[Federal Register Volume 67, Number 187 (Thursday, September 26, 2002)]
[Proposed Rules]
[Pages 60828-60841]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24409]



[[Page 60827]]

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Part V





Securities and Exchange Commission





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17 CFR Parts 239, 249, 274, and 275



Disclosure of Proxy Voting Policies and Proxy Voting Records by 
Registered Management Investment Companies and Investment Advisors; 
Proposed Rules

  Federal Register / Vol. 67, No. 187 / Thursday, September 26, 2002 / 
Proposed Rules  

[[Page 60828]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 249, and 274

[Release Nos. 33-8131, 34-46518, IC-25739; File No. S7-36-02]
RIN 3235-AI64


Disclosure of Proxy Voting Policies and Proxy Voting Records by 
Registered Management Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing amendments 
to its forms under the Securities Act of 1933, the Securities Exchange 
Act of 1934, and the Investment Company Act of 1940 to require 
registered management investment companies to provide disclosure about 
how they vote proxies relating to portfolio securities they hold. Under 
the proposed amendments, registered management investment companies 
would be required to disclose the policies and procedures that they use 
to determine how to vote proxies relating to portfolio securities. The 
proposals also would require registered management investment companies 
to file with the Commission and to make available to their shareholders 
the specific proxy votes that they cast in shareholder meetings of 
issuers of portfolio securities.

DATES: Comments must be received on or before December 6, 2002.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by one method only.
    Comments should be submitted in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-36-02; this file number 
should be included in the subject line if electronic mail is used. 
Comment letters will be available for public inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, NW., 
Washington, DC 20549. Electronically submitted comment letters also 
will be posted on the Commission's Internet Web site (http://www.sec.gov).\1\
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    \1\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Christian L. Broadbent, Attorney, 
Nicholas C. Milano, Jr., Senior Counsel, or Paul G. Cellupica, 
Assistant Director, Office of Disclosure Regulation, Division of 
Investment Management, (202) 942-0721, at the Securities and Exchange 
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Commission, 450 Fifth Street NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is proposing for comment amendments to Forms N-1A [17 
CFR 239.15A; 274.11A], N-2 [17 CFR 239.14; 274.11a-1], and N-3 [17 CFR 
239.17a; 17 CFR 274.11b], the registration forms used by management 
investment companies to register under the Investment Company Act of 
1940 (``Investment Company Act'') and to offer their securities under 
the Securities Act of 1933 (``Securities Act''), and amendments to 
proposed Form N-CSR [17 CFR 249.331; 17 CFR 274.128], a form that we 
recently proposed under the Securities Exchange Act of 1934 (``Exchange 
Act'') and the Investment Company Act to be used by registered 
management investment companies to file certified shareholder reports 
with the Commission under the Sarbanes-Oxley Act of 2002.\2\
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    \2\ See Investment Company Act Release No. 25723 (Aug. 30, 2002) 
[67 FR 57298 (Sept. 9, 2002)]; Sarbanes-Oxley Act of 2002, Pub. L. 
107-204, 116 Stat. 745 (2002).
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Executive Summary

    We are proposing form amendments that would do the following:
    [sbull] Require a management investment company registered under 
the Investment Company Act of 1940 (``fund'') to disclose in its 
registration statement (and, in the case of a closed-end fund, Form N-
CSR) the policies and procedures that it uses to determine how to vote 
proxies relating to portfolio securities; and
    [sbull] Require a fund to file with the Commission and make 
available to its shareholders, upon request and free of charge, the 
fund's proxy voting record. A fund would be required to disclose in its 
annual and semi-annual reports to shareholders and in its registration 
statement the methods by which shareholders may obtain information 
about proxy voting. A fund also would be required to disclose in its 
annual and semi-annual reports to shareholders information regarding 
any proxy votes that are inconsistent with its proxy voting policies 
and procedures.
    In a companion release, we are also publishing proposed amendments 
that would require registered investment advisers to adopt and 
implement written policies and procedures reasonably designed to ensure 
that proxies are voted in the best interests of their clients, disclose 
to clients information about the advisers' proxy voting policies and 
procedures, disclose to clients how they may obtain information on how 
the adviser voted their proxies, and retain records relating to voting 
proxies on client securities.\3\
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    \3\ See Investment Advisers Act Release No. 2059 (Sept. 20, 
2002).
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I. Introduction and Background

    As of December 2001, mutual funds \4\ held $3.4 trillion in U.S. 
corporate stock, representing approximately 19% of all publicly traded 
U.S. corporate equity.\5\ This represents a dramatic increase from only 
6.4% a decade earlier.\6\ Millions of individual American investors, in 
turn, hold shares of equity mutual funds, relying on these funds --and 
the value of the corporate securities in which they invest--to fund 
their retirements, their childrens' educations, and their other basic 
financial needs.\7\ Yet, despite the enormous influence of mutual funds 
in the capital markets and their huge impact on the financial fortunes 
of American investors, funds have been reluctant to disclose how they 
exercise their proxy voting power with respect to portfolio 
securities.\8\ We believe that the

[[Page 60829]]

time has come to consider increasing transparency of proxy voting by 
mutual funds. This increased transparency would enable fund 
shareholders to monitor their funds' involvement in the governance 
activities of portfolio companies, which could have a dramatic impact 
on shareholder value.\9\
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    \4\ For simplicity, this Section of the release focuses on 
mutual funds (i.e., open-end management investment companies). An 
open-end management investment company is an investment company, 
other than a unit investment trust or face-amount certificate 
company, that offers for sale or has outstanding any redeemable 
security of which it is the issuer. See Sections 4 and 5(a)(1) of 
the Investment Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)]. Our 
proposed amendments, however, would apply to all registered 
management investment companies, except where noted. This includes 
both closed-end management investment companies and insurance 
company separate accounts organized as management investment 
companies that offer variable annuity contracts.
    \5\ Investment Company Institute, Mutual Fund Fact Book 62 (42nd 
ed. 2002); Securities Industry Association, Securities Industry Fact 
Book 71 (2002).
    \6\ Securities Industry Fact Book, supra note , at 71.
    \7\ Mutual Fund Fact Book, supra note , at 37. Approximately 93 
million individual investors hold shares of mutual funds. Id. Shares 
of equity mutual funds are held through 164.8 million shareholder 
accounts. Id. at 63. A single individual may hold mutual fund shares 
through multiple accounts.
    \8\ See John Wasik, Speak Loudly--Or Lose Your Big Stick, The 
Financial Times, July 24, 2002, at 26 (only eight retail mutual fund 
groups that openly disclose how they vote on proxies). We have 
previously prepared reports commenting on the role of institutional 
investors in the corporate accountability process and their impact 
on portfolio companies. See Division of Corporation Finance, SEC, 
Staff Report on Corporate Accountability (Sept. 4, 1980) (printed 
for the use of Senate Comm. on Banking, Housing and Urban Affairs, 
96th Cong., 2d Sess.) (hereinafter SEC, Staff Report on Corporate 
Accountability); SEC, Institutional Investor Study Report (Mar. 10, 
1971) (printed for the use of House Comm. on Interstate and Foreign 
Commerce, 92nd Cong., 1st Sess.) (hereinafter SEC, Institutional 
Investor Study Report).
    \9\ We have received three rulemaking petitions urging that we 
adopt rules requiring funds to disclose both the policies and 
guidelines followed by the funds in determining how to vote on proxy 
proposals, and the record of actual proxy votes cast. See Rulemaking 
Petition by Domini Social Investments, LLC (Nov. 27, 2001); 
Rulemaking Petition by the International Brotherhood of Teamsters 
(Jan. 18, 2001); Rulemaking Petition by the American Federation of 
Labor and Congress of Industrial Organizations (July 30, 2002 and 
Dec. 20, 2000). The rulemaking petitions are available for 
inspection and copying in File No. 4-439 in the Commission's Public 
Reference Room.
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    Mutual funds are formed as corporations or business trusts under 
state law and, as in the case of other corporations and trusts, must be 
operated for the benefit of their shareholders.\10\ Because a mutual 
fund is the beneficial owner of its portfolio securities, the fund's 
board of directors, acting on the fund's behalf, has the right and the 
obligation to vote proxies relating to the fund's portfolio securities. 
As a practical matter, however, the board generally delegates this 
function to the fund's investment adviser as part of the adviser's 
general management of fund assets, subject to the board's continuing 
oversight. The investment adviser to a mutual fund is a fiduciary that 
owes the fund a duty of ``utmost good faith, and full and fair 
disclosure.'' \11\ This fiduciary duty extends to all functions 
undertaken on the fund's behalf, including the voting of proxies 
relating to the fund's portfolio securities. An investment adviser 
voting proxies on behalf of a fund, therefore, must do so in a manner 
consistent with the best interests of the fund and its 
shareholders.\12\
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    \10\ See generally James M. Storey & Thomas M. Clyde, Mutual 
Fund Law Handbook Sec.  7.2 (1998); Allan S. Mostoff & Olivia P. 
Adler, Organizing an Investment Company--Structural Considerations 
Sec.  2.4 in The Investment Company Regulation Deskbook (Amy L. 
Goodman ed., 1997).
    \11\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 
194 (1963) (interpreting Section 206 of the Investment Advisers Act 
of 1940). Cf. Section 36(b) of the Investment Company Act [15 U.S.C. 
80a-35] (investment adviser of a fund has a fiduciary duty with 
respect to the receipt of compensation paid by the fund).
    \12\ See Investment Advisers Act Release No. 2059, supra note . 
See also SEC, Staff Report on Corporate Accountability, supra note , 
at 391 (fiduciary principle applies to all aspects of investment 
management, including voting). Cf. Dep't of Labor, Interpretive 
Bulletins Relating to the Employee Retirement Income Security Act of 
1974, 29 CFR 2509.94-2 (2002) (fiduciary act of managing employee 
benefit plan assets consisting of equity securities includes voting 
of proxies appurtenant to those securities).
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    Traditionally, mutual funds have been viewed as largely passive 
investors, reluctant to challenge corporate management on issues such 
as corporate governance.\13\ Funds have often followed the so-called 
``Wall Street rule,'' according to which an investor should either vote 
as management recommends or, if dissatisfied with management, sell the 
stock.\14\ In recent years, however, some funds, along with other 
institutional investors, have become more assertive in exercising their 
proxy voting responsibilities.\15\ The increased assertiveness by 
mutual funds in the voting of proxies may have a number of causes. In 
some instances, funds have come to hold such large positions in a 
particular portfolio company that they cannot easily sell the company's 
stock if the company's management is performing poorly.\16\ The 
investment policies of index funds generally do not permit them to sell 
poorly performing investments, and thus these funds may become active 
in corporate governance in order to maximize value for their 
shareholders.\17\
    Recent corporate scandals have created renewed investor interest in 
issues of corporate governance and have underscored the need for mutual 
funds and other institutional investors to play a more active role in 
corporate governance.\18\ The increased equity holdings and 
accompanying voting power of mutual funds place them in a position to 
have enormous influence on corporate accountability. As major 
shareholders, mutual funds may play a vital role in monitoring the 
stewardship of the companies in which they invest.
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    \13\ See, e.g., SEC, Staff Report on Corporate Accountability, 
supra note 8, at 404 (investment managers have routinely supported 
management slates of director nominees); Alan R. Palmiter, Mutual 
Fund Voting of Portfolio Shares: Why Not Disclose?, 23 Cardozo L. 
Rev. 1419, 1430-31 (2002) (discussing mutual fund passivity in 
corporate governance). See generally John C. Coffee, Jr., The SEC 
and The Institutional Investor: A Half-Time Report, 15 Cardozo L. 
Rev. 837 (1994) (institutional investors have historically been 
passive investors); Bernard S. Black, Shareholder Passivity 
Reexamined, 89 Mich. L. Rev. 520 (1990) (shareholder voting has 
historically been passive).
    \14\ See SEC, Staff Report on Corporate Accountability, supra 
note 8, at 392 (describing ``Wall Street Rule'').
    \15\ See, e.g., Aaron Lucchetti, A Mutual-Fund Giant Is Stalking 
Excessive Pay, Wall Street Journal, June 12, 2002, at C1 (Fidelity 
has voted against management recommendations involving stock-option 
plans); Kathleen Day, Prodding For Disclosure of Funds' Proxy Votes, 
Washington Post, Apr. 8, 2001, at H1 (Domini Social Equity Fund 
voted against management proposal to issue additional stock options 
for directors).
    \16\ See Palmiter, supra note 13, at 1435-1436 (as holdings have 
increased, mutual funds have realized that they cannot easily sell 
blocks of poorly performing stock).
    \17\ See Kathleen Pender, The Influence of Indexing on the 
Markets, San Francisco Chronicle, June 23, 2002, at G1 (some index 
funds are more likely to vote proxies because they generally cannot 
sell portfolio securities consistent with their investment 
policies).
    \18\ See, e.g., Josh Friedman, Vanguard to Turn More Activist in 
Proxy Voting, Los Angeles Times, Aug. 22, 2002, at B3 (Vanguard 
imposing stricter corporate governance guidelines in light of recent 
events); Tom Hamburger, Union Targets Corporate Change, Wall Street 
Journal, July 30, 2002, at A2 (workers should use pension funds and 
votes to compel changes in corporate behavior); Beth Healy, Big 
Investors Assuming a More Activist Stance, Boston Globe, July 11, 
2002, at C1 (big investors say they are taking a more activist 
stance after financial scandals at Enron, Global Crossing, and 
WorldCom); Russ Wiles, Funds May Have More to Say on Governance, 
Chicago Sun-Times, June 3, 2002, at F53 (investors taking a closer 
look at corporate governance issues as a result of Enron).
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    Moreover, in some situations the interests of a mutual fund's 
shareholders may conflict with those of its investment adviser with 
respect to proxy voting.\19\ This may occur, for example, 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.\20\ In these situations, 
a fund's adviser may have an incentive to support management 
recommendations to further its business interests.
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    \19\ See, e.g., Aaron Bernstein & Geoffrey Smith, Can You Trust 
Your Fund Company?, BusinessWeek Online, Aug. 8, 2002 (AFL-CIO 
argues that conflicts of interest lead mutual funds to vote with 
management).
    \20\ For additional examples of potential conflicts of interest 
involving investment advisers, see Investment Advisers Act Release 
No. 2059, supra note 3, at Section I., ``Background.''
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    Yet, in spite of the substantial institutional voting power held by 
mutual funds, the increasing importance of the exercise of that power 
to fund shareholders, and the potential for conflicts of interest with 
respect to the exercise of fund proxy voting power, limited information 
is available regarding how funds vote their proxies. At present, the 
Commission's rules do not require mutual funds to disclose either their 
proxy voting policies and procedures or their proxy voting records.\21\ 
Several mutual fund complexes voluntarily provide information to 
investors, often on their websites, about the policies and procedures 
that they use to determine

