); (2) I recognize that I am subject to the Code of Ethics; (3) I have complied with the requirements of the Code of Ethics during the calendar year ending December 31, 2009; and (4) I have reported all violations of the Code of Ethics required to be reported pursuant to the requirements of the Code during the calendar year ending December 31, 2009. Set forth below exceptions to items (3) and (4), if any: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Name: _________________ Date: _________________ EX-99 5 exh99votereg.txt VOTING REG 2010 Cornerstone Proxy Voting Policy Summary Where determined appropriate by the Adviser in order to comply with Federal securities regulations and the rules promulgated thereunder, the Fund reserves the right to shadow vote certain proxies received by it with respect to the annual or special meetings of shareholders for companies in which the Fund is invested. The following is a condensed version of the proxy voting recommendations contained in the RiskMetrics' (RMG) U.S. Proxy Voting Manual. TABLE OF CONTENTS ......................................................... 2 1. ROUTINE/MISCELLANEOUS .................................................. 7 Adjourn Meeting ........................................................... 7 Amend Quorum Requirements ................................................. 7 Amend Minor Bylaws ........................................................ 7 Change Company Name ....................................................... 7 Change Date, Time, or Location of Annual Meeting .......................... 7 Other Business ............................................................ 7 Audit-Related ............................................................. 7 Auditor Indemnification and Limitation of Liability ....................... 7 Auditor Ratification ...................................................... 8 Shareholder Proposals Limiting Non-Audit Services ......................... 8 Shareholder Proposals on Audit Firm Rotation .............................. 8 2. BOARD OF DIRECTORS: .................................................... 10 Voting on Director Nominees in Uncontested Elections ...................... 10 Board Accountability ...................................................... 10 Problematic Takeover Defenses ............................................. 10 Problematic Audit-Related Practices ....................................... 11 Problematic Compensation Practices ........................................ 11 Other Problematic Governance Practices .................................... 12 Board Responsiveness ...................................................... 12 Director Independence ..................................................... 13 Director Competence ....................................................... 13 2010 RMG Categorization of Directors ...................................... 14 Board-Related Management Proposals ........................................ 16 Age Limits ................................................................ 16 Board Size ................................................................ 16 Classification/Declassification of the Board .............................. 16 Cumulative Voting ......................................................... 17 Director and Officer Indemnification and Liability Protection ............. 17 Establish/Amend Nominee Qualifications .................................... 17 Filling Vacancies/Removal of Directors .................................... 17 Majority Vote Threshold for Director Elections ............................ 17 Term Limits ............................................................... 18 -2- Board-Related Shareholder Proposals/Initiatives ........................... 18 Age Limits ................................................................ 18 Annual Election (Declassification) of the Board ........................... 18 Cumulative Voting ......................................................... 18 Establish/Amend Nominee Qualifications .................................... 18 Establishment of Board Committees Shareholder Proposals ................... 19 Establishment of Board Policy on Shareholder Engagement ................... 19 Filling Vacancies/Removal of Directors .................................... 19 Independent Chair (Separate Chair/CEO) .................................... 20 Majority of Independent Directors/Establishment of Independent Committees . 21 Majority Vote Shareholder Proposals ....................................... 21 Open Access (Proxy Access) ................................................ 21 Proxy Contests- Voting for Director Nominees in Contested Elections ....... 21 Require More Nominees than Open Seats ..................................... 21 Term Limits ............................................................... 22 Vote No Campaigns ......................................................... 22 3. SHAREHOLDER RIGHTS & DEFENSES .......................................... 23 Advance Notice Requirements for Shareholder Proposals/Nominations ......... 23 Amend Bylaws without Shareholder Consent .................................. 23 Confidential Voting ....................................................... 23 Control Share Acquisition Provisions ...................................... 23 Control Share Cash-Out Provisions ......................................... 24 Disgorgement Provisions ................................................... 24 Fair Price Provisions ..................................................... 24 Freeze-Out Provisions ..................................................... 24 Greenmail ................................................................. 24 Net Operating Loss (NOL) Protective Amendments ............................ 25 Poison Pills- Shareholder Proposals to put Pill to a Vote and/or Adopt a Pill Policy .............................................. 25 Poison Pills- Management Proposals to Ratify Poison Pill .................. 25 Poison Pills- Management Proposals to ratify a Pill to preserve Net Operating Losses (NOLs) .................................... 26 Reimbursing Proxy Solicitation Expenses ................................... 26 Reincorporation Proposals ................................................. 26 Shareholder Ability to Act by Written Consent ............................. 27 Shareholder Ability to Call Special Meetings .............................. 27 Stakeholder Provisions .................................................... 27 State Antitakeover Statutes ............................................... 27 Supermajority Vote Requirements ........................................... 28 -3- 4. CAPITAL/RESTRUCTURING .................................................. 29 Capital ................................................................... 29 Adjustments to Par Value of Common Stock .................................. 29 Common Stock Authorization ................................................ 29 Issue Stock for Use with Rights Plan ...................................... 29 Preemptive Rights .................................................................... 29 Preferred Stock ........................................................... 29 Recapitalization .......................................................... 30 Reverse Stock Splits ...................................................... 30 Share Repurchase Programs ................................................. 30 Stock Distributions: Splits and Dividends ................................. 30 Tracking Stock ............................................................ 31 Restructuring ............................................................. 31 Appraisal Rights .......................................................... 31 Asset Purchases ........................................................... 31 Asset Sales ............................................................... 31 Bundled Proposals ......................................................... 32 Conversion of Securities .................................................. 32 Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans ................... 32 Formation of Holding Company .............................................. 32 Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) 33 Joint Ventures ............................................................ 33 Liquidations .............................................................. 34 Mergers and Acquisitions .................................................. 34 Plans of Reorganization (Bankruptcy) ...................................... 34 Private Placements/Warrants/Convertible Debentures ........................ 35 Special Purpose Acquisition Corporations (SPACs) .......................... 36 Spinoffs .................................................................. 37 Value Maximization Shareholder Proposals .................................. 37 -4- 5. COMPENSATION ........................................................... 38 Executive Pay Evaluation .................................................. 38 Advisory Votes on Executive Compensation- Management Proposals (Management Say-on-Pay) ....................................... 38 Pay for Performance ....................................................... 39 Problematic Pay Practices ................................................. 40 Non-Performance based Compensation Elements ............................... 40 Incentives that may Motivate Excessive Risk-Taking ........................ 41 Options Backdating ........................................................ 41 Board Communications and Responsiveness ................................... 41 Equity-Based and Other Incentive Plans .................................... 42 Cost of Equity Plans ...................................................... 42 Repricing Provisions ...................................................... 43 Three-Year Burn Rate/Burn Rate Commitment ................................. 43 Burn Rate Table for 2010 .................................................. 44 Pay-for-Performance- Impact on Equity Plans ............................... 45 Liberal Definition of Change-in-Control ................................... 45 Problematic Pay Practices ................................................. 45 Specific Treatment of Certain Award Types in Equity Plan Evaluations: ..... 45 Dividend Equivalent Rights ................................................ 45 Liberal Share Recycling Provisions ........................................ 45 Operating Partnership (OP) units in Equity Plan analysis of Real Estate Investment Trusts (REITs) ................................... 45 Option Overhang Cost ...................................................... 46 Other Compensation Plans .................................................. 46 401(k) Employee Benefit Plans ............................................. 46 Employee Stock Ownership Plans (ESOPs) .................................... 46 Employee Stock Purchase Plans-- Qualified Plans ........................... 47 Employee Stock Purchase Plans-- Non-Qualified Plans ....................... 47 Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals) ................................... 47 -5- Option Exchange Programs/Repricing Options ................................ 48 Stock Plans in Lieu of Cash ............................................... 48 Transfer Stock Option (TSO) Programs ...................................... 49 Director Compensation ..................................................... 49 Equity Plans for Non-Employee Directors ................................... 49 Director Retirement Plans ................................................. 50 Shareholder Proposals on Compensation ..................................... 50 Advisory Vote on Executive Compensation (Say-on-Pay) ...................... 50 Compensation Consultants- Disclosure of Board or Company?s Utilization .... 50 Disclosure/Setting Levels or Types of Compensation for Executives and Directors ................................................ 50 Golden Coffins/Executive Death Benefits ................................... 51 Pay for Superior Performance .............................................. 51 Performance-Based Awards .................................................. 51 Pension Plan Income Accounting ............................................ 52 Pre-Arranged Trading Plans (10b5-1 Plans) ................................. 52 Recoup Bonuses ............................................................ 52 Severance Agreements for Executives/Golden Parachutes ..................... 53 Share Buyback Holding Periods ............................................. 53 Stock Ownership or Holding Period Guidelines .............................. 53 Supplemental Executive Retirement Plans (SERPs) ........................... 54 Termination of Employment Prior to Severance Payment and Eliminating Accelerated Vesting of Unvested Equity ...................... 54 Tax Gross-Up Proposals .................................................... 54 6. SOCIAL/ENVIRONMENTAL ISSUES ............................................ 55 Overall Approach .......................................................... 55 Animal Welfare ............................................................ 55 Animal Testing ............................................................ 55 Animal Welfare Policies ................................................... 55 Controlled Atmosphere Killing (CAK) ....................................... 56 Consumer Issues ........................................................... 56 Genetically Modified Ingredients .......................................... 56 Consumer Lending .......................................................... 56 Pharmaceutical Pricing, Access to Medicines, and Product Reimportation .... 57 Product Safety and Toxic/Hazardous Materials .............................. 57 Tobacco ................................................................... 58 Diversity ................................................................. 58 Board Diversity ........................................................... 58 Equality of Opportunity ................................................... 59 Gender Identity, Sexual Orientation, and Domestic Partner Benefits ........ 59 Climate Change and the Environment ........................................ 59 Climate Change ............................................................ 59 Concentrated Animal Feeding Operations (CAFOs) ............................ 59 Energy Efficiency ......................................................... 60 Facility and Operational Safety/Security .................................. 60 Greenhouse Gas (GHG) Emissions ............................................ 60 Operations in Protected Areas ............................................. 61 Recycling ................................................................. 61 Renewable Energy .......................................................... 61 General Corporate Issues .................................................. 61 Charitable Contributions .................................................. 61 Environmental, Social, and Governance (ESG) Compensation-Related Proposals .......................................... 61 -6- Health Pandemics .......................................................... 62 Lobbying Expenditures/Initiatives ......................................... 62 Political Contributions and Trade Associations Spending ................... 62 International Issues, Labor Issues, and Human Rights ...................... 63 Community Social and Environmental Impact Assessments ..................... 63 Foreign Military Sales/Offsets ............................................ 63 Internet Privacy and Censorship ........................................... 64 Labor and Human Rights Standards .......................................... 64 MacBride Principles ....................................................... 64 Nuclear and Depleted Uranium Weapons ...................................... 65 Operations in High Risk Markets ........................................... 65 Outsourcing/Offshoring .................................................... 65 Sustainability ............................................................ 65 Sustainability Reporting .................................................. 