Calvert Group, Ltd.November 27, 2002 Via electronic delivery: rule-comments@sec.gov Mr. Jonathan G. Katz, Secretary
Re: File No. S7-36-02 - Disclosure of Proxy Voting Policies and Proxy Voting Records Dear Mr. Katz, On behalf of Calvert Group, Ltd.1 ("Calvert"), we are writing to comment on the rule proposed by the Securities and Exchange Commission (the "Commission") governing the disclosure of proxy voting policies and voting records. We want to first acknowledge the Staff's diligent efforts in crafting the Proposed Rule, serving to address the various concerns that investors have expressed over the past years through several rule requests and comments that have called for the disclosure of mutual funds' proxy voting practices. Calvert has previously expressed its support for disclosure of proxy voting practices and has long espoused the view that this disclosure is an important facet of shareholder democracy.2 In the Proposed Rule's "Request for Comments," the Commission states "[w]e believe that the time has come to consider increasing transparency of proxy voting by mutual funds. This increased transparency would enable fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies, which could have a dramatic impact on shareholder value." (emphasis added).3 Calvert supports this belief as the disclosure of proxy voting practices allows investors to better judge the appropriateness of the mutual fund adviser's activities to make sure that they are in line with the shareholder's best interests. In addition, the disclosure of a fund's proxy voting practices aids investors in determining in which mutual fund companies to invest, allowing investors to consider the total value added that a particular fund manager brings to its stated investment objective. The Commission has previously opined "... an investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with ... its fiduciary duties under federal and state law to act in the best interests of its clients."4 This ruling is consistent with the Department of Labor's 1994 ruling under the Employee Retirement Income Security Act of 1974 (ERISA) that investment managers of ERISA assets have a fiduciary responsibility to vote their proxies. This pronouncement was also augmented by a requirement to disclose the proxy voting records to plan participants. Thus, it is a reasonable extension to apply this disclosure philosophy to mutual funds, wherein "in determining whether the investment manager is fulfilling its fiduciary obligations ... the proxy voting records must enable the named fiduciary to review not only the investment manager's voting procedure ... but also to review the actions taken in individual proxy voting situations."5 As was stated at the Open Meeting on September 19, 2002, "the securities belong to fund investors, who are entitled to know how their property is being voted."6 Accordingly, the Proposed Rule acknowledges that a company's proxy solicitation is a means for shareholders to voice concerns about the company's practices and to enhance the system of checks and balances integral to the Federal securities laws and to the concept of shareholder democracy. Calvert strongly supports the Proposed Rule that would require the disclosure of a mutual fund's proxy voting practices, but to more specifically address your request for comments on the particular aspects of the Proposed Rule, we provide the following comments: The release states that $3.4 trillion invested in U.S. corporate stock by mutual funds as of December 2001. Confronted with such a large number, it should not be forgotten that this trillion dollars in investments represents the interests of many individual and institutional investors. As of January 2002, 70.5 million investors owned stock mutual funds.7 With literally millions of individuals investing in U.S. corporate securities through mutual funds, one would expect their voting power to be an influential aspect of the financial markets landscape. However, there is concern that this power is being diluted through the lack of fund managers fulfilling their fiduciary duties to actually vote their proxies, let alone voting in the best interests of shareholders. With this disconnect between shareholders' delegation of duties over their investments to fund managers and the fund managers' fulfillment of their fiduciary duty to vote proxies in the underlying shareholders' best interests, it is essential that mutual fund companies be required to not only develop policies and procedures for voting proxies, but also that these policies and procedures, and the proxy voting record be disclosed to shareholders. Although we appreciate the important function that mutual fund boards, especially the role of disinterested directors, serve in providing oversight on the management of mutual funds, it is not necessary to solely rely upon board members to assess whether the proxy voting process is being instituted according to the stated policies and guidelines, and is consistent with the fund manager's fiduciary duties to shareholders. Allowing shareholders themselves to reach a determination about the actions of a fund manager serves to reinforce the Board in its oversight of fund management. Accordingly, making this disclosure to shareholders should not been seen as interfering with a board's fulfillment of its fiduciary duties, but rather, should be acknowledged as enhancing fund governance. The purpose of the proposed disclosure is to make sure that the best interests of shareholders are always at the forefront of a fund manager's decisions. Throughout the Proposed Rule, the Commission suggests additional actions be taken by fund managers, with the intent of improving current fund practices with respect to proxy voting. The disclosure of a fund's proxy voting practices thus, just serves