[[Page 60830]]

how to vote proxies and, in some cases, their actual proxy voting 
decisions.\22\ The Internet provides a medium for these funds to make 
information about their proxy voting available to shareholders quickly 
and in a cost-effective manner. We applaud these voluntary efforts of 
mutual funds to disclose proxy voting information to shareholders, and 
we encourage all funds to provide similar information without delay.
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    \21\ In general, investment companies are organized either as 
business trusts in Delaware or Massachusetts, or as corporations in 
Maryland. The applicable state statutes do not specifically permit 
shareholders to inspect books and records relating to proxy voting 
by funds with respect to portfolio securities. See Del. Code Ann. 
tit. 12, Sec.  3801-3824 (2001); Mass. Gen. Laws. Ann. ch. 182, 
Sec.  1-14 (2002); Md. Code Ann., Corporations Sec.  2-512 (2001).
    \22\ See Calvert Group, Ltd. <www.calvertgroup.com 
(visited July 25, 2002) (proxy voting policies and votes cast); 
Domini Social Investments LLC <www.domini.com (visited 
July 25, 2002) (proxy voting policies and votes cast); Fidelity 
Management & Research Company <www.fidelity.com  (visited 
Sept. 4, 2002) (proxy voting policies); PAX World Management 
Corporation <www.paxfund.com (visited July 25, 2002) 
(proxy voting policies and votes cast); Teachers Insurance and 
Annuity Association of America-College Retirement and Equities Fund 
<www.tiaa-cref.org (visited Sept. 8, 2002) (proxy voting 
policies); The Vanguard Group <www.vanguard.com (visited 
Sept. 5, 2002) (proxy voting policies).
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    We believe, however, that the time has now arrived for the 
Commission to consider requiring mutual funds to disclose their proxy 
voting policies and procedures, and their actual voting records.\23\ 
Proxy voting decisions by funds may play an important role in 
maximizing the value of the funds' investments, having an enormous 
impact on the financial livelihood of millions of Americans. Further, 
requiring greater transparency of proxy voting by funds may encourage 
funds to become more engaged in corporate governance of issuers held in 
their portfolios, which may benefit all investors and not just fund 
shareholders. Finally, shedding light on mutual fund proxy voting could 
illuminate potential conflicts of interest and discourage voting that 
is inconsistent with fund shareholders' best interests. Advances in 
technology over the last 30 years, specifically the Internet, allow 
this disclosure of proxy voting records to be readily accessible at low 
cost.
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    \23\ Twice in the past we have considered requiring funds to 
provide information about proxy voting with respect to portfolio 
securities. See Notice of Proposal to Amend Forms N-8B-1, N-8B-3, N-
8B-4, N-5, and N-1Q To Require Registered Investment Companies To 
Disclose with Greater Specificity Their Policies on Involvement In 
the Affairs of Their Portfolio Companies, Investment Company Act 
Release No. 6853 (Dec. 1, 1971) [36 FR 25434 (Dec. 31, 1971)] 
(proposed amendments would have required registered investment 
companies to disclose their policies and procedures for considering 
proxy materials of portfolio companies); Notice of Withdrawal of 
Proposal to Amend Forms N-8B-1, N-8B-3, N-8B-4, N-5, and N-1Q To 
Require Registered Investment Companies To Disclose with Greater 
Specificity Their Policies on Involvement In the Affairs of Their 
Portfolio Companies, Investment Company Act Release No. 9295 (May 
20, 1976) [41 FR 21796 (May 28, 1976)]; Proposed Rules Relating to 
Shareholder Communications, Shareholder Participation in the 
Corporate Electoral Process and Corporate Governance Generally, 
Securities Exchange Act Release No. 14970 (July 18, 1978) [43 FR 
31945 (July 24, 1978)] (proposed rules would have required 
registered investment companies and other institutional investors to 
disclose their proxy voting policies and procedures for equity 
securities held for their own account or the account of others, and 
the number of times they voted for or against management or 
abstained from voting on any contested matter); Proposed Rules 
Relating to Shareholder Communications, Shareholder Participation in 
the Corporate Electoral Process and Corporate Governance Generally, 
Withdrawal of Proposed Rule and Amendments, Securities Exchange Act 
Release No. 15385 (Dec. 6, 1978) [43 FR 58533 (Dec. 14, 1978)]. In 
2000, we proposed amendments to Form ADV, the registration form for 
investment advisers, that would require registered investment 
advisers to disclose their proxy voting practices. See Electronic 
Filing by Investment Advisers; Proposed Amendments to Form ADV, 
Investment Advisers Act Release No. 1862 (Apr. 5, 2000) [65 FR 20524 
(Apr. 17, 2000)]. These amendments remain pending.
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II. Discussion

    We are proposing to amend the registration forms for funds, and 
recently proposed Form N-CSR, to require the disclosure of fund proxy 
voting policies and procedures as well as actual proxy votes cast.\24\
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    \24\ Form N-1A [17 CFR 239.15A; 17 CFR 274.11A] is the 
registration form for open-end management investment companies. Form 
N-2 [17 CFR 239.14; 17 CFR 11a-1] is the registration form for 
closed-end management investment companies. Form N-3 [17 CFR 
239.17a; 17 CFR 274.11b] is the registration form for separate 
accounts organized as management investment companies that offer 
variable annuity contracts.
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A. Disclosure of Policies and Procedures With Respect To Voting Proxies 
Relating to Portfolio Securities

