[Federal Register Volume 68, Number 26 (Friday, February 7, 2003)]
[Rules and Regulations]
[Pages 6564-6585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2951]



[[Page 6563]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 239, 249, 270, and 274



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

17 CFR Part 275



Proxy Voting by Investment Advisers; Final Rule

  Federal Register / Vol. 68, No. 26 / Friday, February 7, 2003 / Rules 
and Regulations  

[[Page 6564]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 249, 270, and 274

[Release Nos. 33-8188, 34-47304, IC-25922; 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: Final rule; request for comments on Paperwork Reduction Act 
burden estimate.

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SUMMARY: The Securities and Exchange Commission is adopting rule and 
form amendments 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. These 
amendments require registered management investment companies to 
disclose the policies and procedures that they use to determine how to 
vote proxies relating to portfolio securities. The amendments also 
require registered management investment companies to file with the 
Commission and to make available to shareholders the specific proxy 
votes that they cast in shareholder meetings of issuers of portfolio 
securities.

DATES: Effective Date: April 14, 2003.
    Compliance Dates: See Section III of this release for information 
on compliance dates.
    Comment Date: Comments regarding the ``collection of information'' 
requirements, within the meaning of the Paperwork Reduction Act of 
1995, of Form N-PX should be received by March 14, 2003.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by hard copy or electronic mail, 
but not by both methods.
    Comments sent by hard copy should be submitted in triplicate to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
5th 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. All comments received will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 5th Street, 
NW., Washington, DC 20549-0102. Electronically submitted comment 
letters will also be posted on the Commission's Internet site (http://www.sec.gov).\1\
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    \1\ We do not edit personal identifying information, such as 
names or e-mail addresses, from electronic submissions. Submit only 
information that you wish to make publicly available.

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

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting new rule 30b1-4 [17 CFR 270.30b1-4] and 
new Form N-PX [17 CFR 274.130] under the Investment Company Act of 1940 
[15 U.S.C. 80a-1 et seq.] (``Investment Company Act''); 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 and to offer their securities under the Securities Act of 
1933 [15 U.S.C. 77a et seq.] (``Securities Act''); and amendments to 
Form N-CSR [17 CFR 249.331; 17 CFR 274.128],\2\ the form to be used by 
registered management investment companies to file certified 
shareholder reports with the Commission under the Sarbanes-Oxley Act of 
2002.\3\
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    \2\ See Investment Company Act Release No. 25914 (Jan. 27, 2003) 
(adopting Form N-CSR).
    \3\ Pub. L. 107-204, Sec.  302, 116 Stat. 745 (2002).
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Executive Summary

    We are adopting rule and form amendments that:
    [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 to make 
available to its shareholders, either on its Web site or upon request, 
its record of how it voted proxies relating to portfolio securities. A 
fund will 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.\4\
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    \4\ See Disclosure of Proxy Voting Policies and Proxy Voting 
Records by Registered Management Investment Companies, Investment 
Company Act Release No. 25739 (Sept. 20, 2002) [67 FR 60828 (Sept. 
26, 2002)] (``Proposing Release'').
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    In a companion release, we are also adopting a new rule and rule 
amendments under the Investment Advisers Act of 1940 that will require 
a registered investment adviser that exercises voting authority over 
client proxies to adopt policies and procedures reasonably designed to 
ensure that the adviser votes proxies in the best interests of clients, 
to disclose to clients information about those policies and procedures, 
to disclose to clients how they may obtain information on how the 
adviser voted their proxies, and to maintain certain records relating 
to proxy voting.\5\
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    \5\ See Investment Advisers Act Release No. 2106 (Jan. 31, 
2003).
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I. Introduction and Background

    As of September 2002, mutual funds \6\ held $2.0 trillion in 
publicly traded U.S. corporate equity, representing approximately 18% 
of all publicly traded U.S. corporate equity.\7\ This represents a 
dramatic increase from only 7.4% at the end of 1992.\8\ 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.\9\ Yet, 
despite the enormous influence of mutual funds in the capital markets 
and their huge

[[Page 6565]]