65 7. MUTUAL FUND PROXIES .................................................... 67 Election of Directors ..................................................... 67 Converting Closed-end Fund to Open-end Fund ............................... 67 Proxy Contests ............................................................ 67 Investment Advisory Agreements ............................................ 67 Approving New Classes or Series of Shares ................................. 68 Preferred Stock Proposals ................................................. 68 1940 Act Policies ......................................................... 68 Changing a Fundamental Restriction to a Nonfundamental Restriction ........ 68 Change Fundamental Investment Objective to Nonfundamental ................. 68 Name Change Proposals ..................................................... 68 Change in Fund's Subclassification ........................................ 69 Disposition of Assets/Termination/Liquidation ............................. 69 Changes to the Charter Document ........................................... 69 Changing the Domicile of a Fund ........................................... 69 Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder Approval ............................................ 70 Distribution Agreements ................................................... 70 Master-Feeder Structure ................................................... 70 Mergers ................................................................... 70 Shareholder Proposals for Mutual Funds .................................... 70 Establish Director Ownership Requirement .................................. 70 Reimburse Shareholder for Expenses Incurred ............................... 71 Terminate the Investment Advisor .......................................... 71 -7- 1. Routine/Miscellaneous Adjourn Meeting Generally vote AGAINST proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal. Vote FOR proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote AGAINST proposals if the wording is too vague or if the proposal includes "other business." Amend Quorum Requirements Vote AGAINST proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to support the proposal. Amend Minor Bylaws Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or corrections). Change Company Name Vote FOR proposals to change the corporate name. Change Date, Time, or Location of Annual Meeting Vote FOR management proposals to change the date, time, and/or location of the annual meeting unless the proposed change is unreasonable. Vote AGAINST shareholder proposals to change the date, time, and/or location of the annual meeting unless the current scheduling or location is unreasonable. Other Business Vote AGAINST proposals to approve other business when it appears as voting item. Audit-Related Auditor Indemnification and Limitation of Liability Consider the issue of auditor indemnification and limitation of liability on a CASE-BY-CASE basis. Factors to be assessed include, but are not limited to: The terms of the auditor agreement- the degree to which these agreements impact shareholders' rights; -8- Motivation and rationale for establishing the agreements; Quality of disclosure; and Historical practices in the audit area. WTHHOLD or vote AGAINST members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. Auditor Ratification Vote FOR proposals to ratify auditors, unless any of the following apply: An auditor has a financial interest in or association with the company, and is therefore not independent; There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company?s financial position; Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or Fees for non-audit services ("Other" fees) are excessive. Non-audit fees are excessive if: Non-audit ("other") fees >audit fees + audit-related fees + tax compliance/preparation fees Tax compliance and preparation include the preparation of original and amended tax returns, refund claims and tax payment planning. All other services in the tax category, such as tax advice, planning or consulting should be added to "Other" fees. If the breakout of tax fees cannot be determined, add all tax fees to "Other" fees. In circumstances where "Other" fees include fees related to significant one-time capital structure events: initial public offerings, bankruptcy emergence, and spin-offs; and the company makes public disclosure of the amount and nature of those fees which are an exception to the standard "non-audit fee" category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive. -9- Shareholder Proposals Limiting Non-Audit Services Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services. Shareholder Proposals on Audit Firm Rotation Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation, taking into account: The tenure of the audit firm; The length of rotation specified in the proposal; Any significant audit-related issues at the company; The number of Audit Committee meetings held each year; The number of financial experts serving on the committee; and Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price. -10- 2. Board of Directors: Voting on Director Nominees in Uncontested Elections Votes on director nominees should be determined on a CASE-BY-CASE basis. Four fundamental principles apply when determining votes on director nominees: Board Accountability: Practices that promote accountability include: transparency into a company?s governance practices; annual board elections; and providing shareholders the ability to remove problematic directors and to vote on takeover defenses or other charter/bylaw amendments. These practices help reduce the opportunity for management entrenchment. Board Responsiveness: Directors should be responsive to shareholders, particularly in regard to shareholder proposals that receive a majority vote and to tender offers where a majority of shares are tendered. Furthermore, shareholders should expect directors to devote sufficient time and resources to oversight of the company. Director Independence: Without independence from management, the board may be unwilling or unable to effectively set company strategy and scrutinize performance or executive compensation. Director Competence: Companies should seek directors who can add value to the board through specific skills or expertise and who can devote sufficient time and commitment to serve effectively. While directors should not be constrained by arbitrary limits such as age or term limits, directors who are unable to attend board and committee meetings and/or who are overextended (i.e. serving on too many boards) raise concern on the director?s ability to effectively serve in shareholders? best interests. Board Accountability Problematic Takeover Defenses VOTE WITHHOLD/AGAINST1 the entire board of directors (except new nominees2, who should be considered on a CASE-by-CASE basis), if: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election -- any or all appropriate nominees (except new) may be held accountable; The company?s poison pill has a "dead-hand" or "modified dead-hand" feature. Vote withhold/against every year until this feature is removed; 1 In general, companies with a plurality vote standard use "Withhold" as the valid contrary vote option in director elections; companies with a majority vote standard use "Against". However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company. 2 A "new nominee" is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If RMG cannot determine whether the nominee joined the board before or after the problematic action transpired, the nominee will be considered a "new nominee" if he or she joined the board within the 12 months prior to the upcoming shareholder meeting. -11- The board adopts a poison pill with a term of more than 12 months ("long-term pill"), or renews any existing pill, including any "short-term" pill (12 months or less), without shareholder approval. A commitment or policy that puts a newly-adopted pill to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such companies with annually-elected boards at least once every three years, and vote AGAINST or WITHHOLD votes from all nominees if the company still maintains a non-shareholder-approved poison pill. This policy applies to all companies adopting or renewing pills after the announcement of this policy (Nov 19, 2009); The board makes a material adverse change to an existing poison pill without shareholder approval. Vote CASE-By-CASE on all nominees if the board adopts a poison pill with a term of 12 months or less ("short-term pill") without shareholder approval, taking into account the following factors: The date of the pill,,s adoption relative to the date of the next meeting of shareholders- i.e. whether the company had time to put the pill on ballot for shareholder ratification given the circumstances; The issuer,,s rationale; The issuer's governance structure and practices; and The issuer's track record of accountability to shareholders. Problematic Audit-Related Practices Generally, vote AGAINST or WITHHOLD from the members of the Audit Committee if: The non-audit fees paid to the auditor are excessive (see discussion under "Auditor Ratification"); The company receives an adverse opinion on the company?s financial statements from its auditor; or There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. Vote CASE-by-CASE on members of the Audit Committee and/or the full board if: Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence and duration, as well as the company?s efforts at remediation or corrective actions, in determining whether WITHHOLD/AGAINST votes are warranted. Problematic Compensation Practices VOTE WITHHOLD/AGAINST the members of the Compensation Committee and potentially the full board if: There is a negative correlation between chief executive pay and company performance (see Pay for Performance Policy); The company reprices underwater options for stock, cash, or other consideration without prior shareholder approval, even if allowed in the firm's equity plan; The company fails to submit one-time transfers of stock options to a shareholder vote; -12- The company fails to fulfill the terms of a burn rate commitment made to shareholders; The company has problematic pay practices. Problematic pay practices may warrant withholding votes from the CEO and potentially the entire board as well. Other Problematic Governance Practices VOTE WITHHOLD/AGAINST the entire board of directors (except new nominees, who should be considered on a CASE-by-CASE basis), if: The company?s proxy indicates that not all directors attended 75 percent of the aggregate board and committee meetings, but fails to provide the required disclosure of the names of the director(s) involved. If this information cannot be obtained, withhold from all incumbent directors; The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company?s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company?s five-year total shareholder return and five-year operational metrics. Problematic provisions include but are not limited to: - - A classified board structure; - - A supermajority vote requirement; - - Majority vote standard for director elections with no carve out for contested elections; - - The inability for shareholders to call special meetings; - - The inability for shareholders to act by written consent; - - A dual-class structure; and/or - - A non-shareholder approved poison pill. Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors individually, committee members, or the entire board, due to: Material failures of governance, stewardship, or fiduciary responsibilities at the company; Failure to replace management as appropriate; or Egregious actions related to the director(s)? service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company. Board Responsiveness Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who should be considered on a CASE-by-CASE basis), if: The board failed to act on a shareholder proposal that received approval by a majority of the shares outstanding the previous year (a management proposal with other than a FOR recommendation by management will not be considered as sufficient action taken); -13- The board failed to act on a shareholder proposal that received approval of the majority of shares cast for the previous two consecutive years (a management proposal with other than a FOR recommendation by management will not be considered as sufficient action taken); The board failed to act on takeover offers where the majority of the shareholders tendered their shares; or At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote. Director Independence Vote WITHHOLD/AGAINST Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when: The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating; The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or The full board is less than majority independent. Director Competence Vote AGAINST or WITHHOLD from individual directors who: Attend less than 75 percent of the board and committee meetings without a valid excuse, such as illness, service to the nation, work on behalf of the company, or funeral obligations. If the company provides meaningful public or private disclosure explaining the director?s absences, evaluate the information on a CASE-BY-CASE basis taking into account the following factors: - - Degree to which absences were due to an unavoidable conflict; - - Pattern of absenteeism; and - - Other extraordinary circumstances underlying the director?s absence; Sit on more than six public company boards; Are CEOs of public companies who sit on the boards of more than two public companies besides their own-- withhold only at their outside boards. -14- 2010 RMG Categorization of Directors 1. Inside Director (I) 1.1. Employee of the company or one of its affiliatesi. 1.2. Among the five most highly paid individuals (excluding interim CEO). 1.3. Listed as an officer as defined under Section 16 of the Securities and Exchange Act of 1934 ("Section 16 officer")ii. 1.4. Current interim CEO. 1.5. Beneficial owner of more than 50 percent of the company's voting power (this may be aggregated if voting power is distributed among more than one member of a defined group). 2. Affiliated Outside Director (AO) Board Attestation 2.1. Board attestation that an outside director is not independent. Former CEO 2.2. Former CEO of the companyiii,iv. 2.3. Former CEO of an acquired company within the past five yearsiv. 2.4. Former interim CEO if the service was longer than 18 months. If the service was between twelve and eighteen months an assessment of the interim CEO?s employment agreement will be madev. Non-CEO Executives 2.5. Former Section 16 officerii of the company, an affiliatei or an acquired firm within the past five years. 2.6. Section 16 officerii of a former parent or predecessor firm at the time the company was sold or split off from the parent/predecessor within the past five years. 2.7. Section 16 officerii, former Section 16 officer, or general or limited partner of a joint venture or partnership with the company. Family Members 2.8. Immediate family membervi of a current or former Section 16 officerii of the company or its affiliatesi within the last five years. 2.9. Immediate family membervi of a current employee of company or its affiliatesi where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). Transactional, Professional, Financial, and Charitable Relationships 2.10. Currently provides (or an immediate family membervi provides) professional servicesvii to the company, to an affiliatei of the company or an individual officer of the company or one of its affiliates in excess of $10,000 per year. 2.11. Is (or an immediate family membervi is) a partner in, or a controlling shareholder or an employee of, an organization which provides professional servicesvii to the company, to an affiliatei of the company, or an individual officer of the company or one of its affiliates in excess of $10,000 per year. 2.12. Has (or an immediate family membervi has) any material transactional relationshipviii with the company or its affiliatesi (excluding investments in the company through a private placement). 2.13. Is (or an immediate family membervi is) a partner in, or a controlling shareholder or an executive officer of, an organization which has any material transactional relationshipviii with the company or its affiliatesi (excluding investments in the company through a private placement). 