    We are proposing to require funds that invest in voting securities 
to disclose in their statements of additional information (``SAIs'') 
the policies and procedures that they use to determine how to vote 
proxies relating to securities held in their portfolios.\25\ This would 
include the procedures that a fund uses when a vote presents a conflict 
between the interests of fund shareholders, on the one hand, and those 
of the fund's investment adviser, principal underwriter, or any 
affiliated person of the fund, its investment adviser, or principal 
underwriter, on the other. It also would include any policies and 
procedures of a fund's investment adviser, or any other third party, 
that the fund uses, or that are used on the fund's behalf, to determine 
how to vote proxies relating to portfolio securities.\26\ For example, 
if a fund delegates proxy voting decisions to its investment adviser 
and the adviser uses its own policies and procedures to vote the fund's 
proxies, disclosure of the adviser's policies and procedures would be 
required.
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    \25\ The SAI is part of a fund's registration statement and 
contains information about a fund in addition to that contained in 
the prospectus. The SAI is required to be delivered to investors 
upon request and is available on the Commission's Electronic Data 
Gathering, Analysis, and Retrieval System (``EDGAR'').
    \26\ Proposed Item 13(f) of Form N-1A; Proposed Item 18.16 of 
Form N-2; Proposed Item 20(o) of Form N-3. See Section 2(a)(3) of 
the Investment Company Act [15 U.S.C. 80a-2(a)(3)] (defining 
affiliated person).
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    For open-end management investment companies that continuously 
offer their shares and maintain an updated registration statement, the 
required SAI disclosure will result in continuous investor access, upon 
request, to current proxy voting policies and procedures. Because 
closed-end funds do not offer their shares continuously, and are 
therefore generally not required to maintain an updated SAI to meet 
their obligations under the Securities Act of 1933,\27\ we are also 
proposing to require closed-end funds to disclose their proxy voting 
policies and procedures annually on Form N-CSR.\28\
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    \27\ Pursuant to rule 8b-16(b) under the Investment Company Act 
[17 CFR 270.8b-16(b)], closed-end funds are not required to file 
amendments to their registration statements (including their SAIs) 
in order to comply with their Investment Company Act registration 
obligations, provided that they include specified information in 
their annual reports to shareholders.
    \28\ Item 3 of proposed Form N-CSR.
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    We would expect that funds' disclosure of their policies and 
procedures would include general policies and procedures, as well as 
policies with respect to voting on specific types of issues. The 
following are examples of general policies and procedures that some 
funds include in their proxy voting policies and procedures and with 
respect to which disclosure would be appropriate:
    [sbull] The extent to which the fund delegates its proxy voting 
decisions to its investment adviser or another third party, or relies 
on the recommendations of a third party;
    [sbull] Policies and procedures relating to matters that may affect 
substantially the rights or privileges of the holders of securities to 
be voted; and
    [sbull] Policies regarding the extent to which the fund will 
support or give weight to the views of management of the company.
    The following are examples of specific types of issues that are 
covered by some funds' proxy voting policies and procedures and with 
respect to which disclosure would be appropriate:
    [sbull] Corporate governance matters, including changes in the 
state of incorporation, mergers and other

[[Page 60831]]

corporate restructurings, and anti-takeover provisions such as 
staggered boards, poison pills, and supermajority provisions;
    [sbull] Changes to capital structure, including increases and 
decreases of capital and preferred stock issuance;
    [sbull] Stock option plans and other management compensation 
issues; and
    [sbull] Social and corporate responsibility issues.
    We also are proposing to require that a fund disclose in its 
shareholder reports that a description of the fund's proxy voting 
policies and procedures is available (i) without charge, upon request, 
by calling a specified toll-free (or collect) telephone number; (ii) on 
the fund's website, if applicable; and (iii) on the Commission's Web 
site at http://www.sec.gov.\29\ The proposals also would require a fund 
to send this description of the fund's proxy voting policies and 
procedures within three business days of receipt of the request, by 
first-class mail or other means designed to ensure equally prompt 
delivery.\30\
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    \29\ See Proposed Item 22(b)(7) and 22(c)(5) of Form N-1A; 
Proposed Instructions 4.g. & 5.e. to Item 23 of Form N-2; Proposed 
Instructions 4(vii) & 5(v) to Item 27(a) of Form N-3.
    \30\ Proposed Instructions to Items 22(b)(7) and 22(c)(5) of 
Form N-1A; Proposed Instruction 6 to Item 23 of Form N-2; Proposed 
Instruction 6 to Item 27(a) of Form N-3.
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    We request comment generally on the disclosure of policies and 
procedures that funds use to determine how to vote proxies relating to 
securities held in their portfolios and specifically on the following 
issues.
    [sbull] Should we require funds to disclose their policies and 
procedures with respect to voting proxies of portfolio securities?
    [sbull] Should we provide greater specificity with regard to the 
disclosure that funds are required to make? For example, should our 
forms expressly require disclosure of any or all of the specific 
matters enumerated above or of any other specific matters?
    [sbull] Is the SAI (and, for closed-end funds, Form N-CSR) the 
appropriate location for funds to disclose their policies and 
procedures with respect to voting proxies relating to portfolio 
securities? Will our proposals provide adequate access to fund proxy 
voting policies and procedures by fund shareholders and prospective 
investors? Should the disclosure be included in a document that is 
delivered to every shareholder?

B. Disclosure of Proxy Voting Record

    We also are proposing to require each fund to file with the 
Commission its proxy voting record and make this record available to 
its shareholders. In addition, a fund would be required to disclose in 
its annual and semi-annual reports to shareholders information 
regarding any proxy votes that are inconsistent with its proxy voting 
policies and procedures.
Disclosure of Complete Proxy Voting Record
    The Commission is proposing to require a fund to file its complete 
proxy voting record as part of its report on proposed Form N-CSR. 
Today's proposals would add a new item to proposed Form N-CSR, which 
would require a fund to disclose the following information for each 
matter relating to a portfolio security considered at any shareholder 
meeting held during the period covered by the report and with respect 
to which the fund was entitled to vote:
    [sbull] The name of the issuer of the portfolio security;
    [sbull] The exchange ticker symbol of the portfolio security;
    [sbull] The Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    [sbull] The shareholder meeting date;
    [sbull] A brief identification of the matter voted on;
    [sbull] Whether the matter was proposed by the issuer or by a 
security holder;
    [sbull] Whether the fund cast its vote on the matter;
    [sbull] How the fund cast its vote (e.g., for or against proposal, 
or abstain; for or withhold regarding election of directors); and
    [sbull] Whether the fund cast its vote for or against 
management.\31\
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    \31\ Item 2 of proposed Form N-CSR.
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    A fund also would be required to make its proxy voting record 
available to its shareholders. Specifically, the proposals would 
require a fund to disclose in its SAI, as well as annual and semi-
annual reports to shareholders, that the fund's proxy voting record is 
available (i) without charge, upon request, by calling a specified 
toll-free (or collect) telephone number, (ii) on the fund's Web site, 
if applicable, and (iii) on the Commission's Web site.\32\ The 
proposals also would require a fund, upon receipt of a request for its 
proxy voting record, to send the information disclosed in response to 
Item 2 of the Fund's most recently filed Form N-CSR.\33\ Funds would be 
required to send this information within three business days of receipt 
of the request, by first-class mail or other means designed to ensure 
equally prompt delivery.\34\
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    \32\ See Proposed Items 13(f) and 22(b)(7) & (c)(5) of Form N-
1A; Proposed Item 18.16 and Proposed Instructions 4.g. and 5.e. to 
Item 23 of Form N-2; Proposed Item 20(o) and Proposed Instructions 
4(vii) and 5(v) to Item 27(a) of Form N-3.
    \33\ Proposed Instructions to Items 13(f), 22(b)(7), and 
22(c)(5) of Form N-1A; Proposed Instruction to Item 18.16 and 
proposed Instruction 6 to Item 23 of Form N-2; Proposed Instruction 
to Item 20(o) and proposed Instruction 6 to Item 27(a) of Form N-3.
    \34\ Id.
---------------------------------------------------------------------------

    Our proposals would require that a fund's proxy voting policies and 
procedures and proxy voting record be publicly available through 
filings with us. They also would require that this information be 
readily available to fund shareholders, without charge, and that 
shareholders be apprised of how this information may be obtained. We 
believe that these proposals strike an appropriate balance--ensuring 
that a description of a fund's proxy voting policies and procedures, as 
well as its proxy voting record, are readily available to interested 
fund shareholders without imposing on funds, and their shareholders, 
unnecessary costs that would be associated with the distribution of 
this information to every shareholder of a fund.\35\
---------------------------------------------------------------------------

    \35\ Cf. Rulemaking Petition by Domini Social Investments, LLC 
(Nov. 27, 2001); Rulemaking Petition by the International 
Brotherhood of Teamsters (Jan. 18, 2001); Rulemaking Petition by the 
American Federation of Labor and Congress of Industrial 
Organizations (July 30, 2002, and Dec. 20, 2000) (requesting that 
the Commission require funds to provide their proxy voting 
information on the Internet and make paper copies available upon 
request).
---------------------------------------------------------------------------

    We considered whether to provide funds greater flexibility in 
determining the medium through which to make their proxy voting 
information available to their shareholders, so that a fund could, for 
example, meet this obligation exclusively through website access. We 
concluded that, at this time, requiring funds to make the information 
available to investors who call a toll-free (or collect) telephone 
number would ensure the most widespread access to this information by 
all investors. While the percentage of households with Internet access 
has increased considerably in recent years, it remains substantially 
lower than the percentage with access to telephones.\36\
---------------------------------------------------------------------------

    \36\ See Economics and Statistics Administration & National 
Telecommunications and Information Administration, A Nation Online: 
How Americans Are Expanding Their Use of the Internet, at 3 (Feb. 
2002) (50.5% of households had Internet access as of Sept. 2001); 
Federal Communications Commission, Telephone Subscribership In the 
United States, at 1 (Feb. 2002) (95.1% of households had telephone 
service as of July 2001).
---------------------------------------------------------------------------

    We note, however, that we have taken steps to encourage issuers and 
market intermediaries to communicate with and deliver information to 
investors

[[Page 60832]]

through the Internet.\37\ The increased availability of information 
through the Internet has helped to promote transparency, liquidity, and 
efficiency by making information available to investors quickly and in 
a cost-effective manner. We encourage each fund to make its proxy 
voting information available to its shareholders on its website, if it 
has one.
---------------------------------------------------------------------------

    \37\ See, e.g., Acceleration of Periodic Report Filing Dates and 
Disclosure Concerning Website Access to Reports, Securities Act 
Release No. 8128 (Sept. 5, 2002) [67 FR 58479 (Sept. 16, 2002)] 
(requiring companies to include disclosure in their annual reports 
on Form 10-K about availability on company websites of reports on 
Forms 10-K, 10-Q, and 8-K).
---------------------------------------------------------------------------

    We request comment generally on the proposed disclosure of a fund's 
proxy voting record and specifically on the following issues.
    [sbull] What would be the costs of requiring funds to file with the 
Commission their proxy voting records on Form N-CSR, and to make these 
records available to their shareholders? Are there less costly 
alternative means of requiring funds to disclose their proxy voting 
records?
    [sbull] What would be the benefits to fund shareholders and others 
of having funds' proxy voting records disclosed?
    [sbull] Is Form N-CSR the appropriate location for the disclosure 
of a fund's proxy voting record? We have proposed, but not yet adopted, 
Form N-CSR. If we ultimately do not adopt Form N-CSR to implement the 
certification requirement of Section 302 of the Sarbanes-Oxley Act of 
2002, should we nevertheless adopt Form N-CSR as a medium for a fund to 
disclose its proxy voting record? If not, how should a fund file its 
proxy voting record with the Commission? Should the information simply 
be filed together with the reports to shareholders currently required 
to be filed with the Commission pursuant to rule 30b2-1 under the 
Investment Company Act?\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 270.30b2-1.
---------------------------------------------------------------------------