as another form of the "checks and balances" that we see laced throughout the Federal securities laws.8 In addition to the realization that the proposed disclosure is consistent with the concepts of "full and fair" disclosure so that shareholders may best assess the strengths of a particular manager's investment style, it is important to realize that there is actual demand by shareholders for this information. In a recent survey (www.calvertgroup.com/pdf/harris_summary.pdf">) conducted by Harris Interactive and commissioned by Calvert, 72% of those investors interviewed indicated that their investing behavior has been affected by various economic and world events. Further, 65% of these investors stated that they seek more disclosure about their investments.9 Currently, of the 406 mutual fund families that constitute the membership in the Investment Company Institute, only eight (8) or two percent (2%) post their proxy voting policies and only half of those disclose their vote decisions. Clearly, the representative group of investors who expressed a desire to obtain further information about their mutual funds through enhanced disclosure, are not being fully satisfied with the less than a handful of fund families disclosing information on their proxy voting practices.10 Shareholder democracy demands more. Industry experts have projected that proxy voting disclosure may cost the investment management industry as much as $160 million a year, an amount which could ultimately be deducted from investor returns. We respectfully question this figure and suggest that this is an industry number that should be taken only as an inflated guesstimate and that will not prove to be the actual amount. Among firms that have actually undertaken to report their proxy voting practices to shareholders, the costs have been found to be modest. Most, if not all, investment advisory agreements require that the investment adviser vote the mutual fund's proxies. This cost is already subsumed in the advisory fee that has been approved by shareholders. Therefore, any additional expenses incurred in complying with the Proposed Rule should be for disclosure only. It has been Calvert's experience in committing resources to its proxy voting process and disclosing its proxy voting policies and actual votes cast on its website, that the manpower required and actual expenses incurred have not been administratively, operationally or financially burdensome.11 In advocating against the Proposed Rule, opponents may argue that a company could retaliate against a fund manager that votes a proxy contrary to management. Calvert's experience has been that companies, whether we are voting with or against management, welcome a dialogue with their shareholder base, and thus, we have not experienced any overt form of "retaliation" for how we vote a proxy. Further, Regulation Fair Disclosure (commonly referred to as "Reg FD") strives to create a level playing field for the receipt and dissemination of material non-public information about a company, so a fund manager should not, as a form of retaliation for the fund's proxy votes, be denied information that others have received from the company. In addition, some opponents contend that they prefer to address those concerns that a fund manager may have with the company in private. Again, it has been Calvert's experience in entering into a dialogue with a company, that even when endeavored in a more public forum (i.e., negotiations that emerge as the result of a shareholder resolution), we have been successful in having the fund manager's concerns heard and addressed by the company. Another argument of the opponents is that the disclosure of the proxy voting record could "politicize" the votes, subjecting the fund manager to "outside" pressures that may be motivated by social or political agendas. The fact remains that the fund manager, regardless of demands to perhaps do otherwise, is charged with upholding shareholders' best interests. Accordingly, how a fund manager votes its proxies should not be affected by these pressures, nor should they affect the overall management of the fund. There is also concern that a fund manager's own business interests are influencing proxy votes. The Commission rightly has noted that the disclosure of a fund manager's proxy voting guidelines as well as the voting record will serve to discourage the business interests of the fund manager (perceived or real) from prevailing over the interests of the underlying shareholders in the proxy voting process. It is undeniable that circumstances do exist that pose possible conflicts for fund managers. Sources of conflict are inherent when there is a fund manager with a fiduciary duty to its shareholders, but also who justifiably seeks to expand his own business interests. One of the more routine situations that could pose a conflict of interest arises with 401(k) servicing, where the fund manager is attempting to have its fund included on a company's retirement platform or actually provide the platform, and thus, finds it in his/her interests to side with management on a proxy issue, even though the vote does not benefit shareholders. The Commission also proposes to require funds to develop and disclose policies for how they will handle any conflicts of interest that arise, and to disclose any votes that are inconsistent with a fund's voting guidelines, as another means for avoiding conflicts of interest. Calvert supports this recommendation as such disclosure would allow shareholders to determine first-hand whether a fund manager has placed its own interests in front of those of shareholders in the proxy voting process.12 The disclosure of a fund's proxy voting practices allows shareholders to determine if the fund manager's policies will promote their best