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Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[20606]
November 22, 2006
TO: BOARD OF GOVERNORS No. 27-06
SEC RULES MEMBERS No. 102-06
COMPLIANCE MEMBERS No. 46-06
CLOSED-END INVESTMENT COMPANY MEMBERS No. 56-06
EQUITY MARKETS ADVISORY COMMITTEE No. 25-06
PENSION MEMBERS No. 69-06
TAX MEMBERS No. 42-06
INTERNATIONAL MEMBERS No. 31-06
RE: INSTITUTE LETTER TO COMMITTEE ON CAPITAL MARKETS REGULATION
The Institute has filed a letter with the Committee on Capital Markets Regulation, an
independent, bipartisan committee composed of corporate and financial leaders, setting forth
recommendations on ways to improve the efficiency and competitiveness of the U.S. capital markets. It
is our understanding that the Committee plans to issue an interim report containing its
recommendations at the end of November 2006 that will address, among other things, the effect of
regulation on the efficiency of U.S. capital markets, whether the costs and benefits of regulation are
properly taken into account when new regulations are issued, and whether regulation may
unintentionally be making our markets less competitive in the global economy.
The most significant aspects of the Institute’s letter are summarized below.
Sarbanes-Oxley Act Reform - The letter supports the Committee’s efforts to review
requirements under the Sarbanes-Oxley Act. The letter states that the Act’s certification requirements
applicable to mutual funds, as implemented by the SEC, go beyond the intent of the Act in several
significant respects, place a significant and unnecessary burden on fund executive officers, and are
duplicative of a number of unique compliance requirements already imposed on mutual funds and not
on operating companies subject to the Act. The letter therefore recommends that the Committee
consider the impact of the Act on mutual funds. Specifically, the letter recommends that the
certification requirements of the Act applicable to mutual funds be withdrawn. At a minimum, a more
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reasoned approach to regulation should be adopted, e.g., certifications should not be required for non-
financial information included in shareholder reports.
Point of Sale Disclosure – The letter expresses support for the concept of point of sale
disclosure, but not as currently proposed by the SEC. The letter states that the manner in which the
SEC has proposed to effectuate this disclosure, and the amount of information that will have to be
disclosed, is inconsistent with the manner in which brokers typically sell mutual fund shares. In
addition, since other financial products that brokers sell would not be subject to these requirements,
brokers are likely to steer their customers to alternative investments that are not subject to these
disclosure requirements and do not offer the same level of regulatory protection and other benefits that
mutual funds do. The letter therefore recommends that, if the SEC determines to adopt some form of
point of sale disclosure requirements for mutual funds, it do so in a manner that is consistent with the
nature of the brokers’ business model and that does not create competitive disadvantages for funds.
The letter also recommends that any point of sale disclosure requirements utilize the internet as the
delivery vehicle of information to investors.
Soft Dollars – The letter notes that institutional investors, other than advisers to mutual funds
and ERISA pension plans, are not subject to the restrictions of Section 28(e), with the result that they
have greater freedom to use soft dollars. The letter states that, when combined with other forces
exerting downward pressure on overall commissions, this regulatory disparity may create strong
incentives for broker-dealers to favor hedge fund and other types of advisers. The letter therefore urges
the Committee to include a recommendation in its report that the Institute has made to the SEC to
adopt a rule that would prohibit any investment adviser from using soft dollars to pay for any products
or services that fall outside the Section 28(e) safe harbor. The letter also expresses support for a
recommendation of an NASD task force that the SEC urge the Department of Labor and the federal
banking agencies to require all discretionary investment advisers not subject to the SEC’s jurisdiction to
comply with the standards of the Section 28(e) safe harbor.
Proxy Voting – The letter discusses proxy voting both from the standpoint of funds as
investors and as issuers. As investors, the letter notes that funds are the only investors subject to proxy
voting disclosure requirements, which has created unintended consequences for fund firms. Among
other things, only fund firms are singled out for scrutiny and unnecessary criticism for the manner in
which they voted, thereby uniquely politicizing mutual fund portfolio management. The letter
recommends that, to the extent that disclosure of proxy voting records is considered to achieve
important public policy purposes, these requirements should be applied to all institutional investors.
From the perspective of issuers of securities, the letter discusses concerns relating to developments in
the voting of proxies by brokers. Specifically, the letter states that a recommendation by an NYSE
working group that the election of directors be viewed as a “non-routine” matter on which brokers
would not be permitted to vote proxies on behalf of their customers will create significant difficulties
for funds and other issuers in achieving quorums and getting directors elected. The letter therefore
recommends that brokers should be permitted to continue to vote uninstructed shares on uncontested
director elections until certain steps are taken. Only after these efforts are undertaken and all
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constituents, including the NYSE, are satisfied that shareholders will exercise their voting rights should
director elections become “non-routine.” Alternatively, the letter recommends that the NYSE permit
brokers to exercise “proportional voting” with respect to shares for which voting instructions are not
received.
Tax Efficiency – The letter strongly supports the GROWTH Act, which would address several
burdens on mutual funds by deferring tax on automatically reinvested capital gain distributions until
fund shares are sold. The letter states that the GROWTH Act also would help address problems for
foreign investors in U.S. funds who incur tax currently in their home countries that would not be
incurred if they invested instead in non-U.S. funds. The letter therefore urges the Committee to
support adoption of the GROWTH Act.
Elizabeth Krentzman
General Counsel
Attachment (in .pdf format)
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for memo 20606.