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December 6, 2002 Via Electronic Mail Mr. Jonathan G. Katz
Re: Proposed Rules on Disclosure of Proxy Voting (File No. S7-36-02) Dear Mr. Katz: The College Retirement Equities Fund ("CREF"), with its companion organization Teachers Insurance and Annuity Association of America (together, "TIAA-CREF"), are pleased to submit comments on the proposal by the Securities and Exchange Commission that would require investment companies to disclose their proxy voting policies and procedures and complete proxy voting records to investors. We applaud the SEC's efforts to design a proposal to encourage all investment companies to carefully consider their proxy voting practices and to be more actively involved in the corporate governance of issuers held in their portfolios. As a recognized leader in corporate governance initiatives, we have long held the belief that proxy voting decisions by funds can play an important role in maximizing the value of fund investments. For this reason, we fully support the initiative to require investment companies to disclose their proxy voting policies and procedures and information about their voting records. However, rather than requiring funds to publicly disclose the details of every single proxy vote cast, as currently proposed by the SEC, we recommend that funds instead be required to provide investors with a summary report showing how proxies were actually voted in the aggregate on a given subject and to disclose the details of individual proxy votes cast only when proxies were voted in a manner inconsistent with a fund's published voting policies or when the fund or its affiliates have a potential conflict of interest. This approach would provide investors with more meaningful information about a fund's proxy voting patterns and commitment to corporate governance issues, and enhance the ability of fund fiduciaries to cast their votes in the best interests of fund investors free from other pressures. Introduction and Background CREF is a non-profit corporation registered with the SEC as an investment company. Its companion organization, TIAA, is a non-profit stock life insurance company. Together, TIAA-CREF comprises the principal retirement system for the nation's education and research communities. TIAA-CREF serves over 2.5 million people at over 15,000 United States institutions and jointly manages over $249 billion in assets. In addition to offering fixed and variable annuities, we offer a series of retail and institutional mutual funds that are also registered investment companies with the SEC. TIAA-CREF is widely recognized for its leadership in corporate governance and as a strong voice for shareholder rights. As one of the world's largest institutional investors, with CREF holding shares in over 5,000 portfolio companies, we are committed to promoting sound governance practices through a comprehensive corporate governance program. Over the past several decades, we have developed effective procedures for ensuring that proxy proposals on corporate governance issues brought before portfolio companies are carefully analyzed. In 1993, TIAA-CREF issued a comprehensive Policy Statement on Corporate Governance, possibly the first all-inclusive document of its kind in the investment community. That Policy Statement, which has evolved over the years, seeks to encourage portfolio companies to improve their governance policies and practices so as to produce better long-term returns and enhanced accountability to shareholders. The Policy Statement contains guidelines, established and approved by the independent Corporate Governance and Social Responsibility Committees of our boards, for voting on a range of corporate governance issues. Comments on Proposed Rules A. Disclosure of Proxy Voting Policies and Procedures We strongly support the SEC's proposal to require investment companies to disclose their proxy voting policies and procedures in their registration statements. As we have advocated for years, it is important for institutional investors to be actively engaged in the proxy voting process and have well thought out policies and procedures for voting their proxies. We also believe that interested investors should be provided the means to evaluate the guiding principles a fund follows in proxy voting. It is for this reason that we currently make our Policy Statement, a copy of which is attached to this letter, available on our corporate website and upon request. We fully support the SEC's proposal to require all investment companies to do the same. We believe that the framework articulated in the SEC proposal for appropriate fund proxy voting policies is a good one. We agree with the SEC that it is important that policies be detailed enough to give investors a clear understanding of the funds' overall philosophy and approach on various matters, including, for example, the circumstances that would lead it to abstain on a vote, but also flexible enough to allow for thoughtful consideration of each proxy voting proposal. In order to encourage funds to adopt detailed and expansive policies, which could be lengthy (for example, our published Policy Statement is 27 pages), we would suggest that the rule allow full proxy voting policies to be filed as an exhibit to the fund's registration statement, with just a summary of the policies and procedures spelled out in the text of the Statement of Additional Information. This would be in addition to requiring funds to make their full policies available to investors on their websites and upon request and without charge. We would also suggest, as a means of assuring that funds adopt meaningful and thoughtful policies, that the SEC require a fund's independent board members to review and approve, by separate vote, the fund's proxy voting policies and procedures. B. Disclosure of Proxy Votes That Are Inconsistent with Policies/Disclosure of Conflicts We fully support the SEC's proposal to require an investment company to disclose any proxy vote that it makes that is inconsistent with its proxy voting policies and procedures and the reasons underlying that vote. This disclosure would provide investors with the best opportunity to evaluate the rationale for a proxy voting decision that strays from a fund's articulated policies. Based on our