interests. When faced with a possible conflict of interest, the disclosure of a fund's proxy voting practices is also a means to achieve greater transparency in the proxy voting process to ensure that there is no compromise of shareholders' best interests due to a conflict of interest of the fund manager. Another argument that has been raised by opponents of the Proposed Rule is that information about a fund's proxy voting records may provide insight into what a fund owns and how the fund manager intends to change its holdings going forward. One of the world's largest investors, the California Public Employees' Retirement System (CalPERS), provides detailed information on its proxy votes through its web site. Further, since mutual funds already are required to disclose their holdings semi-annually, the filing of a fund's proxy voting records on an annual or semi-annual basis on the proposed Form N-CSR adds nothing new to the mix of information that would already be in the public purview. Additionally, with respect to concerns over front-running, it would be very difficult to front-run based on the results of a proxy solicitation alone, since the proxy vote is not necessarily indicative of the fund manager's plan to continue to sell or hold a security. The delayed timing of the disclosure, again, would be successful in thwarting any attempts to front-run by investors. Calvert's only point of divergence from the Proposed Rule is that the Commission should permit compliance with the new rule through dissemination over the Internet as an alternative to including the information in filings with the Commission and/or mailings to shareholders. For instance, instead of only having access to a fund's proxy voting policies through the fund's statement of additional information (which is only delivered to shareholders upon their request), the posting of a fund's policies and procedures on a fund's website would allow shareholders immediate access to this information. Of course, funds would be expected to provide this same information to shareholders should a shareholder not have access to the fund's website and request such information. Further, a fund company that does not have a website presence could still comply with the new disclosure requirement via filings with the Commission and semi-annual reports to shareholders. As the Commission so aptly commented in its Release on the Use of Electronic Media, "Investment companies use the Internet to provide investors with fund-related information, as well as shareholder services and educational materials ... One of the key benefits of electronic media is that information can be disseminated to investors and the financial markets rapidly and in a cost-effective and widespread manner."13 It is thus appropriate for the Commission to allow funds to satisfy the proposed disclosure requirement through the use of the Internet so that shareholders are fully informed about the governance of their funds. * * * In conclusion, drawing on the insight of Justice Louis Brandeis, we submit that when faced with the conflicts of interest, corporate avarice and corporate scandals that have plagued the capital markets in recent times, "sunshine is the best disinfectant." The disclosure of the proxy voting practices instituted by mutual funds is an appropriate means to reinforce the commitment to the fiduciary duties that the mutual funds owe to their shareholders to act in their best interests and to strengthen shareholder democracy. Please feel free to contact either of us at (301) 951-4881 to discuss any of our comments or to gain a better understanding of Calvert's experience with disclosing its proxy voting practices. Sincerely,
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September 16, 2002 VIA FACSIMILE Harvey L. Pitt, Chairman
Dear Chairman Pitt: Several weeks ago, I wrote to urge the Securities and Exchange Commission (the "Commission") to adopt regulations that would require mutual funds to disclose their proxy voting practices, which includes the disclosure of the proxy voting policies and guidelines, as well as the actual proxy votes. I write today in response to the Commission's announcement of an Open Meeting to be held this week, during which it will consider this very matter. Calvert is pleased that the Commission is considering proposing a rule to require mutual funds and other registered investment management companies to disclose the policies and procedures that they use to determine how to vote proxies relating to portfolio securities, as well as to require investment companies to file with the Commission, and make available to shareholders, their proxy voting records. We welcome this new requirement, as we firmly believe that this disclosure will allow investors to better judge the appropriateness of a manager's investment policies to make sure that they adequately reflect the shareholders' best interests and views. It has been Calvert's experience in establishing a formal proxy voting process that includes the development of guidelines and policies, as well as the posting of the actual proxy votes on our website, that the cost and effort of this additional disclosure has been de minimis. In fact, Calvert has posted its proxy voting decisions on its website for approximately the last two years, and has not found the additional disclosure to be burdensome. Please refer to our Shareholder Advocacy discussion at www.calvert.com/sri_648.html for detailed disclosure on our proxy voting guidelines, proxy voting decisions, etc. Calvert looks forward to hearing more of the Commission's thoughts on this matter at Thursday's scheduled Open Meeting, and urges the Commission to adopt new rules that will require the disclosure of proxy voting guidelines, as well as the disclosure of the actual proxy voting record.