2.14. Is (or an immediate family membervi is) a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowmentsviii from the company or its affiliatesi. Other Relationships 2.15. Party to a voting agreementix to vote in line with management on proposals being brought to shareholder vote. 2.16. Has (or an immediate family membervi has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committeex. 2.17. Founderxi of the company but not currently an employee. 2.18. Any materialxii relationship with the company. 3. Independent Outside Director (IO) 3.1. No materialxii connection to the company other than a board seat. -15- Footnotes: i "Affiliate" includes a subsidiary, sibling company, or parent company. RMG uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation. ii "Section 16 officer" (officers subject to Section 16 of the Securities and Exchange Act of 1934) includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division, or policy function). A non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will be classified as an Affiliated Outsider. If the company provides explicit disclosure that the director is not receiving additional compensation in excess of $10,000 per year for serving in that capacity, then the director will be classified as an Independent Outsider. iii Includes any former CEO of the company prior to the company?s initial public offering (IPO). iv When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, RMG will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director?s independence; any operating ties to the firm; and the existence of any other conflicting relationships or related party transactions. v RMG will look at the terms of the interim CEO?s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. RMG will also consider if a formal search process was underway for a full-time CEO at the time. vi "Immediate family member" follows the SEC?s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company. vii Professional services can be characterized as advisory in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include, but are not limited to the following: investment banking/financial advisory services; commercial banking (beyond deposit services); investment services; insurance services; accounting/audit services; consulting services; marketing services; legal services; property management services; realtor services; lobbying services; executive search services; and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services; IT tech support services; educational services; and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. "Of Counsel" relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory. viii A material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity exceeding the greater of $200,000 or 5 percent of the recipient?s gross revenues, in the case of a company which follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient?s gross revenues, in the case of a company which follows -16- NYSE/Amex listing standards. In the case of a company which follows neither of the preceding standards, RMG will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction). ix Dissident directors who are parties to a voting agreement pursuant to a settlement arrangement, will generally be classified as independent unless determined otherwise taking into account the following factors: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions. x Interlocks include: executive officers serving as directors on each other?s compensation or similar committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other?s boards and at least one serves on the other?s compensation or similar committees (or, in the absence of such a committee, on the board). xi The operating involvement of the founder with the company will be considered. Little to no operating involvement may cause RMG to deem the founder as an independent outsider. xii For purposes of RMG?s director independence classification, "material" will be defined as a standard of relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one?s objectivity in the boardroom in a manner that would have a meaningful impact on an individual's ability to satisfy requisite fiduciary standards on behalf of shareholders. Board-Related Management Proposals Age Limits Vote AGAINST management proposal to limit the tenure of outside directors through mandatory retirement ages. Board Size Vote FOR proposals seeking to fix the board size or designate a range for the board size. Vote AGAINST proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval. Classification/Declassification of the Board Vote AGAINST proposals to classify (stagger) the board. Vote FOR proposals to repeal classified boards and to elect all directors annually. -17- Cumulative Voting Generally vote AGAINST proposals to eliminate cumulative voting. Director and Officer Indemnification and Liability Protection Vote CASE-BY-CASE on proposals on director and officer indemnification and liability protection using Delaware law as the standard. Vote AGAINST proposals to eliminate entirely directors? and officers? liability for monetary damages for violating the duty of care. Vote AGAINST indemnification proposals that would expand coverage beyond just legal expenses to liability for acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness. Vote AGAINST proposals that would expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for at the discretion of the company's board (i.e., "permissive indemnification") but that previously the company was not required to indemnify. Vote FOR only those proposals providing such expanded coverage in cases when a director?s or officer?s legal defense was unsuccessful if both of the following apply: If the director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company; and If only the director?s legal expenses would be covered. Establish/Amend Nominee Qualifications Vote CASE-BY-CASE on proposals that establish or amend director qualifications. Votes should be based on how reasonable the criteria are and to what degree they may preclude dissident nominees from joining the board. Filling Vacancies/Removal of Directors Vote AGAINST proposals that provide that directors may be removed only for cause. Vote FOR proposals to restore shareholders? ability to remove directors with or without cause. Vote AGAINST proposals that provide that only continuing directors may elect replacements to fill board vacancies. Vote FOR proposals that permit shareholders to elect directors to fill board vacancies. Majority Vote Threshold for Director Elections Generally vote FOR management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote AGAINST if no carve-out for plurality in contested elections is included. -18- Term Limits Vote AGAINST management proposals to limit the tenure of outside directors through term limits. However, scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board. Board-Related Shareholder Proposals/Initiatives Age Limits Vote AGAINST shareholder proposals to limit the tenure of outside directors through mandatory retirement ages. Annual Election (Declassification) of the Board Vote FOR shareholder proposals to repeal classified (staggered) boards and to elect all directors annually. Cumulative Voting Generally vote FOR shareholder proposals to restore or provide for cumulative voting unless: The company has proxy access or a similar structure3 to allow shareholders to nominate directors to the company?s ballot; and The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. Vote FOR proposals for cumulative voting at controlled companies (insider voting power > 50%). Establish/Amend Nominee Qualifications Vote CASE-BY-CASE on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and to what degree they may preclude dissident nominees from joining the board. Vote CASE-BY-CASE on shareholder resolutions seeking a director nominee candidate who possesses a particular subject matter expertise, considering: The company?s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers; 3 Similar structure" would be a structure that allows shareholders to nominate candidates who the company will include on the management ballot IN ADDITION TO management?s nominees, and their bios are included in management?s proxy. -19- The company?s existing board and management oversight mechanisms regarding the issue for which board oversight is sought; The company disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and The scope and structure of the proposal. Establishment of Board Committees Shareholder Proposals Generally vote AGAINST shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company?s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered: Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought; Level of disclosure regarding the issue for which board oversight is sought; Company performance related to the issue for which board oversight is sought; Board committee structure compared to that of other companies in its industry sector; and/or The scope and structure of the proposal. Establishment of Board Policy on Shareholder Engagement Generally vote FOR shareholders proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate: Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board; Effectively disclosed information with respect to this structure to its shareholders; Company has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee; and The company has an independent chairman or a lead director, according to RMG?s definition. This individual must be made available for periodic consultation and direct communication with major shareholders. Filling Vacancies/Removal of Directors Vote AGAINST proposals that provide that directors may be removed only for cause. Vote FOR proposals to restore shareholders? ability to remove directors with or without cause. Vote AGAINST proposals that provide that only continuing directors may elect replacements to fill board vacancies. -20- Vote FOR proposals that permit shareholders to elect directors to fill board vacancies. Independent Chair (Separate Chair/CEO) Generally vote FOR shareholder proposals requiring that the chairman?s position be filled by an independent director, unless the company satisfies all of the following criteria: The company maintains the following counterbalancing governance structure: Designated lead director, elected by and from the independent board members with clearly delineated and comprehensive duties. (The role may alternatively reside with a presiding director, vice chairman, or rotating lead director; however the director must serve a minimum of one year in order to qualify as a lead director.) The duties should include, but are not limited to, the following: - - presides at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors; - - serves as liaison between the chairman and the independent directors; - - approves information sent to the board; - - approves meeting agendas for the board; - - approves meeting schedules to assure that there is sufficient time for discussion of all agenda items; - - has the authority to call meetings of the independent directors; - - if requested by major shareholders, ensures that he is available for consultation and direct communication; Two-thirds independent board; All independent key committees; Established governance guidelines; A company in the Russell 3000 universe must not have exhibited sustained poor total shareholder return (TSR) performance, defined as one- and three-year TSR in the bottom half of the company?s four-digit GICS industry group (using Russell 3000 companies only), unless there has been a change in the Chairman/CEO position within that time. For companies not in the Russell 3000 universe, the company must not have underperformed both its peers and index on the basis of both one-year and three-year total shareholder returns, unless there has been a change in the Chairman/CEO position within that time; The company does not have any problematic governance or management issues, examples of which include, but are not limited to: - - Egregious compensation practices; - - Multiple related-party transactions or other issues putting director independence at risk; - - Corporate and/or management scandals; - - Excessive problematic corporate governance provisions; or - - Flagrant actions by management or the board with potential or realized negative impacts on shareholders. -21- Majority of Independent Directors/Establishment of Independent Committees Vote FOR shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by RMG?s definition of independent outsider. (See Categorization of Directors.) Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors if they currently do not meet that standard. Majority Vote Shareholder Proposals Generally vote FOR precatory and binding resolutions requesting that the board change the company?s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats. Companies are strongly encouraged to also adopt a post-election policy (also know as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director. Open Access (Proxy Access) Vote CASE-BY-CASE on shareholder proposals asking for open or proxy access, taking into account: The ownership threshold proposed in the resolution; The proponent?s rationale for the proposal at the targeted company in terms of board and director conduct. Proxy Contests- Voting for Director Nominees in Contested Elections Vote CASE-BY-CASE on the election of directors in contested elections, considering the following factors: Long-term financial performance of the target company relative to its industry; Management?s track record; Background to the proxy contest; Qualifications of director nominees (both slates); Strategic plan of dissident slate and quality of critique against management; Likelihood that the proposed goals and objectives can be achieved (both slates); Stock ownership positions. Require More Nominees than Open Seats Vote AGAINST shareholder proposals that would require a company to nominate more candidates than the number of open board seats. -22- Term Limits Vote AGAINST shareholder proposals to limit the tenure of outside directors through term limits. However, scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board. Vote No Campaigns In cases where companies are targeted in connection with public "vote no" campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly-available information. -23- 3. Shareholder Rights & Defenses Advance Notice Requirements for Shareholder Proposals/Nominations Vote CASE-BY-CASE basis on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory and shareholder review. To be reasonable, the company?s deadline for shareholder notice of a proposal/ nominations must not be more than 60 days prior to the meeting, with a submittal window of at least 30 days prior to the deadline. The submittal window is the period under which a shareholder must file his proposal/nominations prior to the deadline. In general, support additional efforts by companies to ensure full disclosure in regard to a proponent?s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals. Amend Bylaws without Shareholder Consent Vote AGAINST proposals giving the board exclusive authority to amend the bylaws. Vote FOR proposals giving the board the ability to amend the bylaws in addition to shareholders. Confidential Voting Vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators, and use independent inspectors of election, as long as the proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived. Vote FOR management proposals to adopt confidential voting. Control Share Acquisition Provisions Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares. Vote FOR proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders. Vote AGAINST proposals to amend the charter to include control share acquisition provisions. -24- Vote FOR proposals to restore voting rights to the control shares. Control Share Cash-Out Provisions Control share cash-out statutes give dissident shareholders the right to "cash-out" of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price. Vote FOR proposals to opt out of control share cash-out statutes. Disgorgement Provisions Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company's stock to disgorge, or pay back, to the company any profits realized from the sale of that company's stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits provisions. Vote FOR proposals to opt out of state disgorgement provisions. Fair Price Provisions Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price. Generally, vote AGAINST fair price provisions with shareholder vote requirements greater than a majority of disinterested shares. Freeze-Out Provisions Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company. Greenmail Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders. -25- Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company?s ability to make greenmail payments. Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other charter or bylaw amendments. Net Operating Loss (NOL) Protective Amendments For management proposals to adopt a protective amendment for the stated purpose of protecting a company?s net operating losses ("NOLs"), the following factors should be considered on a CASE-BY-CASE basis: The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing five-percent holder); The value of the NOLs; Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL); The company?s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and Any other factors that may be applicable. Poison Pills- Shareholder Proposals to put Pill to a Vote and/or Adopt a Pill Policy Vote FOR shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it UNLESS the company has: (1) A shareholder approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either: Shareholders have approved the adoption of the plan; or The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the "fiduciary out" provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote FOR the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation. Poison Pills- Management Proposals to Ratify Poison Pill Vote CASE-by-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes: No lower than a 20% trigger, flip-in or flip-over; -26- A term of no more than three years; No dead-hand, slow-hand, no-hand or similar feature that limits the ability of a future board to redeem the pill; Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company?s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns. Poison Pills- Management Proposals to ratify a Pill to preserve Net Operating Losses (NOLs) Vote CASE-BY-CASE on management proposals for poison pill ratification. For management proposals to adopt a poison pill for the stated purpose of preserving a company?s net operating losses ("NOLs"), the following factors are considered on a CASE-BY-CASE basis: The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5%); The value of the NOLs; The term; Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs); The company?s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and Any other factors that may be applicable. Reimbursing Proxy Solicitation Expenses Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When voting in conjunction with support of a dissident slate, vote FOR the reimbursement of all appropriate proxy solicitation expenses associated with the election. Generally vote FOR shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply: The election of fewer than 50% of the directors to be elected is contested in the election; One or more of the dissident?s candidates is elected; Shareholders are not permitted to cumulate their votes for directors; and The election occurred, and the expenses were incurred, after the adoption of this bylaw. Reincorporation Proposals Management or shareholder proposals to change a company's state of incorporation should be evaluated on a CASE-BY-CASE basis, giving consideration to both financial and corporate governance concerns including the following: Reasons for reincorporation; -27- Comparison of company's governance practices and provisions prior to and following the reincorporation; and Comparison of corporation laws of original state and destination state Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes. Shareholder Ability to Act by Written Consent Vote AGAINST management and shareholder proposals to restrict or prohibit shareholders? ability to act by written consent. Generally vote FOR management and shareholder proposals that provide shareholders with the ability to act by written consent taking into account the following factors: Shareholders? current right to act by written consent; Consent threshold; The inclusion of exclusionary or prohibitive language; Investor ownership structure; and Shareholder support of and management?s response to previous shareholder proposals. Shareholder Ability to Call Special Meetings Vote AGAINST management or shareholder proposals to restrict or prohibit shareholders? ability to call special meetings. Generally vote FOR management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors: Shareholders? current right to call special meetings; Minimum ownership threshold necessary to call special meetings (10% preferred); The inclusion of exclusionary or prohibitive language; Investor ownership structure; and Shareholder support of and management?s response to previous shareholder proposals. Stakeholder Provisions Vote AGAINST proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination. State Antitakeover Statutes Vote CASE-BY-CASE on proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freeze-out provisions, fair price provisions, stakeholder laws, poison -28- pill endorsements, severance pay and labor contract provisions, anti-greenmail provisions, and disgorgement provisions). Supermajority Vote Requirements Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote CASE-BY-CASE, taking into account: Ownership structure; Quorum requirements; and Supermajority vote requirements. -29- 4. CAPITAL/RESTRUCTURING Capital Adjustments to Par Value of Common Stock Vote FOR management proposals to reduce the par value of common stock. Common Stock Authorization Vote CASE-BY-CASE on proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors which include, at a minimum, the following: Past Board Performance: o The company?s use of authorized shares during the last three years; o One- and three-year total shareholder return; and o The board?s governance structure and practices; The Current Request: o Disclosure in the proxy statement of the specific reasons for the proposed increase; o The dilutive impact of the request as determined through an allowable cap generated by RiskMetrics' quantitative model, which examines the company?s need for shares and its three-year total shareholder return; and o Risks to shareholders of not approving the request. Vote AGAINST proposals at companies with more than one class of common stock to increase the number of authorized shares of the class that has superior voting rights. Issue Stock for Use with Rights Plan Vote AGAINST proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder approved shareholder rights plan (poison pill). Preemptive Rights Vote CASE-BY-CASE on shareholder proposals that seek preemptive rights, taking into consideration: the size of a company, the characteristics of its shareholder base, and the liquidity of the stock. Preferred Stock Vote CASE-BY-CASE on proposals to increase the number of shares of preferred stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following: Past Board Performance: o The company?s use of authorized preferred shares during the last three years; o One- and three-year total shareholder return; and -30- o The board?s governance structure and practices; The Current Request: o Disclosure in the proxy statement of specific reasons for the proposed increase; o In cases where the company has existing authorized preferred stock, the dilutive impact of the request as determined through an allowable cap generated by RiskMetrics' quantitative model, which examines the company?s need for shares and three-year total shareholder return; and o Whether the shares requested are blank check preferred shares, and whether they are declawed. Vote AGAINST proposals at companies with more than one class or series of preferred stock to increase the number of authorized shares of the class or series that has superior voting rights. Recapitalization Vote CASE-BY-CASE on recapitalizations (reclassifications of securities), taking into account the following: More simplified capital structure; Enhanced liquidity; Fairness of conversion terms; Impact on voting power and dividends; Reasons for the reclassification; Conflicts of interest; and Other alternatives considered. Reverse Stock Splits Vote FOR management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced. Vote FOR management proposals to implement a reverse stock split to avoid delisting. Vote CASE-BY-CASE on proposals to implement a reverse stock split that do not proportionately reduce the number of shares authorized for issue based on the allowable increased calculated using the Capital Structure model. Share Repurchase Programs Vote FOR management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms. Stock Distributions: Splits and Dividends Vote FOR management proposals to increase the common share authorization for a stock split or share dividend, provided that the increase in authorized shares would not result in an excessive number of shares available for issuance as determined using a model developed by RMG. -31- Tracking Stock Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic value of the transaction against such factors as: Adverse governance changes; Excessive increases in authorized capital stock; Unfair method of distribution; Diminution of voting rights; Adverse conversion features; Negative impact on stock option plans; and Alternatives such as spin-off. Restructuring Appraisal Rights Vote FOR proposals to restore, or provide shareholders with rights of appraisal. Asset Purchases Vote CASE-BY-CASE on asset purchase proposals, considering the following factors: Purchase price; Fairness opinion; Financial and strategic benefits; How the deal was negotiated; Conflicts of interest; Other alternatives for the business; Non-completion risk. Asset Sales Vote CASE-BY-CASE on asset sales, considering the following factors: Impact on the balance sheet/working capital; Potential elimination of diseconomies; Anticipated financial and operating benefits; Anticipated use of funds; Value received for the asset; Fairness opinion; -32- How the deal was negotiated; Conflicts of interest. Bundled Proposals Vote CASE-BY-CASE on bundled or "conditional" proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders? best interests, vote AGAINST the proposals. If the combined effect is positive, support such proposals. Conversion of Securities Vote CASE-BY-CASE on proposals regarding conversion of securities. When evaluating these proposals the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest. Vote FOR the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved. Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, taking into consideration the following: Dilution to existing shareholders' position; Terms of the offer; Financial issues; Management's efforts to pursue other alternatives; Control issues; Conflicts of interest. Vote FOR the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved. Formation of Holding Company Vote CASE-BY-CASE on proposals regarding the formation of a holding company, taking into consideration the following: The reasons for the change; Any financial or tax benefits; Regulatory benefits; -33- Increases in capital structure; Changes to the articles of incorporation or bylaws of the company. Absent compelling financial reasons to recommend the transaction, vote AGAINST the formation of a holding company if the transaction would include either of the following: Increases in common or preferred stock in excess of the allowable maximum (see discussion under "Capital Structure"); Adverse changes in shareholder rights. Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) Vote CASE-BY-CASE on going private transactions, taking into account the following: Offer price/premium; Fairness opinion; How the deal was negotiated; Conflicts of interest; Other alternatives/offers considered; and Non-completion risk. Vote CASE-BY-CASE on "going dark" transactions, determining whether the transaction enhances shareholder value by taking into consideration: Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); Balanced interests of continuing vs. cashed-out shareholders, taking into account the following: - - Are all shareholders able to participate in the transaction? - - Will there be a liquid market for remaining shareholders following the transaction? - - Does the company have strong corporate governance? - - Will insiders reap the gains of control following the proposed transaction? - - Does the state of incorporation have laws requiring continued reporting that may benefit shareholders? Joint Ventures Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the following: Percentage of assets/business contributed; Percentage ownership; Financial and strategic benefits; Governance structure; Conflicts of interest; Other alternatives; -34- Noncompletion risk. Liquidations Vote CASE-BY-CASE on liquidations, taking into account the following: Management?s efforts to pursue other alternatives; Appraisal value of assets; and The compensation plan for executives managing the liquidation. Vote FOR the liquidation if the company will file for bankruptcy if the proposal is not approved. Mergers and Acquisitions Vote CASE -BY- CASE on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including: Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale. Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. Negotiations and process - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "RMG Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists. Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. Plans of Reorganization (Bankruptcy) Vote CASE-BY-CASE basis on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to: -35- Estimated value and financial prospects of the reorganized company; Percentage ownership of current shareholders in the reorganized company; Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an Official Equity Committee); The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s); Existence of a superior alternative to the plan of reorganization; and Governance of the reorganized company. Private Placements/Warrants/Convertible Debentures Vote CASE-BY-CASE on proposals regarding private placements taking into consideration: 1. Dilution to existing shareholders' position. - - The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. 2. Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; conversion features; termination penalties; exit strategy. - - The terms of the offer should be weighed against the alternatives of the company and in light of company?s financial issues. - - When evaluating the magnitude of a private placement discount or premium, RiskMetrics will consider whether it is affected by liquidity, due diligence, control and monitoring issues, capital scarcity, information asymmetry and anticipation of future performance. 3. Financial issues include but are not limited to examining the following: - - Company's financial situation; - - Degree of need for capital; - - Use of proceeds; - - Effect of the financing on the company's cost of capital; - - Current and proposed cash burn rate; and - - Going concern viability and the state of the capital and credit markets. 4. Management's efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives. A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger or sale of part or all of the company. 5. Control issues: - - Change in management; - - Change in control, - - Guaranteed board and committee seats; -36- - - Standstill provisions; - - Voting agreements; - - Veto power over certain corporate actions. Minority versus majority ownership and corresponding minority discount or majority control premium 6. Conflicts of interest - - Conflicts of interest should be viewed from the perspective of the company and the investor. - - Were the terms of the transaction negotiated at arm?s-length? Are managerial incentives aligned with shareholder interests? 