experience, votes that are inconsistent with a fund's policies should be rare, since a fund's policies and procedures should be cast broadly enough to allow for careful and deliberate voting on each specific resolution, taking into account the particular facts and circumstances surrounding each vote. In addition, we believe that to further the goals of illuminating potential conflicts of interests and providing investors with the means to evaluate the propriety of proxy voting decisions, funds should also be required to disclose the details of any proxy votes involving a portfolio company that, due to the fund's or an affiliate's business relationship with the portfolio company, has the potential to present a conflict between the interests of investors and those of the fund or any fund affiliate. This type of disclosure will serve as a strong deterrent to voting decisions that are not in the best interests of investors. C. Disclosure of Proxy Voting Record We support the concept that meaningful information about how a fund voted its proxies over a given period should be available to those investors who are interested in that information. We strongly recommend, however, that instead of a report detailing each and every proxy vote, a fund should be required to provide investors with a summary report showing how it voted its proxies in the aggregate on a given type of governance matter or social policy issue. This type of summary, described more fully below, coupled with specific proxy vote disclosure in those instances in which a fund voted in a manner inconsistent with its proxy voting policies or in which the fund had potential conflicts of interest (see Section B above) would provide investors with more meaningful information about a fund's proxy voting patterns than a full vote by vote report, and avoid some of the unintended consequences of requiring such a report. Specifically, we are concerned that requiring complete vote by vote disclosure could unintentionally undermine the effectiveness of fund fiduciaries in voting proxies by discouraging nuanced voting and hampering productive private communications with portfolio companies. Requiring complete disclosure of specific proxy votes could inadvertently make it more difficult for fund boards and investment advisers who, like us, carefully consider each proxy vote on its own terms, and are genuinely focused on exercising their fiduciary duty to act in the best interests of all investors, from continuing to do so. The reporting of specific proxy votes cannot adequately convey the factors considered and actions taken with respect to an issue. For example, when we vote on specific proxy resolutions, we not only look at the specific objectives of the resolutions, but also carefully examine the particular facts and circumstances involved at the portfolio company. Some votes, particularly when we vote to abstain or vote against a proposal, might be followed by or result from private correspondence or discussions with companies. Often we are sympathetic with proponents' goals but believe specific resolutions are flawed or too impractical to implement. Without that information, a specific vote, standing alone, is not meaningful and could be misinterpreted. If funds are put in the position of needing to explain the reasoning process behind their many individual votes, they could be discouraged from voting in a thoughtful and nuanced manner or from working behind the scenes to affect corporate behavior. We are also concerned that if we were required to report our complete proxy voting record, those who are not primarily interested in seeking higher returns for investors, but rather in furthering their own social and political agendas, could more frequently and systematically require a fund to expend its resources to respond to their particular issues and questions with respect to individual proxy votes. This would not serve the broad interests of all fund investors. TIAA-CREF Suggested Proposal. We believe the objective of providing meaningful information to investors about how a fund voted its proxies can be achieved more readily without undermining a fund's ability to effectively act in the interests of all of its shareholders. To this end, we propose that funds be required to produce a summary report at the end of each year showing how they voted proxies in the aggregate by given subject, e.g., board independence, stock option plans, or, in the social arena, global climate change or nuclear energy. While the report would in fact account for each proxy voted during the period, it would report the vote by category, without referring to the specifics of individual proxy votes or particular companies, except in those instances in which a fund voted in a manner inconsistent with its proxy voting policies or in which the fund faced a potential conflict of interest. Attached, as an example of what we suggest, is a report showing total CREF Stock Account votes on corporate governance issues during 2001. We provide a report in this form, and not a vote by vote report, to our boards at the end of each proxy season so our trustees, who are committed to promoting good corporate governance practices, can analyze our proxy voting patterns over a given year. We believe that this kind of report would better serve the public by providing investors with truly meaningful information about a fund's proxy voting patterns and commitment to corporate governance, in a user-friendly format that does not overload investors with data, and without subjecting funds to needless pressure or second-guessing from special interest groups before and after each proxy vote. Conclusion We commend the SEC for taking the initiative to encourage funds to carefully consider their proxy voting practices and to be more actively involved in the corporate governance of issuers held in their portfolios. However, as we have noted, we recommend that certain aspects of the proposal be modified to achieve the goals of providing truly meaningful information to fund investors, while enabling fund fiduciaries to focus on voting in the best interests of fund investors. We would welcome the opportunity to discuss our thoughts on this important initiative with the SEC staff.
cc: The Honorable Harvey L. Pitt
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