    [sbull] Is it sufficient to require that a fund's proxy voting 
record be made available to investors or should we require a fund to 
deliver its proxy voting record to each investor? For example, should a 
fund's complete proxy voting record be included in its reports to 
shareholders?
    [sbull] Should a fund be permitted to meet its obligation to 
disclose its proxy voting record exclusively through posting the 
required information on its website?
    [sbull] The proposal would require funds to disclose their proxy 
voting records semi-annually. Will this provide sufficiently frequent 
disclosure to investors? Should we require funds to disclose their 
proxy voting records more frequently? If so, through what means? Would 
less frequent disclosure, e.g., annually, be sufficient?
    [sbull] Are we proposing to require too much or too little 
information to be disclosed in proposed Form N-CSR? For example, should 
we limit the disclosure to contested matters, not require disclosure 
with respect to any categories of ``routine'' matters, or otherwise 
limit the types of matters with respect to which disclosure is 
required? Could funds generically disclose their votes on any 
categories of matters, e.g., votes with management (or votes as 
recommended by an independent third-party proxy voting service) on 
certain categories of issues? Would this type of summary disclosure 
provide investors with adequate information? Should we require 
additional information, e.g., information about how other funds in the 
fund complex have voted?
    [sbull] Our proposed requirements to disclose proxy voting policies 
and procedures and proxy voting records would only apply to registered 
management investment companies. Should the proposed disclosure 
requirements also extend to unit investment trusts (``UITs'')?\39\ If 
so, how should they apply? UITs do not include SAIs in their 
registration statements.\40\ In addition, UITs do not transmit reports 
to shareholders.\41\ Likewise, we have not proposed that UITs file 
proposed Form N-CSR. If the proxy voting disclosure requirements were 
to extend to UITs, where, and how frequently, should they make the 
required disclosure of their proxy voting policies and procedures and 
proxy voting records (e.g., prospectus, annual report on Form N-SAR, a 
newly created form, sponsor's website)? How would UITs alert investors 
to the availability of the information since they do not file SAIs, or 
transmit reports to shareholders? Should UITs only be required to 
disclose proxy voting information annually because, unlike management 
investment companies, they are not currently subject to semi-annual 
reporting requirements? Are there any other modifications to the 
proposed disclosure requirements that would be appropriate in the case 
of UITs? If we extend the proposed proxy voting requirements to UITs, 
should we exempt UITs that invest exclusively in mutual funds, such as 
UITs that offer variable annuities and variable life insurance, since 
the underlying mutual funds would be covered?
---------------------------------------------------------------------------

    \39\ A unit investment trust is ``an investment company which 
(A) is organized under a trust indenture, contract of custodianship 
or agency, or similar instrument, (B) does not have a board of 
directors, and (C) issues only redeemable securities, each of which 
represents an undivided interest in a unit of specified securities; 
but does not include a voting trust.'' Section 4(2) of the 
Investment Company Act [15 U.S.C. 80a-4(2)].
    \40\ Currently, UITs register under the Investment Company Act 
on Form N-8B-2 [17 CFR 274.12] and register their securities under 
the Securities Act of 1933 on Form S-6 [17 CFR 239.16].
    \41\ Cf. Rule 30e-2 under the Investment Company Act [17 CFR 
270.30e-2] (requiring registered unit investment trusts 
substantially all of the assets of which consist of securities 
issued by a management investment company to transmit to their 
shareholders semi-annually a report containing all of the applicable 
information and financial statements or their equivalent required to 
be included in reports of the management investment company for the 
same fiscal period).
---------------------------------------------------------------------------

Disclosure of Proxy Votes That Are Inconsistent With Fund's Policies 
and Procedures
    We also are proposing to require a fund to disclose in its annual 
and semi-annual reports to shareholders proxy votes (or failures to 
vote) that are inconsistent with the fund's proxy voting policies and 
procedures.\42\ The information that would be required would include 
the same information required by proposed Form N-CSR with respect to 
disclosure of the fund's complete proxy voting record.\43\ In addition, 
the fund would be required to disclose the reasons why the fund voted, 
or failed to vote, in a manner inconsistent with its proxy voting 
policies and procedures.\44\
---------------------------------------------------------------------------

    \42\ See Proposed Items 22(b)(8) & (c)(6) of Form N-1A; Proposed 
Instructions 4.h. & 5.f. to Item 23 of Form N-2; Proposed 
Instructions 4(viii) & 5(vi) to Item 27(a) of Form N-3.
    \43\ See Item 2 of proposed Form N-CSR. See also discussion 
supra Section II.B., ``Disclosure of Complete Proxy Voting Record.''
    \44\ See Proposed Items 22(b)(8)(x) & (c)(6)(x) of Form N-1A; 
Proposed Instructions 4.h.(10) & 5.f.(10) to Item 23 of Form N-2; 
Proposed Instructions 4(viii)(J) & 5(vi)(J) to Item 27(a) of Form N-
3.
---------------------------------------------------------------------------

    We believe that when a fund votes the proxies of its portfolio 
securities in a manner inconsistent with the fund's stated policies and 
procedures, a heightened risk exists that a conflict of interest may be 
present. Therefore, in these instances, it is appropriate that funds 
include information about the vote in reports that are delivered to all 
shareholders. We believe that this will provide shareholders with the 
best opportunity to evaluate the propriety of the proxy voting decision 
and will serve as a strong deterrent to voting decisions that are not 
in the best interests of shareholders.
    We request comment generally on the disclosure of proxy votes that 
are inconsistent with a fund's policies and procedures and specifically 
on the following issues.
    [sbull] Should we require disclosure in reports to shareholders of 
proxy votes

[[Page 60833]]

that are inconsistent with a fund's proxy voting policies and 
procedures? Is it necessary or appropriate to require delivery (as 
opposed to availability) of this information to all shareholders?
    [sbull] Should information about any other aspects of a fund's 
actual proxy voting record be required to be included in reports to 
shareholders? For example, should a fund be required to include in its 
reports to shareholders its votes on contested matters, management 
compensation issues, director elections, or any other matters?

III. General Request for Comments

    The Commission requests comment on the amendments proposed in this 
release, whether any further changes to our rules or forms are 
necessary or appropriate to implement the objectives of our proposed 
amendments, and on other matters that might have an effect on the 
proposals contained in this release.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 [44 U.S.C. 3501, et seq.], and the Commission is 
submitting the proposed collections of information to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The titles for the collections of 
information are: (1) ``Form N-1A under the Investment Company Act of 
1940 and Securities Act of 1933, Registration Statement of Open-End 
Management Investment Companies'; (2) ``Form N-2--Registration 
Statement of Closed-End Management Investment Companies''; (3) ``Form 
N-3--Registration Statement of Separate Accounts Organized as 
Management Investment Companies''; and (4) ``Form N-CSR--Certified 
Shareholder Report of Registered Management Investment Companies.'' An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid OMB control number.
    Form N-1A (OMB Control No. 3235-0307), Form N-2 (OMB Control No. 
3235-0026), and Form N-3 (OMB Control No. 3235-0316) were adopted 
pursuant to Section 8(a) of the Investment Company Act [15 U.S.C. 80a-
8] and Section 5 of the Securities Act [15 U.S.C. 77e]. We issued a 
release proposing Form N-CSR on August 30, 2002, pursuant to Section 
8(a) of the Investment Company Act [15 U.S.C. 80a-8] and Section 13 of 
the Securities Exchange Act [15 U.S.C. 78m].
    We are proposing amendments to require funds holding equity 
securities to disclose the policies and procedures that they use to 
determine how to vote the proxies of their portfolio securities. We are 
also proposing to require disclosure of the actual voting record with 
respect to such proxies. We believe that the changes we propose today 
will enhance the transparency of fund proxy voting and will allow 
shareholders to monitor whether funds are voting portfolio securities 
in the best interests of shareholders.

Form N-1A

    Form N-1A, including the proposed amendments, contains collection 
of information requirements. The likely respondents to this information 
collection are open-end funds registering with the Commission on Form 
N-1A. Compliance with the disclosure requirements of Form N-1A is 
mandatory. Responses to the disclosure requirements are not 
confidential.
    The current hour burden for preparing an initial Form N-1A filing 
is 801 hours per portfolio. The current annual hour burden for 
preparing post-effective amendments of Form N-1A is 99 hours per 
portfolio. The Commission estimates that, on an annual basis, 193 
portfolios file initial registration statements on Form N-1A and 7,525 
file post-effective amendments on Form N-1A. Thus, the current total 
annual hour burden for the preparation and filing of Form N-1A is 
899,568 hours.
    We estimate that the proposed amendments would increase the hour 
burden per portfolio per filing of an initial registration statement by 
8 hours and would increase the hour burden per portfolio per filing of 
a post-effective amendment to a registration statement by 2 hours. 
Thus, if the proposed amendments to Form N-1A are adopted, the total 
annual hour burden for all funds for preparation and filing of initial 
registration statements and post-effective amendments to Form N-1A 
would be 916,162 hours.

Form N-2

    Form N-2, including the proposed amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are closed-end funds registering with the Commission on Form 
N-2. Compliance with the disclosure requirements of Form N-2 is 
mandatory. Responses to the disclosure requirements are not 
confidential.
    The current hour burden for preparing an initial Form N-2 filing is 
536.7 burden hours per filing, and the current annual hour burden for 
preparing post-effective amendments of Form N-2 is 101.7 hours per 
filing. The Commission currently estimates that, on an annual basis, 
140 respondents file an initial registration statement on Form N-2 and 
38 file post-effective amendments on Form N-2. Thus, the current total 
annual hour burden for the preparation and filing of Form N-2 is 79,003 
hours.
    We estimate that the proposed amendments would increase the hour 
burden per filing of an initial registration statement by 8 hours and 
would increase the hour burden per filing of a post-effective amendment 
to a registration statement by 2 hours. Thus, if the proposed 
amendments to Form N-2 are adopted, the total annual hour burden for 
all funds for preparation and filing of initial registration statements 
and post-effective amendments on Form N-2 would be 80,198.6 hours.