August 29, 2002 Harvey L. Pitt, Chairman
Dear Chairman Pitt: I write today on behalf of Calvert Group, Ltd.,1 to urge the Securities and Exchange Commission (the "Commission") to adopt regulations that would require mutual funds to disclose their proxy voting guidelines. This disclosure would allow investors to better judge the appropriateness of a manager's proxy votes to make sure that they are truly in line with shareholders' best interests and views, and to establish what are acceptable corporate practices and policies for the companies in which a fund can invest. This past February, the Commission confirmed a basic principle that Calvert has always adhered to, that "... an investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with ... its fiduciary duties under federal and state law to act in the best interests of its clients." (Ram Trust Services, SEC Letter, Feb. 12, 2002).2 As an investment manager of mutual funds, Calvert believes that it holds a fiduciary duty to its funds to vote proxies, and in the process to enter into dialogue with companies about their corporate practices (be they corporate governance or of social relevance). Calvert hopes to see a similar pronouncement in the area of proxy voting disclosure, recognizing that a portfolio company's proxy solicitation is a means for shareholders to voice concerns about a company's practices, and to provide checks and balances when determining the direction in which a company is going. Calvert fully supports the AFL-CIO's December 20, 2000 petition to the Commission (and its recent renewal of this request) for rulemaking, urging it to institute rules that would require mutual funds to disclose voting information. Although there has been no formal action on this request, Calvert sees it as a positive step that the Commission recently acknowledged that it is considering the rulemaking petition "from the AFL-CIO and others". (Speech by SEC Chairman, Remarks before the Investment Company Institute, 2002 General Membership Meeting, May 24, 2002). I was also encouraged by the comments of the Director of the Division of Investment Management, Paul Roye, at the SEC Investor Summit in May, where in response to a comment urging the Commission to consider requiring mutual funds to provide full disclosure of proxy voting policies and votes cast, he gave the response that "... there is pending a proposal that would encourage additional information regarding proxy voting" and that the SEC is "moving to put more disclosure out there available in this area." We commend the Commission for initiating a "limited scope inspection" of mutual funds' proxy voting policies, procedures and controls. Calvert recently received a request from the Office of Compliance Inspections and Examinations as part of this inspection. We have since responded to this request with the details of our proxy voting process, including our proxy voting guidelines and procedures. For your information, Reiterating the requirement that investment advisers actually vote their proxies is just a first step. The very important next step is that investment advisers be required to disclose their proxy voting policies so that investors, in determining in which mutual fund companies to invest, can determine the total value added that a particular fund manager brings to an investment. Thus, Calvert strongly urges the Commission to adopt a rule requiring the disclosure of a mutual fund's proxy voting policies and guidelines. I welcome the opportunity to speak with you further about this.
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August 26, 2002 Harvey L. Pitt, Chairman
Dear Chairman Pitt: I write today on behalf of Calvert Group, Ltd.,1 to urge the Securities and Exchange Commission (the "Commission") to adopt regulations that would require mutual funds to disclose their proxy voting guidelines. This disclosure would allow investors to better judge the appropriateness of a manager's proxy votes to make sure that they are truly in line with shareholders' best interests and views, and to establish what are acceptable corporate practices and policies for the companies in which a fund can invest. This past February, the Commission confirmed a basic principle that Calvert has always adhered to, that "... an investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with ... its fiduciary duties under federal and state law to act in the best interests of its clients." (Ram Trust Services, SEC Letter, Feb. 12, 2002).2 As an investment manager of mutual funds, Calvert believes that it holds a fiduciary duty to its funds to vote proxies, and in the process to enter into dialogue with companies about their corporate practices (be they corporate governance or of social relevance). Calvert hopes to see a similar pronouncement in the area of proxy voting disclosure, recognizing that a portfolio company's proxy solicitation is a means for shareholders to voice concerns about a company's practices, and to provide checks and balances when determining the direction in which a company is going. Calvert fully supports the AFL-CIO's December 20, 2000 petition to the Commission (and its recent renewal of this request) for rulemaking, urging it to institute rules that would require mutual funds to disclose voting information. Although there has been no formal action on this request, Calvert sees it as a positive step that the Commission recently acknowledged that it is considering the rulemaking petition "from the AFL-CIO and others". (Speech by SEC Chairman, Remarks before the Investment Company Institute, 2002 General Membership Meeting, May 24, 2002). I was also encouraged by the comments of the Director of the Division of Investment Management, Paul Roye, at the SEC Investor Summit in May, where in response to a comment urging the Commission to consider requiring mutual funds to provide full disclosure of proxy voting policies and votes cast, he gave the response that "... there is pending a proposal that would encourage additional information regarding proxy voting" and that the SEC is "moving to put more disclosure out there available in this area." We commend the Commission for initiating a "limited scope inspection" of mutual funds' proxy voting policies, procedures and controls. Calvert recently received a request from the Office of Compliance Inspections and Examinations as part of this inspection. We have since responded to this request with the details of our proxy voting process, including our proxy voting guidelines and procedures. For your information, Reiterating the requirement that investment advisers actually vote their proxies is just a first step. The very important next step is that investment advisers be required to disclose their proxy voting policies so that investors, in determining in which mutual fund companies to invest, can determine the total value added that a particular fund manager brings to an investment. Thus, Calvert strongly urges the Commission to adopt a rule requiring the disclosure of a mutual fund's proxy voting policies and guidelines. I welcome the opportunity to speak with you further about this.
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