IOSCO REPORT ON RESPONSIBILITIES OF AND DISCLOSURE BY COLLECTIVE INVESTMENT SCHEMES AS SHAREHOLDERS

ACTION REQUESTED [14818] June 21, 2002 TO: INTERNATIONAL COMMITTEE No. 48-02 SEC RULES COMMITTEE No. 49-02 RE: IOSCO REPORT ON RESPONSIBILITIES OF AND DISCLOSURE BY COLLECTIVE INVESTMENT SCHEMES AS SHAREHOLDERS The International Organization of Securities Commissions (IOSCO) has requested comment on a report on Collective Investment Schemes as Shareholders: Responsibilities and Disclosure. The report, which was prepared by Standing Committee 5 – Investment Management of IOSCO’s Technical Committee, discusses a number of regulatory and disclosure issues with respect to the way in which collective investment funds and their investment managers exercise voting rights in connection with portfolio securities. IOSCO has requested comment on the report by September 30, 2002. The Report reviews industry and regulatory responses with respect to three questions and presents the committee’s views on appropriate regulatory responses. The questions and the committee’s answers are described below. (1) Is a CIS required to exercise voting and other shareholder rights or otherwise become involved in the governance of corporations in its portfolio? The Report notes that CIS operators are subject to general responsibilities and obligations in their actions in managing a CIS and concludes that a CIS operator should consider these responsibilities in deciding whether to vote or exercise other shareholder rights and make these decisions in the best interest of the CIS alone. (2) Who can make decisions about voting and other shareholder rights and how should these decisions be made? The Report notes that a CIS board of directors or operator generally makes these decisions, subject to applicable standards of care and obligations at law. The Report recommends that regulators provide guidance to the industry on how to deal with conflicts of interest that may arise in exercising shareholder rights, such as by prohibiting a CIS operator from exercising rights, or requiring that the decision be made by independent entities, in a conflict situation. The Report notes that industry guidelines in several countries require CIS operators to develop written policies and procedures in these matters and that these policies are 2 important in encouraging CIS operators to act in the best interests of investors and enabling the public and regulators to monitor CIS adherence to their principles. (3) Should a CIS provide information to CIS investors about how its rights as shareholder will be exercised? The Report states that CIS investors should have information about voting and other corporate governance related policies of CIS operators and that CIS prospectuses and annual reports could reference the availability of these policies and summarize their contents, and annual reports could provide information on how a CIS operator generally exercised these rights over a financial year. The Report suggests that investors should also have access to additional information, such as a summary of actual voting practices on request. Finally, the report states that in specific cases, based on the size of a block, the importance of the vote, or the existence of a potential conflict of interest, it may be desirable for a CIS operator to disclose how it voted a particular block of securities. The Institute expects to draft a comment letter to IOSCO on the report.1 If there are any matters that you would like the Institute to include in a comment letter, please let me know by July 31. You can reach me at Podesta@ici.org or at 202/326-5826. Mary S. Podesta Senior Counsel Attachment Attachment (in .pdf format) 1 IOSCO has requested comment on the issues discussed in the Report and states that information about CIS coporate governance and disclosure policies and practices would be particularly useful. IOSCO also seeks comment on whether the questions and answers outlined in the Report are well-founded in today’s global markets.