Form N-3

    Form N-3, including the proposed amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are separate accounts, organized as management investment 
companies and offering variable annuities, registering with the 
Commission on Form N-3. Compliance with the disclosure requirements of 
Form N-3 is mandatory. Responses to the disclosure requirements are not 
confidential.
    The current annual hour burden for preparing an initial 
registration statement on a Form N-3 is 907.2 hours per portfolio. The 
current annual hour burden for preparing post-effective amendments of 
Form N-3 is 148.4 hours per portfolio. The Commission estimates that, 
on an annual basis, no initial registration statements will be filed on 
Form N-3 and 60 post-effective amendments will be filed on Form N-3. 
The estimated average number of portfolios per filing is 4, bringing 
the estimated total number of portfolios in post-effective amendments 
to Form N-3 filings annually to 240. Thus, the current total burden 
hours for the preparation and filing of Form N-3 is 35,616 hours.
    We estimate that the proposed amendments would increase the hour 
burden per portfolio of an initial registration statement by 8 hours 
and would increase the hour burden per portfolio of a post-effective 
amendment to a registration statement by 2 hours. Thus, if the proposed 
amendments to Form N-3 are adopted, the total annual hour burden for 
all funds for preparation and filing of initial

[[Page 60834]]

registration statements and post-effective amendments on Form N-3 would 
be 36,096 hours.

Form N-CSR

    Proposed Form N-CSR, including the proposed amendments, contains 
collection of information requirements. The respondents to this 
information collection would be management investment companies subject 
to rule 30e-1 under the Investment Company Act of 1940 registering with 
the Commission on Forms N-1A, N-2, or N-3. Compliance with the 
disclosure requirements of Form N-CSR is proposed to be mandatory. 
Responses to the disclosure requirements are not confidential.
    We previously estimated that the hour burden for preparing a 
proposed Form N--CSR would be 5 hours per filing. We also estimated 
that 3,700 registered investment companies would file Form N-CSR on a 
semi-annual basis for a total of 7,400 filings. Thus, we estimated that 
the total annual hour burden for the preparation and filing of Form N-
CSR would be 37,000 hours.\45\
---------------------------------------------------------------------------

    \45\ See Investment Company Act Release No. 25723 (Aug. 30, 
2002) [67 FR 57298 (Sept. 9, 2002)].
---------------------------------------------------------------------------

    We estimate that the proposed amendments would increase the hour 
burden per filing of a Form N-CSR by 10 hours. Thus, if the proposed 
amendments to Form N-CSR are adopted, the total annual hour burden for 
all funds for preparation and filing of Form N-CSR would be 111,000 
hours.\46\
---------------------------------------------------------------------------

    \46\ This increase in hour burden includes that imposed by Item 
3 of proposed Form N-CSR with respect to policies and procedures 
used by a closed-end fund in determining how to vote proxies 
relating to portfolio securities.
---------------------------------------------------------------------------

Shareholder Reports

    Rule 30e-1, including the proposed amendments to Forms N-1A, N-2, 
and N-3, contains collection of information requirements.\47\ 
Compliance with the disclosure requirements of rule 30e-1 is mandatory. 
Responses to the disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------

    \47\ The proposed amendments are to Forms N-1A, N-2, and N-3. 
Rule 30e-1(a) under the Investment Company Act of 1940 [17 CFR 
270.30e-1(a)] requires funds to include in the shareholder reports 
the information that is required by the fund's registration 
statement form.
---------------------------------------------------------------------------

    There are approximately 3,700 management investment companies 
subject to rule 30e-1. We estimate that the current hour burden for 
preparing and filing semi-annual and annual shareholder reports in 
compliance with rule 30e-1 is 202.5 hours. We estimate that the 
proposed amendments would increase the hour burden of complying with 
rule 30e-1 by 10 hours. Thus, if the proposed amendments are adopted, 
the total hour burden of complying with rule 30e-1 would be 212.5 
hours, for a total annual burden to the industry of 786,250 hours.

Request for Comments

    We request your comments on the accuracy of our estimates. Pursuant 
to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) 
Evaluate whether the proposed collection of information is necessary 
for the proper performance of the functions of the agency, including 
whether the information will have practical utility; (ii) evaluate the 
accuracy of the Commission's estimate of burden of the proposed 
collection of information; (iii) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (iv) evaluate whether there are ways to minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Room 3208, 
New Executive Office Building, Washington, DC 20503, and should send a 
copy to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 5th Street, NW, Washington, DC 20549-0609, with 
reference to File No. S7-36-02. OMB is required to make a decision 
concerning the collection of information between 30 and 60 days after 
publication of this release. Consequently, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days 
after publication of this Release.

V. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. We propose to require funds to provide disclosure about how 
they vote proxies of the portfolio securities they hold. Funds would be 
required to disclose in their registration statements their policies 
and procedures used to determine how to vote proxies relating to 
portfolio securities, and to include disclosure about the availability 
of the fund's proxy voting record. This disclosure would be included in 
the statement of additional information (``SAI''), which is not part of 
the fund's prospectus but is delivered to investors free of charge upon 
request. We are also proposing to require a fund to file with the 
Commission semi-annually, as part of its reports on proposed Form N-
CSR, its complete proxy voting record for the period covered by the 
report. Our proposals would also require a fund to include in its 
annual and semi-annual reports to shareholders disclosure that this 
record, and the fund's proxy voting policies and procedures, are 
available (i) without charge, upon request from the fund, (ii) on the 
fund's website, if applicable, and (iii) on the SEC website. Finally, 
our proposals would require disclosure in shareholder reports of any 
proxy votes that are inconsistent with the fund's policies and 
procedures.

A. Benefits

    The proposed form amendments will benefit fund investors, by 
providing them with access to information about how funds vote their 
proxies. To the extent that investors would choose among funds based on 
their proxy voting policies and records, in addition to other factors 
such as expenses and investment policies, investors will be better able 
to select funds that suit their particular preferences.
    In some situations the interests of a mutual fund's shareholders 
may conflict with those of its investment adviser with respect to proxy 
voting. This may occur, for example, 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. In these situations, a fund's adviser 
may have an incentive to support management recommendations to further 
its business interests. Our proposals would require funds to disclose 
how they address such conflicts of interest in determining how to vote 
their proxies, and would also require funds to identify any proxy votes 
that are inconsistent with their stated voting policies. This 
disclosure requirement should benefit fund shareholders by deterring 
voting decisions that are motivated by considerations of the interests 
of the fund's adviser rather than the interests of fund shareholders.
    Moreover, the proposed rules could increase funds' focus on 
corporate governance. This could result in better decisionmaking in 
particular corporate governance matters, which may enhance shareholder 
value of the issuers of portfolio securities, and may, in turn, benefit 
both investors in the fund and other investors in these issuers. These 
benefits are difficult to quantify. We note that assets held in equity 
funds account for approximately 19% of the market capitalization of all 
publicly

[[Page 60835]]

traded U.S. corporate equity.\48\ We request comment on the extent and 
magnitude of the effect that requiring disclosure of proxy voting 
guidelines and decisions by funds would have on corporate governance, 
and on the U.S. economy generally.
---------------------------------------------------------------------------

    \48\ See Securities Industry Fact Book, supra note 5, at 71.
---------------------------------------------------------------------------

B. Costs

    The proposed amendments would lead to some additional costs for 
funds, which may be passed on to fund shareholders.
    Our proposals would require new disclosure by a fund regarding its 
proxy voting policies and records, in its SAI and its annual and semi-
annual reports to shareholders. These costs would include both internal 
costs (for attorneys and other non-legal staff of a fund, such as 
computer programmers, to prepare and review the required disclosure) 
and external costs (for printing and typesetting of the 
disclosure).\49\ First, our proposals would require disclosure of the 
fund's proxy voting policies and procedures, and disclosure about the 
availability of its proxy voting record, in the fund's SAI. Because the 
SAI is typically not typeset and is only provided to shareholders upon 
request, we estimate that the external costs per investment company of 
this additional disclosure in the SAI would be minimal. For purposes of 
the Paperwork Reduction Act, we have estimated that the disclosure 
requirements would add 18,270 hours to the burden of completing Forms 
N-1A, N-2 and N-3.\50\ We estimate that this additional burden would 
equal total internal costs of $1,259,534 annually, or $340 per 
investment company.\51\
    Second, with respect to annual and semi-annual reports to 
shareholders, funds would be required to include disclosure about the 
availability of information regarding the fund's proxy voting policies 
and procedures, and proxy voting record, and to disclose any proxy 
votes that were inconsistent with the fund's proxy voting policies and 
procedures. We estimate that to comply with these disclosure 
requirements, a typical fund would need to include at most one 
additional page in its annual and semi-annual reports to shareholders, 
at a typesetting cost of $55 per page and a printing cost of $0.025 per 
page.\52\ We estimate that a typical fund may have, on average, 30,000 
shareholder accounts;\53\ therefore, the additional disclosure in 
shareholder reports would cost approximately $1610 (($0.025 x 30,000 
shareholder accounts, plus $55) x 2 reports per year) in external costs 
per fund. Based on the Commission's estimate of 3700 registered 
management investment companies, we estimate these external costs would 
be $5,957,000 for the industry as a whole. In addition, we estimate 
that these disclosure requirements would add 37,000 burden hours for 
management investment companies required to transmit shareholder 
reports, or 10 hours per fund, equal to internal costs of $2,550,780 
for the industry annually, or $689 per investment company.\54\
---------------------------------------------------------------------------

    \49\ Based on the Division's review of materials submitted by 
various mutual fund complexes, we believe that most registered 
management investment companies currently maintain policies and 
procedures used to determine how to vote proxies relating to 
portfolio securities.
    \50\ This would represent 16,594 additional hours for Form N-1A, 
1,196 additional hours for Form N-2, and 480 additional hours for 
Form N-3.
    \51\ These figures are based on a Commission estimate that 
approximately 3,700 management investment companies would be subject 
to the proposed amendments and an estimated hourly wage rate of 
$68.94. The estimate of the number of investment companies is based 
on data derived from the Commission's EDGAR filing system. The 
estimated wage rate figure is based on published hourly wage rates 
for compliance attorneys in New York City ($74.22) and programmers 
($27.91), and the estimate, based on the Commission staff's 
discussions with certain fund complexes, that attorneys and 
programmers would divide time equally on compliance with the proxy 
voting disclosure requirements, yielding a weighted wage rate of 
$51.065 (($74.22 x .50) + (27.91 x .50)) = $51.065). See Securities 
Industry Association, Report on Management & Professional Earnings 
in the Securities Industry 2001 (Oct. 2001). This weighted wage rate 
was then adjusted upward by 35% for overhead, reflecting the costs 
of supervision, space, and administrative support, to obtain the 
total per hour internal cost of $68.94 (51.065 x 1.35) = $68.94.
    \52\ This estimate is based on information provided to the 
Division of Investment Management by registered investment companies 
regarding printing and typesetting costs for prospectuses and SAIs.
    \53\ This estimate regarding the average number of shareholder 
accounts per typical fund is derived from data provided in the 
Mutual Fund Fact Book, supra note 5, at 63, 64.
    \54\ These figures are based on a Commission estimate that 
approximately 3,700 investment companies would be subject to the 
proposed amendments and an estimated hourly wage rate of $68.94. See 
supra note.
---------------------------------------------------------------------------

    Third, our proposals also would require funds to file with the 
Commission information regarding each matter relating to a portfolio 
security considered at any shareholder meeting held during the period 
covered by the report on proposed Form N-CSR, and to make available to 
their shareholders the information contained in proposed Form N-CSR. We 
estimate that the external costs per investment company of this 
additional disclosure would be minimal. In addition, we estimate that 
these disclosure requirements would add 74,000 burden hours to Form N-
CSR, or 20 hours per management investment company filing on Form N-CSR 
annually. We estimate that this burden would be $5,101,560 in total 
internal costs annually, or $1,379 per investment company.\55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

    Therefore, based on this analysis, we estimate that the total 
external and internal costs of the additional disclosure that would be 
required by the proposed amendments would be $14,868,874. We request 
comment on the nature and magnitude of our estimates of the costs of 
the additional disclosure that would be required if our proposals were 
adopted.
    Because the proposed amendments may have the effect of inducing 
fund advisers and fund boards to devote more resources to articulating 
their proxy voting policies and procedures in more detail, and to 
monitoring proxy voting decisions, they may result in higher expenses 
and advisory fees for funds. Some of these expenses may be passed on to 
shareholders. We request comment on the extent to which the proposed 
amendments would increase costs to funds and their shareholders as well 
as affect shareholder value.