7. Market reaction - - The market?s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one day impact on the unaffected stock price. Vote FOR the private placement if it is expected that the company will file for bankruptcy if the transaction is not approved. Special Purpose Acquisition Corporations (SPACs) Vote on a CASE-BY-CASE basis on SPAC mergers and acquisitions taking into account the following: Valuation - Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target, if it is a private entity. Market reaction - How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. Deal timing - A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. Negotiations and process - - What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors. Conflicts of interest - How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80% rule (the charter requires that the fair market value of the target is at least equal to 80% of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24 month timeframe. Voting agreements - Are the sponsors entering into enter into any voting agreements/ tender offers with shareholders who are likely to vote AGAINST the proposed merger or exercise conversion rights? Governance - What is the impact of having the SPAC CEO or founder on key committees following the proposed merger? -37- Spinoffs Vote CASE-BY-CASE on spin-offs, considering: Tax and regulatory advantages; Planned use of the sale proceeds; Valuation of spinoff; Fairness opinion; Benefits to the parent company; Conflicts of interest; Managerial incentives; Corporate governance changes; Changes in the capital structure. Value Maximization Shareholder Proposals Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value by hiring a financial advisor to explore strategic alternatives, selling the company or liquidating the company and distributing the proceeds to shareholders. These proposals should be evaluated based on the following factors: Prolonged poor performance with no turnaround in sight; Signs of entrenched board and management; Strategic plan in place for improving value; Likelihood of receiving reasonable value in a sale or dissolution; and Whether company is actively exploring its strategic options, including retaining a financial advisor. -38- 5. COMPENSATION Executive Pay Evaluation Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs: 1. Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; 2. Avoid arrangements that risk "pay for failure": This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation; 3. Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); 4. Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; 5. Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers? pay and performance. At the market level, it may incorporate a variety of generally accepted best practices. Advisory Votes on Executive Compensation- Management Proposals (Management Say-on-Pay) Evaluate executive pay and practices, as well as certain aspects of outside director compensation, on a CASE-BY-CASE basis. Vote AGAINST management say on pay (MSOP) proposals, AGAINST/WITHHOLD on compensation committee members (or, in rare cases where the full board is deemed responsible, all directors including the CEO), and/or AGAINST an equity-based incentive plan proposal if: There is a misalignment between CEO pay and company performance (pay for performance); The company maintains problematic pay practices; The board exhibits poor communication and responsiveness to shareholders. Voting Alternatives In general, the management say on pay (MSOP) ballot item is the primary focus of voting on executive pay practices-- dissatisfaction with compensation practices can be expressed by voting against MSOP rather than withholding or voting against the compensation committee. However, if there is no MSOP on the ballot, then the negative vote will apply to members of the compensation committee. In addition, in egregious cases, or if the board fails to respond to concerns raised by a prior MSOP proposal, then vote withhold or against compensation committee members (or, if the full board is deemed accountable, all directors). If the negative factors involve equity-based compensation, then vote AGAINST an equity-based plan proposal presented for shareholder approval. -39- Additional CASE-BY-CASE considerations for the management say on pay (MSOP) proposals: Evaluation of performance metrics in short-term and long-term plans, as discussed and explained in the Compensation Discussion & Analysis (CD&A). Consider the measures, goals, and target awards reported by the company for executives? short- and long-term incentive awards: disclosure, explanation of their alignment with the company?s business strategy, and whether goals appear to be sufficiently challenging in relation to resulting payouts; Evaluation of peer group benchmarking used to set target pay or award opportunities. Consider the rationale stated by the company for constituents in its pay benchmarking peer group, as well as the benchmark targets it uses to set or validate executives? pay (e.g., median, 75th percentile, etc.,) to ascertain whether the benchmarking process is sound or may result in pay "ratcheting" due to inappropriate peer group constituents (e.g., much larger companies) or targeting (e.g., above median); and Balance of performance-based versus non-performance-based pay. Consider the ratio of performance-based (not including plain vanilla stock options) vs. non-performance-based pay elements reported for the CEO?s latest reported fiscal year compensation, especially in conjunction with concerns about other factors such as performance metrics/goals, benchmarking practices, and pay-for-performance disconnects. Primary Evaluation Factors for Executive Pay Pay for Performance Evaluate the alignment of the CEO?s pay with performance over time, focusing particularly on companies that have underperformed their peers over a sustained period. From a shareholders? perspective, performance is predominantly gauged by the company?s stock performance over time. Even when financial or operational measures are utilized in incentive awards, the achievement related to these measures should ultimately translate into superior shareholder returns in the long-term. Focus on companies with sustained underperformance relative to peers, considering the following key factors: Whether a company?s one-year and three-year total shareholder returns ("TSR") are in the bottom half of its industry group (i.e., four-digit GICS - Global Industry Classification Group); and Whether the total compensation of a CEO who has served at least two consecutive fiscal years is aligned with the company?s total shareholder return over time, including both recent and long-term periods. If a company falls in the bottom half of its four-digit GICS, further analysis of the CD&A is required to better understand the various pay elements and whether they create or reinforce shareholder alignment. Also assess the CEO?s pay relative to the company?s TSR over a time horizon of at least five years. The most recent year-over-year increase or decrease in pay remains a key consideration, but there will be additional emphasis on the long term trend of CEO total compensation relative to shareholder return. Also consider the mix of performance-based compensation relative to total compensation. In general, standard stock options or time-vested restricted stock are not considered to be performance-based. If a company provides performance-based incentives to its executives, the company is highly encouraged to provide the complete disclosure of the performance measure and goals (hurdle rate) so that shareholders can assess the rigor of the performance program. The use of non-GAAP financial metrics also makes it very challenging for shareholders to ascertain the rigor of the program as shareholders often cannot tell the type of adjustments being made and if the -40- adjustments were made consistently. Complete and transparent disclosure helps shareholders to better understand the company?s pay for performance linkage. Problematic Pay Practices The focus is on executive compensation practices that contravene the global pay principles, including: Problematic practices related to non-performance-based compensation elements; Incentives that may motivate excessive risk-taking; and Options Backdating. Non-Performance based Compensation Elements Companies adopt a variety of pay arrangements that may be acceptable in their particular industries, or unique for a particular situation, and all companies are reviewed on a case-by-case basis. However, there are certain adverse practices that are particularly contrary to a performance-based pay philosophy, including guaranteed pay and excessive or inappropriate non-performance-based pay elements. While not exhaustive, this is the list of practices that carry greatest weight in this consideration and may result in negative vote recommendations on a stand-alone basis. For more details, please refer to RMG?s Compensation FAQ document: http://www.riskmetrics.com/policy/2010_compensation_FAQ: Multi-year guarantees for salary increases, non-performance based bonuses, and equity compensation; Including additional years of unworked service that result in significant additional benefits, without sufficient justification, or including long-term equity awards in the pension calculation; Perquisites for former and/or retired executives, and extraordinary relocation benefits (including home buyouts) for current executives; Change-in-control payments exceeding 3 times base salary and target bonus; change-in-control payments without job loss or substantial diminution of duties ("Single Triggers"); new or materially amended agreements that provide for "modified single triggers" (under which an executive may voluntarily leave for any reason and still receive the change-in-control severance package); new or materially amended agreements that provide for an excise tax gross-up (including "modified gross-ups"); Tax Reimbursements related to executive perquisites or other payments such as personal use of corporate aircraft, executive life insurance, bonus, etc; (see also excise tax gross-ups above) Dividends or dividend equivalents paid on unvested performance shares or units; Executives using company stock in hedging activities, such as "cashless" collars, forward sales, equity swaps or other similar arrangements; or Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval (including cash buyouts and voluntary surrender/subsequent regrant of underwater options). -41- Incentives that may Motivate Excessive Risk-Taking Assess company policies and disclosure related to compensation that could incentivize excessive risk-taking, for example: Guaranteed bonuses; A single performance metric used for short- and long-term plans; Lucrative severance packages; High pay opportunities relative to industry peers; Disproportionate supplemental pensions; or Mega annual equity grants that provide unlimited upside with no downside risk. Factors that potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines. Options Backdating Vote CASE-by-CASE on options backdating issues. Generally, when a company has recently practiced options backdating, WITHHOLD from or vote AGAINST the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. When deciding on votes on compensation committee members who oversaw questionable options grant practices or current compensation committee members who fail to respond to the issue proactively, consider several factors, including, but not limited to, the following: Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; Duration of options backdating; Size of restatement due to options backdating; Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future. A CASE-by-CASE analysis approach allows distinctions to be made between companies that had "sloppy" plan administration versus those that acted deliberately and/or committed fraud, as well as those companies that subsequently took corrective action. Cases where companies have committed fraud are considered most egregious. Board Communications and Responsiveness Consider the following factors on a CASE-BY-CASE basis when evaluating ballot items related to executive pay: Poor disclosure practices, including: - - Unclear explanation of how the CEO is involved in the pay setting process; -42- - - Retrospective performance targets and methodology not discussed; - - Methodology for benchmarking practices and/or peer group not disclosed and explained. Board?s responsiveness to investor input and engagement on compensation issues, for example: - - Failure to respond to majority-supported shareholder proposals on executive pay topics; or - - Failure to respond to concerns raised in connection with significant opposition to MSOP proposals. Equity-Based and Other Incentive Plans Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the following factors apply: The total cost of the company?s equity plans is unreasonable; The plan expressly permits the repricing of stock options/stock appreciate rights (SARs) without prior shareholder approval; The CEO is a participant in the proposed equity-based compensation plan and there is a disconnect between CEO pay and the company?s performance where over 50 percent of the year-over-year increase is attributed to equity awards (see Pay-for-Performance); The company?s three year burn rate exceeds the greater of 2% or the mean plus one standard deviation of its industry group; Liberal Change of Control Definition: The plan provides for the acceleration of vesting of equity awards even though an actual change in control may not occur (e.g., upon shareholder approval of a transaction or the announcement of a tender offer); or The plan is a vehicle for problematic pay practices. Each of these factors is described below: Cost of Equity Plans Generally, vote AGAINST equity plans if the cost is unreasonable. For non-employee director plans, vote FOR the plan if certain factors are met (see Director Compensation section). The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders? equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised. All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full value awards), the assumption is made that all awards to be granted will be the most expensive types. See discussion of specific types of awards. The Shareholder Value Transfer is reasonable if it falls below the company-specific allowable cap. The allowable cap is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers? historic SVT. Regression analyses are run on each industry group to identify the -43- variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size and cash compensation into the industry cap equations to arrive at the company?s allowable cap. Repricing Provisions Vote AGAINST plans that expressly permit the repricing or exchange of underwater stock options without prior shareholder approval, even if the cost of the plan is reasonable. Also, vote AGAINST OR WITHHOLD from members of the Compensation Committee who approved and/or implemented a repricing or an option exchange program, by buying out underwater options for stock, cash or other consideration or canceling underwater options and regranting options with a lower exercise price, without prior shareholder approval, even if such repricings are allowed in their equity plan. Vote AGAINST plans if the company has a history of repricing options without shareholder approval, and the applicable listing standards would not preclude them from doing so. Three-Year Burn Rate/Burn Rate Commitment Generally vote AGAINST equity plans for companies whose average three-year burn rates exceeds the greater of: (1) the mean plus one standard deviation of the company's GICS group segmented by Russell 3000 index and non-Russell 3000 index (per the following Burn Rate Table); or (2) two percent of weighted common shares outstanding. The three-year burn rate policy does not apply to non-employee director plans unless outside directors receive a significant portion of shares each year. -44- The annual burn rate is calculated as follows: Annual Burn rate = (# of options granted + # of full value shares awarded * Multiplier) / Weighted Average common shares outstanding) However, vote FOR equity plans if the company fails this burn rate test but the company commits in a public filing to a three-year average burn rate equal to its GICS group burn rate mean plus one standard deviation (or 2%, whichever is greater), assuming all other conditions for voting FOR the plan have been met. If a company fails to fulfill its burn rate commitment, vote AGAINST or WITHHOLD from the compensation committee. For the Dec. 1, 2009 and future quarterly data downloads, RMG will use the 200-day volatility for the shareholder value transfer and burn rate policies. We will also use the 200-day average stock price for the shareholder value transfer policy. For companies that grant both