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.\10\ We believe that the time has come 
to increase the transparency of proxy voting by mutual funds. This 
increased transparency will enable fund shareholders to monitor their 
funds' involvement in the governance activities of portfolio companies, 
which may have a dramatic impact on shareholder value.
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    \6\ For simplicity, this 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)]. The amendments, however, would also 
apply to registered closed-end management investment companies and 
insurance company separate accounts organized as management 
investment companies that offer variable annuity contracts.
    \7\ See Board of Governors of the Federal Reserve System, Flow 
of Funds Accounts of the United States: Flows and Outstandings, 
Third Quarter 2002, at 90 (2002) [hereinafter Flow of Funds 
Accounts] (estimating $2.005 trillion market value of mutual fund 
corporate equity holdings and $10.960 trillion market value of all 
corporate equity issues).
    \8\ Securities Industry Association, Securities Industry Fact 
Book 71 (2002).
    \9\ Investment Company Institute, Mutual Fund Fact Book 37 (42nd 
ed. 2002). 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.
    \10\ See John Wasik, Speak Loudly--Or Lose Your Big Stick, The 
Financial Times, July 24, 2002, at 26 (only eight retail mutual fund 
groups 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].
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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.\11\ 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 typically 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.''\12\ 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.\13\
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    \11\ 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).
    \12\ 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).
    \13\ See Investment Advisers Act Release No. 2106, supra note 5. 
See also SEC, Staff Report on Corporate Accountability, supra note 
10, 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.\14\ 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.\15\ In recent years, however, some funds, along with other 
institutional investors, have become more assertive in exercising their 
proxy voting responsibilities.\16\ 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.\17\ The 
investment policies of index funds typically 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.\18\
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    \14\ See, e.g., SEC, Staff Report on Corporate Accountability, 
supra note 10, 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).
    \15\ See SEC, Staff Report on Corporate Accountability, supra 
note 10, at 392 (describing ``Wall Street Rule'').
    \16\ 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).
    \17\ See Palmiter, supra note 14, at 1435-36 (as holdings have 
increased, mutual funds have realized that they cannot easily sell 
blocks of poorly performing stock).
    \18\ 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).
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    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 focus on corporate 
governance.\19\ 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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    \19\ 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.\20\ 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.\21\ In these situations, 
a fund's adviser may have an incentive to support management 
recommendations to further its business interests.
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    \20\ 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).
    \21\ For additional examples of potential conflicts of interest 
involving investment advisers, See Investment Advisers Act Release 
No. 2106, supra note 5, 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.\22\ 
Several mutual fund complexes voluntarily provide

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information to investors, often on their Web sites, about the policies 
and procedures that they use to determine how to vote proxies and, in 
some cases, their actual proxy voting decisions.\23\ 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.
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    \22\ 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).
    \23\ See Calvert Group, Ltd. <www.calvertgroup.com 
(visited January 14, 2003) (proxy voting policies and votes cast); 
Domini Social Investments LLC <www.domini.com (visited 
January 14, 2003) (proxy voting policies and votes cast); Fidelity 
Management & Research Company <www.fidelity.com (visited 
January 14, 2003) (proxy voting policies); PAX World Management 
Corporation <www.paxfund.com (visited January 14, 2003) 
(proxy voting policies and votes cast); Teachers Insurance and 
Annuity Association of America-College Retirement and Equities Fund 
<www.tiaa-cref.org (visited January 14, 2003) (proxy 
voting policies); The Vanguard Group <www.vanguard.com 
(visited January 14, 2003) (proxy voting policies).
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    We believe, however, that the time has now arrived for the 
Commission to require mutual funds to disclose their proxy voting 
policies and procedures, and their actual voting records. Investors in 
mutual funds have a fundamental right to know how the fund casts proxy 
votes on shareholders' behalf. Last September, we proposed amendments 
that would require mutual funds and other registered management 
investment companies to provide disclosure about how they vote proxies 
relating to portfolio securities that they hold (``Proposing 
Release'').\24\ Our proposals resulted in an extraordinary level of 
public interest and vigorous debate and over 8,000 comment letters.\25\ 
Today we adopt these proposals, with modifications to address 
commenters' concerns.
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    \24\ See Proposing Release, supra note 4. Prior to our rule 
proposal, we 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 Petitions 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.
    \25\ See, e.g., John J. Brennan and Edward C. Johnson 3d, No 
Disclosure: The Feeling is Mutual, Wall Street Journal, Jan. 14, 
2003, at A14 (arguing that proxy voting disclosure would harm 
shareholders); Aaron Lucchetti, SEC Proposal on Proxy Votes Finds 
Supporters in the House, Wall Street Journal, Dec. 17, 2002, at C14 
(reporting that House Financial Services Committee Chairman Michael 
G. Oxley and Capital Markets Subcommittee Chairman Richard H. Baker 
support the proxy voting disclosure proposal); John C. Bogle, Mutual 
Fund Secrecy, New York Times, Dec. 14, 2002, at A35 (arguing that 
fund agents should disclose proxy voting information); Gretchen 
Morgenson, Wider Support Is Sought For Disclosing Mutual Fund Votes, 
New York Times, Oct. 23, 2002, at C11 (explaining joint efforts of 
Pax World Funds, AFL-CIO, and Fund Democracy to urge investors to 
support the proposal, and discussing comments by industry 
participants); Kathleen Day, SEC Wants Funds To Disclose Votes, 
Washington Post, Sept. 20, 2002, at E3 (reporting comments on the 
proposal by disclosure advocates and opponents).
    The comment letters are available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549 (File No. S7-36-02). Public comments 
submitted by electronic mail are also available on our Web site, 
www.sec.gov. Many of the comment letters that the Commission 
received commented on both the Proposing Release and a companion 
release proposing a new rule and rule amendments under the 
Investment Advisers Act of 1940 that we are also adopting today. See 
Investment Advisers Act Release No. 2106, supra note 5.
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    Proxy voting decisions by funds can play an important role in 
maximizing the value of the funds' investments, thereby having an 
enormous impact on the financial livelihood of millions of Americans. 
Further, shedding light on mutual fund proxy voting could illuminate 
potential conflicts of interest and discourage voting that is 
inconsistent with fund shareholders' best interests. Finally, 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.