C. Request for Comments

    We request comments on all aspects of this cost-benefit analysis, 
including identification of any additional costs or benefits of, or 
suggested alternatives to, the proposed amendments. Commenters are 
requested to provide empirical data and other factual support for their 
views to the extent possible.

VI. Consideration of Burden on Competition; Promotion of Efficiency, 
Competition, and Capital Formation

    Section 23(a)(2) of the Exchange Act requires us, when adopting 
rules under the Exchange Act, to consider the impact that any new rule 
would have on competition. Section 23(a)(2) also prohibits us from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\56\ In addition, section 2(c) of the Investment Company Act, 
section 2(b) of the Securities Act, and section 3(f) of the Exchange 
Act require the Commission, when engaging in rulemaking that requires 
it to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.\57\

[[Page 60836]]

    The proposed amendments are intended to provide greater 
transparency for fund shareholders regarding the management of their 
investments in funds. The changes may improve efficiency. The enhanced 
disclosure requirements would provide shareholders with greater access 
to proxy voting policies and decisions of the funds in which they 
invest, which would promote more efficient allocation of investments by 
investors and more efficient allocation of assets among competing 
funds. The proposed amendments may also improve competition, as 
enhanced disclosure may prompt funds to seek to provide better-informed 
investors with improved products and services. Finally, the effects of 
the proposed amendments on capital formation are unclear. Although, as 
noted above, we believe that the proposed amendments would benefit 
investors, the magnitude of the effect of the proposed amendments on 
efficiency, competition, and capital formation is difficult to 
quantify, particularly given that most funds do not currently provide 
the type of disclosure contemplated by the proposed amendments.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78w(a)(2).
    \57\ 15 U.S.C. 77(b), 78c(f), and 80a-2(c).
---------------------------------------------------------------------------

    We request comment on whether the proposed amendments, if adopted, 
would impose a burden on competition. We also request comment on 
whether the proposed amendments, if adopted, would promote efficiency, 
competition, and capital formation. Commenters are requested to provide 
empirical data and other factual support for their views if possible.

VII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``Analysis'') has 
been prepared in accordance with 5 U.S.C. 603, and relates to the 
Commission's proposed form amendments under the Securities Act, the 
Exchange Act, and the Investment Company Act to require funds to 
provide disclosure about how they vote proxies of portfolio securities 
they hold. Under the proposed amendments, funds would be required to 
disclose in their registration statements the policies and procedures 
that they use to determine how to vote the proxies of portfolio 
securities. The proposal also would require funds to file with the 
Commission and to make available to their shareholders, upon request 
and without charge, a document containing the information required by 
proposed Form N-CSR.
    Specifically, a fund would be required to disclose in its statement 
of additional information (``SAI'') its policies and procedures used to 
determine how to vote proxies of the securities held in its portfolio, 
and to provide disclosure regarding the availability of its proxy 
voting record to shareholders. The proposals also would require a fund 
to file with the Commission, as part of its reports on proposed Form N-
CSR, its complete proxy voting record for the period covered by the 
report. Finally, the proposals also would require a fund to include in 
its annual and semi-annual reports to shareholders disclosure that this 
record, and the fund's proxy voting policies and procedures, are 
available
    (i) without charge, upon request from the fund, (ii) on the fund's 
Web site, if applicable, and (iii) on the SEC Web site, and to include 
disclosure about any proxy votes cast by the fund that are inconsistent 
with its policies and procedures.

A. Reasons for, and Objectives of, Proposed Amendments

    As we have noted above, proxy voting decisions may play an 
important role in maximizing the value of a fund's investments for its 
shareholders. Requiring funds to disclose specific proxy voting 
information could enable shareholders to make an informed assessment as 
to whether funds are utilizing proxy voting for the benefit of fund 
shareholders. We are proposing these amendments because we believe that 
requiring management investment companies to disclose their proxy 
policies and procedures as well as voting records will result in 
greater transparency for fund shareholders regarding the overall 
management of their investments. We also believe it is possible to 
achieve this improved disclosure quickly and inexpensively because of 
the advancements in technology over the last 30 years, such as the 
Internet.

B. Legal Basis

    The Commission is proposing amendments to Forms N-1A, N-2, N-3, and 
N-CSR pursuant to authority set forth in sections 5, 6, 7, 10, 19(a), 
and 28 of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, 77s(a), and 
77z-3], sections 10(b), 13, 15(d), 23(a), and 36 of the Exchange Act 
[15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm], and sections 6(c), 
8, 24(a), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-6(c), 
80a-8, 80a-24(a), 80a-29, and 80a-37].

C. Small Entities Subject to the Rule

    For purposes of the Regulatory Flexibility Act, an investment 
company is a small entity if it, together with other investment 
companies in the same group of related investment companies, has net 
assets of $50 million or less as of the end of its most recent fiscal 
year.\58\ Approximately 205 out of 3700 investment companies that would 
be affected by this rule meet this definition.\59\
---------------------------------------------------------------------------

    \58\ 17 CFR 270.0-10.
    \59\ This estimate is based on figures compiled by Division of 
Investment Management staff regarding investment companies 
registered on Form N-1A, Form N-2, and Form N-3. In determining 
whether an insurance company separate account is a small entity for 
purposes of the Regulatory Flexibility Act, the assets of insurance 
company separate accounts are aggregated with the assets of their 
sponsoring insurance companies. Investment Company Act rule 0-10(b) 
[17 CFR 270.0-10(b)]. Currently, no insurance company separate 
account filing on Form N-3 qualifies as a small entity.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed amendments would require a fund to disclose in its SAI 
its policies and procedures used to determine how to vote proxies for 
the securities held in its portfolio, and to provide disclosure 
regarding the availability of its proxy voting record to shareholders. 
The proposals would also require a fund to file with the Commission, as 
part of its reports on proposed Form N-CSR, its complete proxy voting 
record for the period covered by the report. Finally, the proposals 
would require a fund to include in its annual and semi-annual reports 
to shareholders disclosure that this proxy voting record, and the 
fund's proxy voting policies and procedures, are available (i) without 
charge, upon request, from the fund, (ii) on the fund's Web site, if 
applicable, and (iii) on the SEC Web site, and to include disclosure 
about any proxy votes cast by the fund that are inconsistent with its 
policies and procedures.
    The Commission estimates some one-time formatting and ongoing costs 
and burdens that would be imposed on all funds, but which may have a 
relatively greater impact on smaller firms. These include the costs 
related to disclosing proxy voting policies and procedures to fund 
shareholders; filing proxy voting records with the Commission on 
proposed Form N-CSR; and disclosing voting records via the Internet, 
U.S. mail, or other means. These costs also could include expenses for 
computer time, legal and accounting fees, information technology staff, 
and additional computer and telephone equipment. However, we believe, 
based on consultations with a number of fund complexes, including 
smaller fund complexes, that many investment companies presently 
collect in-house or outsource proxy voting information on a basis at 
least as current as semi-annually

[[Page 60837]]

and, therefore, that the marginal cost increases for most funds would 
be minimal.
    The Commission solicits comment on the effect the proposed 
amendments would have on small entities.

E. Duplicative, Overlapping or Conflicting Federal Rules

    There are no rules that duplicate, overlap, or conflict with the 
proposed amendments.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish our stated objective, while 
minimizing any significant adverse impact on small issuers. In 
connection with the proposed amendments, the Commission considered the 
following alternatives: (i) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources available to small entities; (ii) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the proposed amendments for small entities; (iii) 
the use of performance rather than design standards; and (iv) an 
exemption from coverage of the proposed amendments, or any part 
thereof, for small entities.
    The Commission believes at the present time that special compliance 
or reporting requirements for small entities, or an exemption from 
coverage for small entities, would not be appropriate or consistent 
with investor protection. The proposed disclosure amendments would 
provide shareholders with greater transparency regarding a fund's proxy 
voting policies and procedures, as well as records of votes cast. 
Different disclosure requirements for small entities, such as reducing 
the level of proxy voting disclosure that small entities would have to 
provide shareholders, may create the risk that those shareholders would 
not receive sufficient information to make an informed evaluation as to 
whether the fund's board and its investment adviser are complying with 
their fiduciary duties to vote proxies of portfolio securities in the 
best interest of fund shareholders. We believe it is important for the 
proxy disclosure that would be required by the proposed amendments to 
be provided to shareholders by all funds, not just funds that are not 
considered small entities.
    We have endeavored through the proposed amendments to minimize the 
regulatory burden on all funds, including small entities, while meeting 
our regulatory objectives. Small entities should benefit from the 
Commission's reasoned approach to the proposed amendments to the same 
degree as other investment companies. Further clarification, 
consolidation, or simplification of the proposals for funds that are 
small entities would be inconsistent with the Commission's concern for 
investor protection. Finally, we do not consider using performance 
rather than design standards to be consistent with our statutory 
mandate of investor protection in the present context.