full value awards and stock options to their participants, apply a premium on full value awards for the past three fiscal years. The guideline for applying the premium is as follows: Stock Price Volatility Multiplier 54.6% and higher 1 full-value award will count as 1.5 option shares 36.1% or higher and less than 54.6% 1 full-value award will count as 2.0 option shares 24.9% or higher and less than 36.1% 1 full-value award will count as 2.5 option shares 16.5% or higher and less than 24.9% 1 full-value award will count as 3.0 option shares 7.9% or higher and less than 16.5% 1 full-value award will count as 3.5 option shares Less than 7.9% 1 full-value award will count as 4.0 option shares -45- Pay-for-Performance- Impact on Equity Plans If a significant portion of the CEO?s misaligned pay is attributed to equity awards, and there is an equity plan on the ballot, vote AGAINST the equity plan, taking in to consideration: Magnitude of pay increase/decrease in the last fiscal year; Source of pay increase (cash or equity); and Proportion of equity awards granted in the last fiscal year concentrated at the named executive officer level. See Pay-for-Performance discussion under Executive Pay Evaluation for further details. Liberal Definition of Change-in-Control Generally vote AGAINST equity plans if the plan provides for the acceleration of vesting of equity awards even though an actual change in control may not occur. Examples of such a definition could include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a "potential" takeover, shareholder approval of a merger or other transactions, or similar language. Problematic Pay Practices If the equity plan on the ballot is a vehicle for problematic pay practices, vote AGAINST the plan. Specific Treatment of Certain Award Types in Equity Plan Evaluations: Dividend Equivalent Rights Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured. Liberal Share Recycling Provisions Under net share counting provisions, shares tendered by an option holder to pay for the exercise of an option, shares withheld for taxes or shares repurchased by the company on the open market can be recycled back into the equity plan for awarding again. All awards with such provisions should be valued as full-value awards. Stock-settled stock appreciation rights (SSARs) will also be considered as full-value awards if a company counts only the net shares issued to employees towards their plan reserve. Operating Partnership (OP) units in Equity Plan analysis of Real Estate Investment Trusts (REITs) For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis. -46- Option Overhang Cost Companies with sustained positive stock performance and high overhang cost attributable to in-the-money options outstanding in excess of six years may warrant a carve-out of these options from the overhang as long as the dilution attributable to the new share request is reasonable and the company exhibits sound compensation practices. Consider, on a CASE-BY-CASE basis, a carve-out of a portion of cost attributable to overhang, considering the following criteria: Performance: Companies with sustained positive stock performance will merit greater scrutiny. Five-year total shareholder return (TSR), year-over-year performance, and peer performance could play a significant role in this determination. Overhang Disclosure: Assess whether optionees have held in-the-money options for a prolonged period (thus reflecting their confidence in the prospects of the company). Note that this assessment would require additional disclosure regarding a company's overhang. Specifically, the following disclosure would be required: - - The number of in-the-money options outstanding in excess of six or more years with a corresponding weighted average exercise price and weighted average contractual remaining term; - - The number of all options outstanding less than six years and underwater options outstanding in excess of six years with a corresponding weighted average exercise price and weighted average contractual remaining term; - - The general vesting provisions of option grants; and - - The distribution of outstanding option grants with respect to the named executive officers; Dilution: Calculate the expected duration of the new share request in addition to all shares currently available for grant under the equity compensation program, based on the company's three-year average burn rate (or a burn-rate commitment that the company makes for future years). The expected duration will be calculated by multiplying the company?s unadjusted (options and full-value awards accounted on a one-for-one basis) three-year average burn rate by the most recent fiscal year?s weighted average shares outstanding (as used in the company?s calculation of basic EPS) and divide the sum of the new share request and all available shares under the company?s equity compensation program by the product. For example, an expected duration in excess of five years could be considered problematic; and Compensation Practices: An evaluation of overall practices could include: (1) stock option repricing provisions, (2) high concentration ratios (of grants to top executives), or (3) additional practices outlined in the Poor Pay Practices policy. Other Compensation Plans 401(k) Employee Benefit Plans Vote FOR proposals to implement a 401(k) savings plan for employees. Employee Stock Ownership Plans (ESOPs) Vote FOR proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares). -47- Employee Stock Purchase Plans-- Qualified Plans Vote CASE-BY-CASE on qualified employee stock purchase plans. Vote FOR employee stock purchase plans where all of the following apply: Purchase price is at least 85 percent of fair market value; Offering period is 27 months or less; and The number of shares allocated to the plan is ten percent or less of the outstanding shares. Vote AGAINST qualified employee stock purchase plans where any of the following apply: Purchase price is less than 85 percent of fair market value; or Offering period is greater than 27 months; or The number of shares allocated to the plan is more than ten percent of the outstanding shares. Employee Stock Purchase Plans-- Non-Qualified Plans Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR nonqualified employee stock purchase plans with all the following features: Broad-based participation (i.e., all employees of the company with the exclusion of individuals with 5 percent or more of beneficial ownership of the company); Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary; Company matching contribution up to 25 percent of employee?s contribution, which is effectively a discount of 20 percent from market value; No discount on the stock price on the date of purchase since there is a company matching contribution. Vote AGAINST nonqualified employee stock purchase plans when any of the plan features do not meet the above criteria. If the company matching contribution exceeds 25 percent of employee?s contribution, evaluate the cost of the plan against its allowable cap. Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals) Vote FOR proposals that simply amend shareholder-approved compensation plans to include administrative features or place a cap on the annual grants any one participant may receive to comply with the provisions of Section 162(m) of the Internal Revenue Code. Vote FOR proposals to add performance goals to existing compensation plans to comply with the provisions of Section 162(m) unless they are clearly inappropriate. Votes to amend existing plans to increase shares reserved and to qualify for favorable tax treatment under the provisions of Section 162(m) are considered on a CASE-BY-CASE basis using a proprietary, quantitative model developed by RMG. Generally vote FOR cash or cash and stock bonus plans that are submitted to shareholders for the purpose of exempting compensation from taxes under the provisions of Section 162(m) if no increase in shares is requested. -48- Vote AGAINST proposals if the compensation committee does not fully consist of independent outsiders, as defined in RMG?s classification of director independence. Option Exchange Programs/Repricing Options Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice options taking into consideration: Historic trading patterns--the stock price should not be so volatile that the options are likely to be back "in-the-money" over the near term; Rationale for the re-pricing--was the stock price decline beyond management's control? Is this a value-for-value exchange? Are surrendered stock options added back to the plan reserve? Option vesting--does the new option vest immediately or is there a black-out period? Term of the option--the term should remain the same as that of the replaced option; Exercise price--should be set at fair market or a premium to market; Participants--executive officers and directors should be excluded. If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company?s total cost of equity plans and its three-year average burn rate. In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company?s stock price demonstrates poor timing. Repricing after a recent decline in stock price triggers additional scrutiny and a potential AGAINST vote on the proposal. At a minimum, the decline should not have happened within the past year. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price. Vote FOR shareholder proposals to put option repricings to a shareholder vote. Stock Plans in Lieu of Cash Vote CASE-by-CASE on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock. Vote FOR non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange. Vote CASE-by-CASE on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, RMG will not make any adjustments to carve out the in-lieu-of cash compensation. -49- Transfer Stock Option (TSO) Programs One-time Transfers: Vote AGAINST or WITHHOLD from compensation committee members if they fail to submit one-time transfers to shareholders for approval. Vote CASE-BY-CASE on one-time transfers. Vote FOR if: Executive officers and non-employee directors are excluded from participating; Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants. Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management's control. A review of the company's historic stock price volatility should indicate if the options are likely to be back "in-the-money" over the near term. Ongoing TSO program: Vote AGAINST equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following: Eligibility; Vesting; Bid-price; Term of options; Cost of the program and impact of the TSOs on company?s total option expense Option repricing policy. Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable. Director Compensation Equity Plans for Non-Employee Directors Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the cost of the plans against the company?s allowable cap. On occasion, director stock plans that set aside a relatively small number of shares when combined with employee or executive stock compensation plans will exceed the allowable cap. Vote for the plan if ALL of the following qualitative factors in the board?s compensation are met and disclosed in the proxy statement: Director stock ownership guidelines with a minimum of three times the annual cash retainer. Vesting schedule or mandatory holding/deferral period: - - A minimum vesting of three years for stock options or restricted stock; or -50- - - Deferred stock payable at the end of a three-year deferral period. Mix between cash and equity: - - A balanced mix of cash and equity, for example 40% cash/60% equity or 50% cash/50% equity; or - - If the mix is heavier on the equity component, the vesting schedule or deferral period should be more stringent, with the lesser of five years or the term of directorship. No retirement/benefits and perquisites provided to non-employee directors; and Detailed disclosure provided on cash and equity compensation delivered to each non-employee director for the most recent fiscal year in a table. The column headers for the table may include the following: name of each non-employee director, annual retainer, board meeting fees, committee retainer, committee-meeting fees, and equity grants. Director Retirement Plans Vote AGAINST retirement plans for non-employee directors. Vote FOR shareholder proposals to eliminate retirement plans for non-employee directors. Shareholder Proposals on Compensation Advisory Vote on Executive Compensation (Say-on-Pay) Generally, vote FOR shareholder proposals that call for non-binding shareholder ratification of the compensation of the Named Executive Officers and the accompanying narrative disclosure of material factors provided to understand the Summary Compensation Table. Compensation Consultants- Disclosure of Board or Company's Utilization Generally vote FOR shareholder proposals seeking disclosure regarding the Company, Board, or Compensation Committee?s use of compensation consultants, such as company name, business relationship(s) and fees paid. Disclosure/Setting Levels or Types of Compensation for Executives and Directors Generally, vote FOR shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders' needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company. Vote AGAINST shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation. Vote AGAINST shareholder proposals requiring director fees be paid in stock only. Vote CASE-BY-CASE on all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook. -51- Golden Coffins/Executive Death Benefits Generally vote FOR proposals calling companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals that the broad-based employee population is eligible. Pay for Superior Performance Generally vote FOR shareholder proposals based on a case-by-case analysis that requests the board establish a pay-for-superior performance standard in the company's executive compensation plan for senior executives. The proposal has the following principles: Sets compensation targets for the Plan?s annual and long-term incentive pay components at or below the peer group median; Delivers a majority of the Plan?s target long-term compensation through performance-vested, not simply time-vested, equity awards; Provides the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; Establishes performance targets for each plan financial metric relative to the performance of the company?s peer companies; Limits payment under the annual and performance-vested long-term incentive components of the plan to when the company?s performance on its selected financial performance metrics exceeds peer group median performance. Consider the following factors in evaluating this proposal: What aspects of the company?s annual and long-term equity incentive programs are performance driven? If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group? Can shareholders assess the correlation between pay and performance based on the current disclosure? What type of industry and stage of business cycle does the company belong to? Performance-Based Awards Vote CASE-BY-CASE on shareholder proposal requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps: -52- First, vote FOR shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a "substantial" portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a premium of at least 25 percent and higher to be considered performance-based awards. Second, assess the rigor of the company?s performance-based equity program. If the bar set for the performance-based program is too low based on the company?s historical or peer group comparison, generally vote FOR the proposal. Furthermore, if target performance results in an above target payout, vote FOR the shareholder proposal due to program?s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote FOR the shareholder proposal regardless of the outcome of the first step to the test. In general, vote FOR the shareholder proposal if the company does not meet both of the above two steps. Pension Plan Income Accounting Generally vote FOR shareholder proposals to exclude pension plan income in the calculation of earnings used in determining executive bonuses/compensation. Pre-Arranged Trading Plans (10b5-1 Plans) Generally vote FOR shareholder proposals calling for certain principles regarding the use of prearranged trading plans (10b5-1 plans) for executives. These principles include: Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed within two business days in a Form 8-K; Amendment or early termination of a 10b5-1 Plan is allowed only under extraordinary circumstances, as determined by the board; Ninety days must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan; Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan; An executive may not trade in company stock outside the 10b5-1 Plan. Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive. Recoup Bonuses Vote on a CASE-BY-CASE on proposals to recoup unearned incentive bonuses or other incentive payments made to senior executives if it is later determined that the figures upon which incentive compensation is earned later turn out to have been in error. This is line with the clawback provision in the Trouble Asset Relief Program. Many companies have adopted policies that permit recoupment in cases where fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. RMG will take into consideration: If the company has adopted a formal recoupment bonus policy; If the company has chronic restatement history or material financial problems; or -53- If the company?s policy substantially addresses the concerns raised by the proponent. Severance Agreements for Executives/Golden Parachutes Vote FOR shareholder proposals requiring that golden parachutes or executive severance agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts. Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden parachutes. An acceptable parachute should include, but is not limited to, the following: The triggering mechanism should be beyond the control of management; The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the five years prior to the year in which the change of control occurs; Change-in-control payments should be double-triggered, i.e., (1) after a change in control has taken place, and (2) termination of the executive as a result of the change in control. Change in control is defined as a change in the company ownership structure. Share Buyback Holding Periods Generally vote AGAINST shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote FOR the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks. Stock Ownership or Holding Period Guidelines Generally vote AGAINST shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. While RMG favors stock ownership on the part of directors, the company should determine the appropriate ownership requirement. Vote on a CASE-BY-CASE on shareholder proposals asking companies to adopt policies requiring Named Executive Officers to retain 75% of the shares acquired through compensation plans while employed and/or for two years following the termination of their employment, and to report to shareholders regarding this policy. The following factors will be taken into account: Whether the company has any holding period, retention ratio, or officer ownership requirements in place. These should consist of: - - Rigorous stock ownership guidelines, or - - A holding period requirement coupled with a significant long-term ownership requirement, or - - A meaningful retention ratio, Actual officer stock ownership and the degree to which it meets or exceeds the proponent?s suggested holding period/retention ratio or the company?s own stock ownership or retention requirements. Problematic pay practices, current and past, which may promote a short-term versus a long-term focus. -54- A rigorous stock ownership guideline should be at least 10x base salary for the CEO, with the multiple declining for other executives. A meaningful retention ratio should constitute at least 50 percent of the stock received from equity awards (on a net proceeds basis) held on a long-term basis, such as the executive?s tenure with the company or even a few years past the executive?s termination with the company. Supplemental Executive Retirement Plans (SERPs) Generally vote FOR shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company?s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans. Generally vote FOR shareholder proposals requesting to limit the executive benefits provided under the company?s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive?s annual salary and excluding of all incentive or bonus pay from the plan?s definition of covered compensation used to establish such benefits. Termination of Employment Prior to Severance Payment and Eliminating Accelerated Vesting of Unvested Equity Vote on a CASE-by-CASE on shareholder proposals seeking a policy requiring termination of employment prior to severance payment, and eliminating accelerated vesting of unvested equity. Change-in-control payouts without loss of job or substantial diminution of job duties (single-triggered) are consider a poor pay practice under RMG policy, and may even result in withheld votes from compensation committee members. The second component of this proposal -- related to the elimination of accelerated vesting - requires more careful consideration. The following factors will be taken into regarding this policy. The company?s current treatment of equity in change-of-control situations (i.e. is it double triggered, does it allow for the assumption of equity by acquiring company, the treatment of performance shares. Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements. Tax Gross-Up Proposals Generally vote FOR proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy. -55- 6. Social/Environmental Issues Overall Approach When evaluating social and environmental shareholder proposals, RMG considers the following factors: Whether adoption of the proposal is likely to enhance or protect shareholder value; Whether the information requested concerns business issues that relate to a meaningful percentage of the company's business as measured by sales, assets, and earnings; The degree to which the company's stated position on the issues raised in the proposal could affect its reputation or sales, or leave it vulnerable to a boycott or selective purchasing; Whether the issues presented are more appropriately/effectively dealt with through governmental or company-specific action; Whether the company has already responded in some appropriate manner to the request embodied in the proposal; Whether the company's analysis and voting recommendation to shareholders are persuasive; What other companies have done in response to the issue addressed in the proposal; Whether the proposal itself is well framed and the cost of preparing the report is reasonable; Whether implementation of the proposal?s request would achieve the proposal?s objectives; Whether the subject of the proposal is best left to the discretion of the board; Whether the requested information is available to shareholders either from the company or from a publicly available source; and Whether providing this information would reveal proprietary or confidential information that would place the company at a competitive disadvantage. Animal Welfare Animal Testing Generally vote AGAINST proposals to phase out the use of animals in product testing unless: The company is conducting animal testing programs that are unnecessary or not required by regulation; The company is conducting animal testing when suitable alternatives are commonly accepted and used at industry peers; or There are recent, significant fines or litigation related to the company?s treatment of animals. Animal Welfare Policies Generally vote FOR proposals seeking a report on the company?s animal welfare standards unless: The company has already published a set of animal welfare standards and monitors compliance; The company?s standards are comparable to industry peers; and There are no recent, significant fines or litigation related to the company?s treatment of animals. -56- Controlled Atmosphere Killing (CAK) Generally vote AGAINST proposals requesting the implementation of CAK methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard. Vote CASE-BY-CASE on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company. Consumer Issues Genetically Modified Ingredients Generally vote AGAINST proposals asking suppliers, genetic research companies, restaurants and food retail companies to voluntarily label genetically engineered (GE) ingredients in their products and/or eliminate GE ingredients. The cost of labeling and/or phasing out the use of GE ingredients may not be commensurate with the benefits to shareholders and is an issue better left to regulators. Vote CASE-BY-CASE on proposals asking for a report on the feasibility of labeling products containing GE ingredients taking into account: The company's business and the proportion of it affected by the resolution; The quality of the company?s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and Company?s current disclosure on the feasibility of GE product labeling, including information on the related costs. Generally vote AGAINST proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community. Generally vote AGAINST proposals to completely phase out GE ingredients from the company's products or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company?s products. Such resolutions presuppose that there are proven health risks to GE ingredients (an issue better left to regulators) that may outweigh the economic benefits derived from biotechnology. Consumer Lending Vote CASE-BY CASE on requests for reports on the company?s lending guidelines and procedures taking into account: Whether the company has adequately disclosed mechanisms in place to prevent abusive lending practices; Whether the company has adequately disclosed the financial risks of the lending products in question; Whether the company has been subject to violations of lending laws or serious lending controversies; Peer companies? policies to prevent abusive lending practices. -57- Pharmaceutical Pricing, Access to Medicines, and Product Reimportation Generally vote AGAINST proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing. Vote CASE-BY-CASE on proposals requesting that the company evaluate report on their product pricing policies or their access to medicine policies, considering: The nature of the company?s business and the potential for reputational and market risk exposure; The existing disclosure of relevant policies; Deviation from established industry norms; The company?s existing, relevant initiatives to provide research and/or products to disadvantaged consumers; Whether the proposal focuses on specific products or geographic regions; and The potential cost and scope of the requested report. Generally vote FOR proposals requesting that companies report on the financial and legal impact of their prescription drug reimportation policies unless such information is already publicly disclosed. Generally vote AGAINST proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers. Product Safety and Toxic/Hazardous Materials Generally vote FOR proposals requesting the company to report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless: The company already discloses similar information through existing reports such as a Supplier Code of Conduct and/or a sustainability report; The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; and The company has not been recently involved in relevant significant controversies, significant fines, or litigation. Vote CASE-BY-CASE on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering: The company?s current level of disclosure regarding its product safety policies, initiatives and oversight mechanisms. Current regulations in the markets in which the company operates; and Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company. Generally vote AGAINST resolutions requiring that a company reformulate its products. -58- Tobacco Vote CASE-BY-CASE on resolutions regarding the advertisement of tobacco products, considering: Recent related fines, controversies, or significant litigation; Whether the company complies with relevant laws and regulations on the marketing of tobacco; Whether the company?s advertising restrictions deviate from those of industry peers; Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; Whether restrictions on marketing to youth extend to foreign countries. Vote CASE-BY-CASE on proposals regarding second-hand smoke, considering; Whether the company complies with all laws and regulations; The degree that voluntary restrictions beyond those mandated by law might hurt the company?s competitiveness; The risk of any health-related liabilities. Generally vote AGAINST resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers. Generally vote AGAINST proposals regarding tobacco product warnings. Such decisions are better left to public health authorities. Diversity Board Diversity Generally vote FOR requests for reports on the company's efforts to diversify the board, unless: The gender and racial minority representation of the company?s board is reasonably inclusive in relation to companies of similar size and business; and The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company. Vote CASE-BY-CASE on proposals asking the company to increase the gender and racial minority representation on its board, taking into account: The degree of existing gender and racial minority diversity on the company?s board and among its executive officers; The level of gender and racial minority representation that exists at the company?s industry peers; The company?s established process for addressing gender and racial minority board representation; Whether the proposal includes an overly prescriptive request to amend nominating committee charter language; The independence of the company?s nominating committee; The company uses an outside search firm to identify potential director nominees; and -59- Whether the company has had recent controversies, fines, or litigation regarding equal employment practices. Equality of Opportunity Generally vote FOR proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company?s comprehensive workforce diversity data, including requests for EEO-1 data, unless: The company publicly discloses its comprehensive equal opportunity policies and initiatives; The company already publicly discloses comprehensive workforce diversity data; and The company has no recent significant EEO-related violations or litigation. Generally vote AGAINST proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant cost and administration burden on the company. Gender Identity, Sexual Orientation, and Domestic Partner Benefits Generally vote FOR proposals seeking to amend a company?s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would result in excessive costs for the company. Generally vote AGAINST proposals to extend company benefits to, or eliminate benefits from domestic partners. Decisions regarding benefits should be left to the discretion of the company. Climate Change and the Environment Climate Change Generally vote FOR resolutions requesting that a company disclose information on the impact of climate change on the company?s operations and investments considering: The company already provides current, publicly-available information on the impacts that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; The company?s level of disclosure is at least comparable to that of industry peers; and There are no significant, controversies, fines, penalties, or litigation associated with the company?s environmental performance. Concentrated Animal Feeding Operations (CAFOs) Generally vote FOR resolutions requesting companies report to shareholders on the risks and liabilities associated with CAFOs unless: The company has publicly disclosed its environmental management policies for its corporate and contract farming operations, including compliance monitoring; and The company publicly discloses company and supplier farm environmental performance data; or -60- The company does not have company-owned CAFOs and does not directly source from contract farm CAFOs. Energy Efficiency Generally vote FOR on proposals requesting a company report on its comprehensive energy efficiency policies, unless: The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or The proponent requests adoption of specific energy efficiency goals within specific timelines. Facility and Operational Safety/Security Vote CASE-BY-CASE on resolutions requesting that companies report on safety and/or security risks associated with their operations and/or facilities, considering: The company?s compliance with applicable regulations and guidelines; The company?s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and, The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company?s