From: Joe Keefe [jkeefe@newcirclecom.com]
Sent: Wednesday, November 13, 2002 5:20 PM
To: rule-comments@sec.gov
Subject: File No. S7-36-02 - Proposed Rule on Proxy Voting Disclosure

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: File No. S7-36-02 - Disclosure of Proxy Voting Policies and Proxy Voting
Records by Registered Management Investment Companies

Dear Mr. Katz:

This letter is in support of the Commission's proposed rule issued September
19, 2002 mandating that mutual funds disclose their proxy voting policies,
procedures and voting records.  I think the Commission should be commended
for these bold steps to promote transparency and accountability in financial
markets.

The rationale for this rule change is stated forcefully in the Commission's
release accompanying the proposed rule, and in many of the letters of
support posted on the Commission's web site.  I concur in particular with
the remarks of Amy Domini of Domini Social investments contained in her
letter of November 1, 2002.  (By way of disclosure, my firm has a business
relationship with Domini Social Investments, and I am a member of the Board
of Directors of the Social Investment Forum.)
Rather than repeat what Ms. Domini and others have said in support of the
proposed rules, I would like to take this opportunity to address an argument
raised by some prominent opponents of reform, including Fidelity, Vanguard
and, most recently, TIAA-CREFF, in the November 7 edition of The Wall Street
Journal.

The argument is that proxy voting by mutual funds should remain
"confidential," because disclosing the same to shareholders would somehow
subject funds and their advisers to inordinate lobbying and other pressure.
What "confidential" means in this formulation, of course, is that
confidential discussions between mutual fund managers and corporate
management should be kept confidential from mutual fund shareholders.
This is a curious argument.
The fund managers making this argument, who after all are fiduciaries, are
taking the position that the person to whom the fiduciary duty (of voting
proxies) is owed has no right to information regarding whether or how that
duty is being discharged.  In fact, these fund manager fiduciaries contend
that they might be compromised if their shareholders knew in advance how
they intended to vote - or even, after the fact, how they did vote - their
proxies.  Instead, they argue, the only ones who should be entitled to know
how fund managers are leaning on a particular matter coming up for a vote,
or how they eventually do vote their proxies, are the portfolio companies
with whom those fund managers very well may have or be seeking other
business (e.g., management of retirement assets).  Curious indeed.
In fact, some of those advancing this argument go so far as to claim that
fund managers might receive more pressure to vote with company management
once they are required to disclose their proxy votes.  This is really a
remarkable argument.  First of all, we don't know how they vote their
proxies at present, so we have no way of knowing whether they are voting for
or against company management.  Apparently, we are supposed to take it on
faith that they do in fact vote against company management sometimes - and
that they vote in the best interests of their shareholders all the time -
and that potential conflicts are always resolved in favor of their
shareholders rather than to benefit fund management.  Moreover, the elegant
beauty of this system apparently lies in its secretive nature: exposing it
to the light of day will cause the whole thing to crumble.  The informed
shareholder is therefore the enemy of this wondrous system that enables fund
managers to represent his or her best interests only to the extent that that
the shareholder is kept ignorant of what those fiduciaries are doing to
protect those interests.
"Quiet diplomacy," it is argued, rather than public accountability, is the
best way to persuade corporate management to improve policies and
performance - quiet diplomacy whose very existence we must take on faith,
because it can exist only so long as it is not known.
My guess is that there is much less quiet diplomacy taking place than these
fund managers claim; and conversely, that there will be more genuine
diplomacy and dialogue once they are required to disclose their actions.  In
fact, many of the mutual funds most actively engaged in dialogues with
corporate management - the socially responsible mutual funds - already
voluntarily disclose their proxy-voting policies and voting records.
It should be pointed out as well that under the proposed rule, mutual funds
would only be required to disclose their proxy votes on a semi-annual basis.
This should effectively eliminate the already remote risk of proxy
disclosure somehow interfering with "quiet diplomacy," or influencing the
outcome of a fund manager's proxy vote, or impacting a fund manager's
decision to sell its shares of a company's stock (the so-called
"front-running" problem).  The argument that proxy-voting disclosure will
impede honest discussions between fund management and company management is
simply a red herring.
One must also ask the question: If fund managers will be subject to
increased pressure and lobbying by company management once proxy voting is
publicly disclosed, why are they not subject to the same pressures today,
when proxy voting takes place in secret?  After all, company management
still needs their votes - whether disclosed or not disclosed - in order to
prevail.  Opponents of disclosure nevertheless clearly argue that this
pressure will increase.  Logically, there can only be one reason for this:
that public disclosure will somehow make it more likely that fund managers
will vote against company management.
The increased "pressure" these fund managers fear, therefore, would have to
be coming from shareholders, not from company management.  But what possible
problem could this present for a fiduciary, absent a conflict of interest?

Lest we dance around this issue any longer, I would simply reference the
remarks of TIAA-CREF's chief counsel for corporate governance, who was
reported to have said that, "because corporate managers sometimes have put
pressure on fund managers to side with them on shareholder proposals or risk
losing the chance to invest funds for the company, disclosure can be an
obstacle to more responsible investment."  Dow Jones News Service, November
8, 2002.

Thus, the argument around which many of the larger mutual funds are circling
their wagons turns out to prove the Commission's point: a conflict of
interest may indeed exist "when a fund's adviser also manages or seeks to
manage the retirement plan assets of a company whose securities are held by
the fund."  This conflict is real, and has now been acknowledged.  The only
question, it seems, is whether the conflict of interest at the heart of this
debate - which together with other policy considerations prompted the
proposed rule - will be exposed to the sunshine of public disclosure or
allowed to live on under the euphemistic guise of "quiet diplomacy."

The bold step that the Commission has taken in proposing proxy-voting
disclosure will promote transparency and help restore investor confidence in
mutual fund governance, corporate governance and financial markets.  If the
Commission backs down and allows the large mutual fund companies opposing
proxy-voting disclosure to prevail, it will be setting back rather than
advancing those goals.  It will also have achieved a first: Proxy voting by
mutual fund managers and investment advisers would become the first and only
fiduciary duty known in the annals of the law where the discharge of that
duty need not be disclosed to the one to whom the duty is owed.  This would
be a remarkable precedent, at odds with the Commission's longstanding goals
of advancing investor education, mutual fund governance, transparent
financial markets and improved corporate governance.

I would urge the Commission to move forward with adoption of the proposed
reforms requiring that mutual funds disclose their proxy-voting policies,
procedures and voting records.

Sincerely,


Joseph F. Keefe

NewCircle Communications
36 Salmon Street
Manchester, NH 03104
(603) 644-1544
www.newcirclecom.com