II. Discussion

    The Proposing Release generated significant comment and public 
interest. Of the approximately 8,000 comment letters, the overwhelming 
majority supported the proposals and urged us to adopt the proposed 
amendments. Many commenters, including individual investors, fund 
groups that currently provide proxy voting information to their 
shareholders, labor unions, and pension and retirement plan trustees, 
supported the proposals, and in some cases commented that the proposals 
did not go far enough in requiring funds to provide proxy voting 
disclosure. Many fund industry members supported the proposed 
amendments regarding the disclosure of policies and procedures. 
However, most fund industry members opposed the proposed amendments 
that would require disclosure of a fund's complete proxy voting record 
and disclosure of votes that are inconsistent with fund policies and 
procedures.
    The Commission is adopting the proposed amendments with the 
modifications described below that address some of the concerns 
expressed by commenters.

A. Disclosure of Policies and Procedures With Respect to Voting Proxies 
Relating to Portfolio Securities

    The Commission is adopting, with one modification to address 
commenters' concerns, the requirement that mutual funds that invest in 
voting securities 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.\26\ We are also adopting the requirement that closed-end 
funds disclose their proxy voting policies and procedures annually on 
Form N-CSR.\27\ This disclosure 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 an affiliated person of the fund, 
its investment adviser, or principal underwriter, on the other.\28\ It 
also includes 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. 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 is required. Or a fund's board may 
wish to adopt its adviser's policies and procedures, rather than 
designing its own.
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    \26\ Item 13(f) of Form N-1A; Item 18.16 of Form N-2; Item 20(o) 
of Form N-3. 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'').
    \27\ Item 7 of Form N-CSR.
    \28\ See Investment Advisers Act Release No. 2106, supra note, 
at Section II.A.2.b. ``Resolving Conflicts of Interest'' (discussing 
need for investment adviser's policies and procedures to address how 
adviser resolves material conflicts of interest with its clients).
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    We also are adopting, as proposed, the requirement 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 Web site, if applicable; and (iii) on the 
Commission's Web site at http://