G. Solicitation of Comments

    The Commission encourages the submission of written comments with 
respect to any aspect of this analysis. Comment is specifically 
requested on the number of small entities that would be affected by the 
proposed amendments and the likely impact of the proposals on small 
entities. Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. These 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed amendments are adopted, and will 
be placed in the same public file as comments on the proposed 
amendments themselves. Comments should be submitted in triplicate to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following e-mail address: [email protected]. All comment letters should refer to File No. S7-36-
02; this file number should be included on the subject line if e-mail 
is used. Comment letters will be available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549-0102. Electronically submitted comment 
letters also will be posted on the Commission's Internet Web site 
(http://www.sec.gov).\60\
---------------------------------------------------------------------------

    \60\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.
---------------------------------------------------------------------------

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Enforcement Fairness Act of 
1996,\61\ a rule is ``major'' if it results or is likely to result in:
---------------------------------------------------------------------------

    \61\ Pub. L. 104-21, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

    [sbull] an annual effect on the economy of $100 million or more;
    [sbull] a major increase in costs or prices for consumers or 
individual industries; or
    [sbull] significant adverse effects on competition, investment, or 
innovation.
    The Commission requests comment on the potential impact of the 
proposed amendments on the U.S. economy on an annual basis. Commenters 
are requested to provide empirical data to support their views.

IX. Statutory Authority

    The Commission is proposing amendments to Forms N-1A, N-2, N-3, and 
proposed Form N-CSR pursuant to authority set forth in sections 5, 6, 
7, 10, 19(a), and 28 of the Securities Act [15 U.S.C. 77e, 77f, 77g, 
77j, 77s(a), and 77z-3], sections 10(b), 13, 15(d), 23(a), and 36 of 
the Exchange Act [15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm], and 
sections 6(c), 8, 24(a), 30, and 38 of the Investment Company Act [15 
U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37].

List of Subjects

17 CFR Parts 239 and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rule and Form Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend title 17, chapter II of the Code of Federal Regulations as 
follows:

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    1. The authority citation for part 239 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    2. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *

[[Page 60838]]

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

    3. The authority citation for part 274 is amended by adding the 
following citations to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise 
noted.

    Section 274.101 is also issued under secs. 3(a) and 302, Pub. L. 
107-204, 116 Stat. 745.
    Section 274.128 is also issued under secs. 3(a) and 302, Pub. L. 
107-204, 116 Stat. 745.

    4. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is 
amended by:
    a. In Item 13, adding paragraph (f); and
    b. In Item 22, adding paragraphs (b)(7) and (8) and (c)(5) and (6).
    These amendments read as follows:

    Note: The text of Form N-1A does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 13. Management of the Fund

* * * * *
    (f) Proxy Voting Policies. Unless the Fund invests exclusively in 
non-voting securities, describe the policies and procedures that the 
Fund uses to determine how to vote proxies relating to portfolio 
securities, including the procedures that the Fund uses when a vote 
presents a conflict between the interests of Fund shareholders, on the 
one hand, and those of the Fund's investment adviser; principal 
underwriter; or any affiliated person of the Fund, its investment 
adviser, or its principal underwriter, on the other. Include any 
policies and procedures of the Fund's investment adviser, or any other 
third party, that the Fund uses, or that are used on the Fund's behalf, 
to determine how to vote proxies relating to portfolio securities. 
Also, state that shareholders may obtain information regarding how the 
Fund voted proxies relating to portfolio securities (1) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (2) on the Fund's website, if applicable; and (3) on the 
Commission's Web site at http://www.sec.gov.
    Instruction. When a Fund (or financial intermediary through which 
shares of the Fund may be purchased or sold) receives a request for 
information regarding how the Fund voted proxies relating to portfolio 
securities, the Fund (or financial intermediary) must send the 
information disclosed in response to Item 2 in the Fund's most recently 
filed Form N-CSR within 3 business days of receipt of the request by 
first-class mail or other means designed to ensure equally prompt 
delivery.
* * * * *

Item 22. Financial Statements

* * * * *
    (b) * * *
    (7) A statement that the Fund's proxy voting record for the period 
covered by the report, and a description of the policies and procedures 
that the Fund uses to determine how to vote proxies relating to 
portfolio securities, are available (i) without charge, upon request, 
by calling a specified toll-free (or collect) telephone number; (ii) on 
the Fund's Web site, if applicable; and (iii) on the Commission's Web 
site at http://www.sec.gov.
    Instruction. When a Fund (or financial intermediary through which 
shares of the Fund may be purchased or sold) receives a request for the 
Fund's proxy voting record, or a request for a description of the 
policies and procedures that the Fund uses to determine how to vote 
proxies, the Fund (or financial intermediary) must send the information 
disclosed in response to Item 2 in the Fund's most recently filed Form 
N-CSR, in the case of a request for the Fund's proxy voting record, or 
the information disclosed in response to Item 13(f) of this Form, in 
the case of a request for a description of the Fund's policies and 
procedures, within 3 business days of receipt of the request by first-
class mail or other means designed to ensure equally prompt delivery.
    (8) In the case of each matter relating to a portfolio security 
considered at any shareholder meeting held during the period covered by 
the report and with respect to which the Fund was entitled to vote and 
voted (or failed to vote) in a manner that was inconsistent with the 
Fund's proxy voting policies and procedures disclosed pursuant to Item 
13(f), the following information:
    (i) The name of the issuer of the portfolio security;
    (ii) The exchange ticker symbol of the portfolio security;
    (iii) The Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    (iv) The shareholder meeting date;
    (v) A brief identification of the matter voted on;
    (vi) Whether the matter was proposed by the issuer or by a security 
holder;
    (vii) Whether the Fund cast its vote on the matter;
    (viii) How the Fund cast its vote (e.g., for or against proposal, 
or abstain; for or withhold regarding election of directors);
    (ix) Whether the Fund cast its vote for or against management; and
    (x) The reasons why the Fund voted, or failed to vote, in a manner 
that was inconsistent with its proxy voting policies and procedures.
    (c) * * *
    (5) A statement that the Fund's proxy voting record for the period 
covered by the report, and a description of the policies and procedures 
that the Fund uses to determine how to vote proxies relating to 
portfolio securities, are available (i) without charge, upon request, 
by calling a specified toll-free (or collect) telephone number; (ii) on 
the Fund's Web site, if applicable; and (iii) on the Commission's Web 
site at http://www.sec.gov.
    Instruction. When a Fund (or financial intermediary through which 
shares of the Fund may be purchased or sold) receives a request for the 
Fund's proxy voting record, or a request for a description of the 
policies and procedures that the Fund uses to determine how to vote 
proxies, the Fund (or financial intermediary) must send the information 
disclosed in response to Item 2 in the Fund's most recently filed Form 
N-CSR, in the case of a request for the Fund's proxy voting record, or 
the information disclosed in response to Item 13(f) of this Form, in 
the case of a request for a description of the Fund's policies and 
procedures, within 3 business days of receipt of the request by first-
class mail or other means designed to ensure equally prompt delivery.
    (6) In the case of each matter relating to a portfolio security 
considered at any shareholder meeting held during the period covered by 
the report and with respect to which the Fund was entitled to vote and 
voted (or failed to vote) in a manner that was inconsistent with the 
Fund's proxy voting policies and procedures disclosed pursuant to Item 
13(f), the following information:
    (i) The name of the issuer of the portfolio security;
    (ii) The exchange ticker symbol of the portfolio security;
    (iii) The Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    (iv) The shareholder meeting date;
    (v) A brief identification of the matter voted on;
    (vi) Whether the matter was proposed by the issuer or by a security 
holder;
    (vii) Whether the Fund cast its vote on the matter;

[[Page 60839]]

    (viii) How the Fund cast its vote (e.g., for or against proposal, 
or abstain; for or withhold regarding election of directors);
    (ix) Whether the Fund cast its vote for or against management; and
    (x) The reasons why the Fund voted, or failed to vote, in a manner 
that was inconsistent with its proxy voting policies and procedures.
* * * * *
    5. Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1) is 
amended by:
    a. In Item 18, adding paragraph 16;
    b. In Item 23, removing ``and'' from the end of Instruction 4.e.;
    c. In Item 23, removing the period from the end of Instruction 4.f. 
and in its place adding a semi-colon;
    d. In Item 23, adding Instructions 4.g. and 4.h.;
    e. In Item 23, removing ``and'' from the end of Instruction 5.c.;
    f. In Item 23, removing the period from the end of Instruction 5.d. 
and in its place adding a semi-colon;
    g. In Item 23, adding Instructions 5.e. and 5.f.;
    h. In Item 23, redesignating Instruction 6 as Instruction 7; and
    i. In Item 23, adding new Instruction 6.
    These amendments read as follows:

    Note: The text of Form N-2 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-2

* * * * *

Item 18. Management

* * * * *
    16. Unless the Registrant invests exclusively in non-voting 
securities, describe the policies and procedures that the Registrant 
uses to determine how to vote proxies relating to portfolio securities, 
including the procedures that the Registrant uses when a vote presents 
a conflict between the interests of the Registrant's shareholders, on 
the one hand, and those of the Registrant's investment adviser; 
principal underwriter; or any affiliated person (as defined in section 
2(a)(3) of the 1940 Act (15 U.S.C. 80a-2(a)(3)) and the rules 
thereunder) of the Registrant, its investment adviser, or its principal 
underwriter, on the other. Include any policies and procedures of the 
Registrant's investment adviser, or any other third party, that the 
Registrant uses, or that are used on the Registrant's behalf, to 
determine how to vote proxies relating to portfolio securities. Also, 
state that shareholders may obtain information regarding how the 
Registrant voted proxies relating to portfolio securities (i) without 
charge, upon request, by calling a specified toll-free (or collect) 
telephone number; (ii) on the Registrant's Web site, if applicable; and 
(iii) on the Commission's Web site at http://www.sec.gov.
    Instruction. When a Registrant (or financial intermediary through 
which shares of the Registrant may be purchased or sold) receives a 
request for information regarding how the Registrant voted proxies 
relating to portfolio securities, the Registrant (or financial 
intermediary) must send the information disclosed in response to Item 2 
in the Registrant's most recently filed Form N-CSR within 3 business 
days of receipt of the request by first-class mail or other means 
designed to ensure equally prompt delivery.
* * * * *

