Alert July 29, 2008

ICI and IDC Publish White Papers on Proxy Voting by Mutual Funds

The Investment Company Institute (the “ICI”) and the Independent Directors Council (the “IDC”) have published white papers examining mutual fund proxy voting.  The ICI’s paper (the “ICI Paper”) explores the proxy voting practices of registered investment companies (“funds”), including an examination of actual proxy voting results, while the IDC paper (the “IDC Paper”) focuses on board oversight of mutual fund proxy voting. 

ICI Paper.  The ICI Paper, entitled “Proxy Voting by Registered Investment Companies: Promoting the Interests of Shareholders,” provides a broad analysis of the proxy voting process for funds, with a particular emphasis on analyzing how a sample of funds actually voted their proxies on certain categories of proposals.  The ICI Paper offers a summary of some of the most common types of management and shareholder proposals for shareholder meetings held during the period from July 1, 2006 to June 30, 2007 by companies represented in the Russell 3000 Index (the “Russell 3000”), which measures the performance of the largest 3,000 U.S. companies.  The ICI Paper also examines the sponsorship of shareholder proposals including the extent to which certain individuals and entities sponsor a significant proportion of shareholder proposals.

The ICI Paper’s examination of the proxy voting process for funds addresses, among other things, (i) different mechanisms used to determine how funds vote their proxies, (ii) the various ways in which funds and their advisers manage conflicts of interest in the proxy voting process, and (iii) principles and common themes in the proxy voting guidelines of the 35 largest fund families. 

A significant portion of the ICI Paper is devoted to an analysis of how funds actually voted with respect to proposals for companies in the Russell 3000 as disclosed in the funds’ filings on Form N-PX for the year July 1, 2006 to June 30, 2007.  This analysis includes a comparison of how funds voted to the voting recommendations of the companies’ boards and the recommendations of two proxy voting services, ISS Governance Services/Risk Metrics and Glass Lewis.  The ICI Paper also discusses the services provided by proxy administrators and proxy advisory firms, and reviews academic research regarding whether fund adviser voting of fund proxies has been affected by other relationships between advisers and the issuers whose shares are being voted.

IDC Paper.  The IDC Paper, entitled “Oversight of Fund Proxy Voting,” is another in a series of reports the IDC has published regarding the various duties of mutual fund boards of directors.  As it describes the different arrangements registered funds may use to vote fund proxies, the IDC Paper provides lists of factors that a fund board may wish to consider in assessing a proxy voting policy, and in overseeing adviser proxy voting and potential conflicts of interest on an ongoing basis.  The IDC Paper also examines the role of third party proxy voting services, including the range of functions that may be performed by third party services and special considerations relating to board approval of third party proxy voting services, and issues related to board voting of fund proxies.  A section of the IDC Paper looks at special proxy voting issues that a fund board may need to examine in connection with the use of subadvisers, a manager‑of‑manager’s structure, an affiliated fund of funds, securities lending and foreign securities.  The IDC Paper concludes with an Appendix that analyzes the techniques that investment advisers have developed to identify and resolve conflicts of interest that may arise when they vote fund proxies.