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www.sec.gov.\29\ A fund will be required 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 Item 22(b)(7) and 22(c)(5) of Form N-1A; Instructions 
4.g. & 5.e. to Item 23 of Form N-2; Instructions 4(vii) & 5(v) to 
Item 27(a) of Form N-3.
    \30\ Instructions to Items 22(b)(7) and 22(c)(5) of Form N-1A; 
Instruction 6.a. to Item 23 of Form N-2; Instruction 6(i) to Item 
27(a) of Form N-3.
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    Commenters generally supported the proposed disclosure requirements 
regarding proxy voting policies and procedures. A number of commenters, 
however, objected to certain aspects of the disclosure requirements. 
Some commenters recommended that we provide additional, more specific 
guidelines regarding the categories of disclosure that should be 
included in proxy voting policies and procedures. These commenters, 
which included many ``socially responsible'' fund groups,\31\ argued 
that the absence of specific guidelines could create an incentive for 
funds to adopt as few policies and procedures as possible, thereby 
minimizing reporting and disclosure obligations.
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    \31\ ``Socially responsible'' funds use social and moral 
criteria as well as traditional investment criteria to select 
investments.
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    We have determined not to prescribe more specific guidelines or 
requirements for the proxy voting policies and procedures that a fund 
must disclose in its SAI or Form N-CSR for closed-end funds. The intent 
of our proposal is to promote transparency with respect to proxy voting 
information, and not to mandate the content of a fund's policies or 
procedures. Therefore, we believe that funds should be allowed the 
flexibility to determine the content that would be appropriate for this 
disclosure.
    We do expect, however, that funds' disclosure of their policies and 
procedures will 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 a portfolio 
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 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 are modifying our proposal in one respect, however, to clarify 
that a fund may satisfy the requirements for a description of its 
policies and procedures by including a copy of the policies and 
procedures themselves.\32\ A number of commenters recommended that we 
streamline the disclosure of policies and procedures that would be 
required in the SAI. Several of these commenters were fund groups that 
noted that they have funds with multiple sub-advisers, each of which 
uses its own proxy voting policies and procedures to vote the fund's 
proxies. Because the proposed rules would require the fund to include a 
description of each such sub-adviser's policies and procedures in the 
fund's SAI, commenters argued, the requirements would add lengthy 
disclosure to the SAI. Further, because different sub-advisers for a 
single fund could have policies that vary with respect to a particular 
issue, this disclosure could confuse investors. These commenters argued 
that disclosure of policies and procedures was not necessary or 
appropriate given the lack of genuine shareholder interest in the 
information.
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    \32\ Instruction 1 to Item 13(f) of Form N-1A; Instruction 1 to 
Item 18.16 of Form N-2; Instruction 1 to Item 20(o) of Form N-3; 
Instruction to Item 7 of Form N-CSR.
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    We have determined that it would not be appropriate to modify the 
proposal to allow a fund to reduce or eliminate the disclosure 
regarding its proxy voting policies and procedures. Shareholders have a 
right to know the policies and procedures that are being used by a fund 
to vote proxies on their behalf. To the extent that multiple policies 
are being used by a single fund, shareholders should have access to 
information about all the policies that are in effect. In order to 
mitigate the burden of preparing descriptions of policies and 
procedures, however, we have modified our disclosure requirements to 
permit a fund to include the actual policies and procedures used to 
vote proxies in the SAI or N-CSR, rather than a description of the 
policies.
    Some commenters argued that the SAI was not the appropriate 
location for disclosure of proxy voting policies and procedures because 
the SAI is not likely to reach a wide base of investors. These 
commenters argued that the policies and procedures should be required 
to be distributed to all investors, as part of the fund's prospectus, 
annual report, or in a separate mailing. We continue to believe, 
however, that the SAI is the most appropriate and cost-effective 
location for this disclosure. The disclosure will be readily accessible 
to shareholders because funds are required to provide an SAI promptly 
to any investor who requests one.\33\ On the other hand, funds and 
their shareholders will not be forced to bear the costs for printing 
and mailing this information to every shareholder, without regard to 
their level of interest in this information.
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    \33\ Instruction 3 to Item 1(b)(1) of Form N-1A (requiring fund 
or financial intermediary through which shares of the fund may be 
purchased or sold to send the SAI, within three business days of 
receipt of the request, by first-class mail or other means designed 
to ensure equally prompt delivery).
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B. Disclosure of Proxy Voting Record

    The Commission is adopting, with modifications, amendments that 
will require each fund to file with the Commission its proxy voting 
record and make this record available to its shareholders. The 
Commission is not, however, adopting its proposal to require a fund 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.
    The proposal to require funds to disclose their proxy voting 
records generated strong and divergent views among commenters. A number 
of commenters, including an overwhelming number of individual 
investors, strongly supported the Commission's proposal to require a 
fund to disclose its complete proxy voting record. Many of these 
commenters stated that this disclosure would improve shareholders' 
ability to monitor funds' voting decisions on their behalf and that it 
would allow investors to make more informed decisions when choosing 
among funds.