operations and/or facilities. Greenhouse Gas (GHG) Emissions Generally vote FOR proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless: The company already provides current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; The company's level of disclosure is comparable to that of industry peers; and There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions. Vote CASE-BY-CASE on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account: Overly prescriptive requests for the reduction in GHG emissions by specific amounts or within a specific time frame; Whether company disclosure lags behind industry peers; Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions; The feasibility of reduction of GHGs given the company?s product line and current technology and; Whether the company already provides meaningful disclosure on GHG emissions from its products and operations. -61- Operations in Protected Areas Generally vote FOR requests for reports on potential environmental damage as a result of company operations in protected regions unless: Operations in the specified regions are not permitted by current laws or regulations; The company does not currently have operations or plans to develop operations in these protected regions; or, The company?s disclosure of its operations and environmental policies in these regions is comparable to industry peers. Recycling Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy, taking into account: The nature of the company?s business; The extent that peer companies are recycling; The timetable prescribed by the proposal and the costs and methods of implementation; Whether the company has a poor environmental track record, such as violations of applicable regulations. Renewable Energy Generally vote FOR requests for reports on the feasibility of developing renewable energy resources unless the report is duplicative of existing disclosure or irrelevant to the company?s line of business. Generally vote AGAINST proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management?s evaluation of the feasibility and financial impact that such programs may have on the company. General Corporate Issues Charitable Contributions Vote AGAINST proposals restricting the company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company. Environmental, Social, and Governance (ESG) Compensation-Related Proposals Generally vote AGAINST proposals to link, or report on linking, executive compensation to environmental and social criteria (such as corporate downsizings, customer or employee satisfaction, community involvement, human rights, environmental performance, or predatory lending) as the practice of linking executive compensation and such criteria is currently the exception rather than the norm and there appears to be a lack of widely-accepted standards regarding the implementation of effective linkages between executive compensation and corporate non-financial performance. However, the following factors will be considered: -62- Whether the company has significant and persistent controversies or violations regarding social and/or environmental issues; Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance; The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and The company?s current level of disclosure regarding its environmental and social performance. Generally vote AGAINST proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The value of the information sought by such proposals is unclear. Health Pandemics Vote CASE-BY-CASE on requests for reports outlining the impact of health pandemics (such as HIV/AIDS, Malaria, Tuberculosis, and Avian Flu) on the company?s operations and how the company is responding to the situation, taking into account: The scope of the company?s operations in the affected/relevant area(s); The company?s existing healthcare policies, including benefits and healthcare access; and Company donations to relevant healthcare providers. Vote AGAINST proposals asking companies to establish, implement, and report on a standard of response to health pandemics (such as HIV/AIDS, Malaria, Tuberculosis, and Avian Flu), unless the company has significant operations in the affected markets and has failed to adopt policies and/or procedures to address these issues comparable to those of industry peers. Lobbying Expenditures/Initiatives Vote CASE-BY-CASE on proposals requesting information on a company?s lobbying initiatives, considering: Significant controversies, fines, or litigation surrounding a company?s public policy activities, The company?s current level of disclosure on lobbying strategy, and The impact that the policy issue may have on the company?s business operations. Political Contributions and Trade Associations Spending Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as: There are no recent, significant controversies, fines or litigation regarding the company?s political contributions or trade association spending; and The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibits coercion. -63- Vote AGAINST proposals to publish in newspapers and public media the company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders. Vote CASE-BY-CASE on proposals to improve the disclosure of a company's political contributions and trade association spending considering: Recent significant controversy or litigation related to the company?s political contributions or governmental affairs; and The public availability of a company policy on political contributions and trade association spending including information on the types of organizations supported, the business rationale for supporting these organizations, and the oversight and compliance procedures related to such expenditures of corporate assets. Vote AGAINST proposals barring the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level and barring political contributions can put the company at a competitive disadvantage. Vote AGAINST proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders. International Issues, Labor Issues, and Human Rights Community Social and Environmental Impact Assessments Vote CASE-BY-CASE on requests for reports outlining policies and/or the potential (community) social and/or environmental impact of company operations considering: Current disclosure of applicable policies and risk assessment report(s) and risk management procedures; The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company?s operations in question, including the management of relevant community and stakeholder relations; The nature, purpose, and scope of the company?s operations in the specific region(s); The degree to which company policies and procedures are consistent with industry norms; and Scope of the resolution. Foreign Military Sales/Offsets Vote AGAINST reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales. -64- Internet Privacy and Censorship Vote CASE-BY-CASE on resolutions requesting the disclosure and implementation of Internet privacy and censorship policies and procedures considering: The level of disclosure of company policies and procedures relating to privacy, freedom of speech, Internet censorship, and government monitoring of the Internet; Engagement in dialogue with governments and/or relevant groups with respect to the Internet and the free flow of information; The scope of business involvement and of investment in markets that maintain government censorship or monitoring of the Internet; The market-specific laws or regulations applicable to Internet censorship or monitoring that may be imposed on the company; and, The level of controversy or litigation related to the company?s international human rights policies and procedures. Labor and Human Rights Standards Generally vote FOR proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed. Vote CASE-BY-CASE on proposals to implement company or company supplier labor and/or human rights standards and policies, considering: The degree to which existing relevant policies and practices are disclosed; Whether or not existing relevant policies are consistent with internationally recognized standards; Whether company facilities and those of its suppliers are monitored and how; Company participation in fair labor organizations or other internationally recognized human rights initiatives; Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse; Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers; The scope of the request; and Deviation from industry sector peer company standards and practices. MacBride Principles Generally vote AGAINST proposals to endorse or increase activity on the MacBride Principles, unless: The company has formally been found to be out of compliance with relevant Northern Ireland fair employment laws and regulations; Failure to implement the MacBride Principles would put the company in an inconsistent position and/or at a competitive disadvantage compared with industry peers; Failure to implement the MacBride Principles would subject the company to excessively negative financial impacts due to laws that some municipalities have passed regarding their contracting operations and companies that have not implemented the MacBride Principles; or -65- The company has had recent, significant controversies, fines or litigation regarding religious-based employment discrimination in Northern Ireland. Nuclear and Depleted Uranium Weapons Generally vote AGAINST proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company?s business. Operations in High Risk Markets Vote CASE-BY-CASE on requests for a report on a company?s potential financial and reputational risks associated with operations in "high-risk" markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account: The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption; Current disclosure of applicable risk assessment(s) and risk management procedures; Compliance with U.S. sanctions and laws; Consideration of other international policies, standards, and laws; and Whether the company has been recently involved in recent, significant controversies, fines or litigation related to its operations in "high-risk" markets. Outsourcing/Offshoring Vote CASE-BY-CASE on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering: Controversies surrounding operations in the relevant market(s); The value of the requested report to shareholders; The company?s current level of disclosure of relevant information on outsourcing and plant closure procedures; and The company?s existing human rights standards relative to industry peers. Sustainability Sustainability Reporting Generally vote FOR proposals requesting the company to report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless: -66- The company already discloses similar information through existing reports or policies such as an Environment, Health, and Safety (EHS) report; a comprehensive Code of Corporate Conduct; and/or a Diversity Report; or The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame -67- 7. Mutual Fund Proxies Election of Directors Vote CASE-BY-CASE on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee. Converting Closed-end Fund to Open-end Fund Vote CASE-BY-CASE on conversion proposals, considering the following factors: Past performance as a closed-end fund; Market in which the fund invests; Measures taken by the board to address the discount; and Past shareholder activism, board activity, and votes on related proposals. Proxy Contests Vote CASE-BY-CASE on proxy contests, considering the following factors: Past performance relative to its peers; Market in which fund invests; Measures taken by the board to address the issues; Past shareholder activism, board activity, and votes on related proposals; Strategy of the incumbents versus the dissidents; Independence of directors; Experience and skills of director candidates; Governance profile of the company; Evidence of management entrenchment. Investment Advisory Agreements Vote CASE-BY-CASE on investment advisory agreements, considering the following factors: Proposed and current fee schedules; Fund category/investment objective; Performance benchmarks; Share price performance as compared with peers; Resulting fees relative to peers; Assignments (where the advisor undergoes a change of control). -68- Approving New Classes or Series of Shares Vote FOR the establishment of new classes or series of shares. Preferred Stock Proposals Vote CASE-BY-CASE on the authorization for or increase in preferred shares, considering the following factors: Stated specific financing purpose; Possible dilution for common shares; Whether the shares can be used for antitakeover purposes. 1940 Act Policies Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940, considering the following factors: Potential competitiveness; Regulatory developments; Current and potential returns; and Current and potential risk. Generally vote FOR these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation. Changing a Fundamental Restriction to a Nonfundamental Restriction Vote CASE-BY-CASE on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors: The fund's target investments; The reasons given by the fund for the change; and The projected impact of the change on the portfolio. Change Fundamental Investment Objective to Nonfundamental Vote AGAINST proposals to change a fund?s fundamental investment objective to non-fundamental. Name Change Proposals Vote CASE-BY-CASE on name change proposals, considering the following factors: Political/economic changes in the target market; Consolidation in the target market; and Current asset composition. -69- Change in Fund's Subclassification Vote CASE-BY-CASE on changes in a fund's sub-classification, considering the following factors: Potential competitiveness; Current and potential returns; Risk of concentration; Consolidation in target industry. Disposition of Assets/Termination/Liquidation Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate, considering the following factors: Strategies employed to salvage the company; The fund?s past performance; The terms of the liquidation. Changes to the Charter Document Vote CASE-BY-CASE on changes to the charter document, considering the following factors: The degree of change implied by the proposal; The efficiencies that could result; The state of incorporation; Regulatory standards and implications. Vote AGAINST any of the following changes: Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series; Removal of shareholder approval requirement for amendments to the new declaration of trust; Removal of shareholder approval requirement to amend the fund's management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act; Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund's shares; Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; Removal of shareholder approval requirement to change the domicile of the fund. Changing the Domicile of a Fund Vote CASE-BY-CASE on re-incorporations, considering the following factors: -70- Regulations of both states; Required fundamental policies of both states; The increased flexibility available. Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder Approval Vote AGAINST proposals authorizing the board to hire/terminate subadvisors without shareholder approval. Distribution Agreements Vote CASE-BY-CASE on distribution agreement proposals, considering the following factors: Fees charged to comparably sized funds with similar objectives; The proposed distributor?s reputation and past performance; The competitiveness of the fund in the industry; The terms of the agreement. Master-Feeder Structure Vote FOR the establishment of a master-feeder structure. Mergers Vote CASE-BY-CASE on merger proposals, considering the following factors: Resulting fee structure; Performance of both funds; Continuity of management personnel; Changes in corporate governance and their impact on shareholder rights. Shareholder Proposals for Mutual Funds Establish Director Ownership Requirement Generally vote AGAINST shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. -71- Reimburse Shareholder for Expenses Incurred Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote FOR the reimbursement of the proxy solicitation expenses. Terminate the Investment Advisor Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering the following factors: Performance of the fund?s Net Asset Value (NAV); The fund?s history of shareholder relations; The performance of other funds under the advisor's management. -72- -----END PRIVACY-ENHANCED MESSAGE-----