Item 23. Financial Statements

* * * * *
    Instructions:
* * * * *
    4. * * *
    g. a statement that the Registrant's proxy voting record for the 
period covered by the report, and a description of the policies and 
procedures that the Registrant uses to determine how to vote proxies 
relating to portfolio securities, are available (1) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (2) on the Registrant's Web site, if applicable; and (3) on the 
Commission's Web site at http://www.sec.gov; and
    h. in the case of each matter relating to a portfolio security 
considered at any shareholder meeting held during the period covered by 
the report and with respect to which the Registrant was entitled to 
vote and voted (or failed to vote) in a manner that was inconsistent 
with the Registrant's proxy voting policies and procedures most 
recently disclosed pursuant to Item 18.16 of this Form or Item 3 of 
Form N-CSR, the following information:
    (1) the name of the issuer of the portfolio security;
    (2) the exchange ticker symbol of the portfolio security;
    (3) the Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    (4) the shareholder meeting date;
    (5) a brief identification of the matter voted on;
    (6) whether the matter was proposed by the issuer or by a security 
holder;
    (7) whether the Registrant cast its vote on the matter;
    (8) how the Registrant cast its vote (e.g., for or against 
proposal, or abstain; for or withhold regarding election of directors);
    (9) whether the Registrant cast its vote for or against management; 
and
    (10) the reasons why the Registrant voted, or failed to vote, in a 
manner that was inconsistent with its proxy voting policies and 
procedures.
    5. * * *
    e. a statement that the Registrant's proxy voting record for the 
period covered by the report, and a description of the policies and 
procedures that the Registrant uses to determine how to vote proxies 
relating to portfolio securities, are available (1) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (2) on the Registrant's Web site, if applicable; and (3) on the 
Commission's Web site at http://www.sec.gov; and
    f. in the case of each matter relating to a portfolio security 
considered at any shareholder meeting held during the period covered by 
the report and with respect to which the Registrant was entitled to 
vote and voted (or failed to vote) in a manner that was inconsistent 
with the Registrant's proxy voting policies and procedures most 
recently disclosed pursuant to Item 18.16 of this Form or Item 3 of 
Form N-CSR, the following information:
    (1) the name of the issuer of the portfolio security;
    (2) the exchange ticker symbol of the portfolio security;
    (3) the Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    (4) the shareholder meeting date;
    (5) a brief identification of the matter voted on;
    (6) whether the matter was proposed by the issuer or by a security 
holder;
    (7) whether the Registrant cast its vote on the matter;
    (8) how the Registrant cast its vote (e.g., for or against 
proposal, or abstain; for or withhold regarding election of directors);
    (9) whether the Registrant cast its vote for or against management; 
and
    (10) the reasons why the Registrant voted, or failed to vote, in a 
manner that was inconsistent with its proxy voting policies and 
procedures.
    6. When a Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives a request 
for the Registrant's proxy voting record, or a request for a 
description of the policies and procedures that the Registrant uses to 
determine how to vote proxies, the Registrant (or financial 
intermediary) must send the information disclosed in response to Item 2 
in the Registrant's most recently filed Form N-CSR, in the

[[Page 60840]]

case of a request for the Registrant's proxy voting record, or the 
information most recently disclosed in response to Item 18.16 of this 
Form or Item 3 of Form N-CSR, in the case of a request for a 
description of the Registrant's policies and procedures, within 3 
business days of receipt of the request by first-class mail or other 
means designed to ensure equally prompt delivery.
* * * * *
    6. Form N-3 (referenced in Sec. Sec.  239.17 and 274.11b) is 
amended by:
    a. In Item 20, adding paragraph (o);
    b. In Item 27(a), removing ``and'' from the end of Instruction 
4(v);
    c. In Item 27(a), removing the period from the end of Instruction 
4(vi) and in its place adding a semi-colon;
    d. In Item 27(a), adding Instructions 4(vii) and 4(viii);
    e. In Item 27(a), removing ``and'' from the end of Instruction 
5(iii);
    f. In Item 27(a), removing the period from the end of Instruction 
5(iv) and in its place adding a semi-colon;
    g. In Item 27(a), adding Instructions 5(v) and 5(vi);
    h. In Item 27(a), redesignating Instruction 6 as Instruction 7; and
    i. In Item 27(a), adding new Instruction 6.
    These amendments read as follows:

    Note: The text of Form N-3 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-3

* * * * *

Item 20. Management

* * * * *
    (o) Unless the Registrant invests exclusively in non-voting 
securities, describe the policies and procedures that the Registrant 
uses to determine how to vote proxies relating to portfolio securities, 
including the procedures that the Registrant uses when a vote presents 
a conflict between the interests of the Registrant's contractowners, on 
the one hand, and those of the Registrant's investment adviser; 
principal underwriter; or any affiliated person (as defined in Section 
2(a)(3) of the 1940 Act (15 U.S.C. 80a-2(a)(3)) and the rules 
thereunder) of the Registrant, its investment adviser, or its principal 
underwriter, on the other. Include any policies and procedures of the 
Registrant's investment adviser, or any other third party, that the 
Registrant uses, or that are used on the Registrant's behalf, to 
determine how to vote proxies relating to portfolio securities. Also, 
state that contractowners may obtain information regarding how the 
Registrant voted proxies relating to portfolio securities (i) without 
charge, upon request, by calling a specified toll-free (or collect) 
telephone number; (ii) on the Registrant's Web site, if applicable; and 
(iii) on the Commission's Web site at http://www.sec.gov.
    Instruction. When a Registrant (or financial intermediary through 
which shares of the Registrant may be purchased or sold) receives a 
request for information regarding how the Registrant voted proxies 
relating to portfolio securities, the Registrant (or financial 
intermediary) must send the information disclosed in response to Item 2 
in the Registrant's most recently filed Form N-CSR within 3 business 
days of receipt of the request by first-class mail or other means 
designed to ensure equally prompt delivery.
* * * * *

Item 27. Financial Statements

    (a) * * *
    Instructions:
* * * * *
    4. * * *
    (vii) a statement that the Registrant's proxy voting record for the 
period covered by the report, and a description of the policies and 
procedures that the Registrant uses to determine how to vote proxies 
relating to portfolio securities, are available (A) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (B) on the Registrant's Web site, if applicable; and (C) on the 
Commission's Web site at http://www.sec.gov; and
    (viii) in the case of each matter relating to a portfolio security 
considered at any shareholder meeting held during the period covered by 
the report and with respect to which the Registrant was entitled to 
vote and voted (or failed to vote) in a manner that was inconsistent 
with the Registrant's proxy voting policies and procedures disclosed 
pursuant to Item 20(o), the following information:
    (A) the name of the issuer of the portfolio security;
    (B) the exchange ticker symbol of the portfolio security;
    (C) the Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    (D) the shareholder meeting date;
    (E) a brief identification of the matter voted on;
    (F) whether the matter was proposed by the issuer or by a security 
holder;
    (G) whether the Registrant cast its vote on the matter;
    (H) how the Registrant cast its vote (e.g., for or against 
proposal, or abstain; for or withhold regarding election of directors);
    (I) whether the Registrant cast its vote for or against management; 
and
    (J) the reasons why the Registrant voted, or failed to vote, in a 
manner that was inconsistent with its proxy voting policies and 
procedures.
    5. * * *
    (v) a statement that the Registrant's proxy voting record for the 
period covered by the report, and a description of the policies and 
procedures that the Registrant uses to determine how to vote proxies 
relating to portfolio securities, are available (A) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (B) on the Registrant's Web site, if applicable; and (C) on the 
Commission's Web site at http://www.sec.gov; and
    (vi) in the case of each matter relating to a portfolio security 
considered at any shareholder meeting held during the period covered by 
the report and with respect to which the Registrant was entitled to 
vote and voted (or failed to vote) in a manner that was inconsistent 
with the Registrant's proxy voting policies and procedures disclosed 
pursuant to Item 20(o), the following information:
    (A) the name of the issuer of the portfolio security;
    (B) the exchange ticker symbol of the portfolio security;
    (C) the Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    (D) the shareholder meeting date;
    (E) a brief identification of the matter voted on;
    (F) whether the matter was proposed by the issuer or by a security 
holder;
    (G) whether the Registrant cast its vote on the matter;
    (H) how the Registrant cast its vote (e.g., for or against 
proposal, or abstain; for or withhold regarding election of directors);
    (I) whether the Registrant cast its vote for or against management; 
and
    (J) the reasons why the Registrant voted, or failed to vote, in a 
manner that was inconsistent with its proxy voting policies and 
procedures.
    6. When a Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives a request 
for the Registrant's proxy voting record, or a request for a 
description of the policies and procedures that the Registrant uses to 
determine how to vote proxies, the Registrant (or financial 
intermediary) must send the information disclosed in response to Item 2 
in the Registrant's most recently filed Form N-CSR, in the case of a 
request for the Registrant's proxy voting record, or the information 
disclosed in response to Item 20(o) of

[[Page 60841]]

this Form, in the case of a request for a description of the 
Registrant's policies and procedures, within 3 business days of receipt 
of the request by first-class mail or other means designed to ensure 
equally prompt delivery.
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

    7. Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128; as 
proposed in 67 FR 57298 (9/9/02)) is amended by:
    a. Redesignating Item 2 as Item 4; and
    b. Adding new Items 2 and 3 to read as follows:

    Note: The text of Form N-CSR does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-CSR

* * * * *

Item 2. Proxy Voting Records.

    Disclose the following information for each matter relating to a 
portfolio security considered at any shareholder meeting held during 
the period covered by the report provided pursuant to Item 1 and with 
respect to which the registrant was entitled to vote:
    (1) The name of the issuer of the portfolio security;
    (2) The exchange ticker symbol of the portfolio security;
    (3) The Council on Uniform Securities Identification Procedures 
(``CUSIP'') number for the portfolio security;
    (4) The shareholder meeting date;
    (5) A brief identification of the matter voted on;
    (6) Whether the matter was proposed by the issuer or by a security 
holder;
    (7) Whether the registrant cast its vote on the matter;
    (8) How the registrant cast its vote (e.g., for or against 
proposal, or abstain; for or withhold regarding election of directors); 
and
    (9) Whether the registrant cast its vote for or against management.
    Instruction. In the case of a registrant that offers multiple 
series of shares, provide the information required by this Item 
separately for each series. The term ``series'' means shares offered by 
a registrant that represent undivided interests in a portfolio of 
investments and that are preferred over all other series of shares for 
assets specifically allocated to that series in accordance with Rule 
18f-2(a) under the Investment Company Act of 1940 (17 CFR 270.18f-
2(a)).

Item 3. Disclosure of Proxy Voting Policies and Procedures for Closed-
End Management Investment Companies

    A closed-end management investment company that, pursuant to Item 
1, is including a copy of an annual report transmitted to stockholders 
must, unless it invests exclusively in non-voting securities, describe 
the policies and procedures that it uses to determine how to vote 
proxies relating to portfolio securities, including the procedures that 
the company uses when a vote presents a conflict between the interests 
of its shareholders, on the one hand, and those of the company's 
investment adviser; principal underwriter; or any affiliated person (as 
defined in section 2(a)(3) of the Investment Company Act of 1940 (15 
U.S.C. 80a-2(a)(3)) and the rules thereunder) of the company, its 
investment adviser, or its principal underwriter, on the other. Include 
any policies and procedures of the company's investment adviser, or any 
other third party, that the company uses, or that are used on the 
company's behalf, to determine how to vote proxies relating to 
portfolio securities.
* * * * *

    By the Commission.

    Dated: September 20, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-24409 Filed 9-25-02; 8:45 am]
BILLING CODE 8010-01-P