[[Page 6568]]

    On the other hand, many commenters, including a large number of 
fund industry participants, strongly opposed any requirement for a fund 
to provide disclosure of its actual proxy votes cast. First, they 
argued that shareholders are not interested in this disclosure, with 
many fund groups claiming that they have received virtually no requests 
from their shareholders for proxy voting information. Second, they 
argued that the proposals would deny funds the ability to vote 
confidentially and subject funds to pressure from corporate management 
to influence proxy voting decisions, as well as to retaliatory actions 
by management, such as restricting access by portfolio managers to 
corporate personnel. Third, on a related point, commenters argued that 
mandatory disclosure of proxy votes would undermine their ability to 
change corporate governance practices of portfolio companies through 
``behind the scenes'' private communications. Fourth, they argued that 
requiring funds to disclose their proxy votes publicly will subject 
them to orchestrated campaigns in the media and elsewhere by special 
interest groups with social or political agendas different from those 
of fund shareholders, which will detract from a fund's ability to 
concentrate on the management of its portfolio. Fifth, fund industry 
commenters argued that the required disclosure of proxy votes would 
undermine the role of fund boards of directors, including independent 
directors, in overseeing proxy voting and protecting fund shareholders 
against conflicts of interest. Some of these commenters suggested that 
rather than requiring disclosure of proxy votes, the Commission should 
mandate that fund directors approve proxy voting policies and 
procedures, including policies and procedures for addressing potential 
conflicts of interest, and should require reports to be provided to 
fund directors concerning actual proxy votes cast. Sixth, the 
commenters argued that the costs of collecting and disclosing the 
information in semi-annual reports on Form N-CSR would be substantial 
and would exceed any benefit to shareholders from the disclosure.
    After careful consideration of these comments, we continue to 
believe that requiring funds to disclose their complete proxy voting 
records will benefit investors by improving transparency and enabling 
fund shareholders to monitor their funds' involvement in the governance 
activities of portfolio companies. With respect to the specific 
arguments raised by commenters who opposed disclosure of proxy votes, 
we note first that the argument that investors are not interested in 
proxy voting disclosure is to some extent belied by the large number of 
favorable comments from individual investors that the proposal 
attracted. In addition, we note that a recent shareholder proposal 
seeking to require a major fund to disclose its proxy votes on social 
and environmental issues generated significant support from fund 
shareholders.\34\ Further, regardless of whether all, or a majority of, 
investors are interested in proxy vote disclosure, we believe that fund 
shareholders who are interested in this information have a fundamental 
right to know how the fund has exercised its proxy votes on their 
behalf.
---------------------------------------------------------------------------

    \34\ See CREF Participants Reject All Four Resolutions at 2002 
Annual Meeting, TIAA-CREF Press Release, Nov. 7, 2002 <www.tiaa-cref.org (visited Jan. 14, 2002) (18.7% of shares voted 
in favor of shareholder proposal that College Retirement Equities 
Fund (CREF) disclose how it votes proxies that involve social and 
environmental issues).
---------------------------------------------------------------------------

    Second, while we are cognizant of concerns that disclosure will 
undermine funds' ability to vote confidentially and thereby lead to 
pressure on or retaliation against funds, we believe that this risk is 
not sufficient to outweigh shareholders' interests in knowing how their 
funds have voted their portfolio securities. In addition, as some 
proponents of the disclosure requirements argued, the principle of 
confidential voting is intended to protect shareholders from having 
their votes disclosed prior to a shareholder meeting, while the 
amendments that we are adopting would only require disclosure of votes 
two months or more after a shareholder meeting. We are also persuaded 
by other commenters who noted that a large majority of portfolio 
companies currently do not have confidential voting policies and that 
companies are often able to identify when and how a particularly large 
shareholder, such as a fund, has cast its votes.\35\
---------------------------------------------------------------------------

    \35\ See Timothy M. Hunt, IRRC Corporate Governance Service 2002 
Background Report F, Background Reports (IRRC) at 7, 10 (Jan. 2002) 
(noting that 26.9% of the S&P 500 companies have confidential voting 
procedures, with smaller percentages at smaller companies, and that 
use of street names often does not protect the identity of 
shareholders).
---------------------------------------------------------------------------

    Third, with respect to the argument that the disclosure of a fund's 
proxy voting record will undermine the use of ``behind the scenes'' 
communications to change corporate governance practices, we note that 
disclosure by funds of their proxy votes is not inconsistent with these 
communications and will not force funds to disclose these 
communications. Further, we believe that requiring a fund to disclose 
its proxy voting record may actually encourage it to become more 
engaged in corporate governance matters involving issuers held in its 
portfolio, through ``behind the scenes'' communications as well as 
other means.
    Fourth, with respect to the argument that proxy vote disclosure 
will ``politicize'' the process of proxy voting by funds to the 
detriment of fund shareholders, we believe that to the extent that 
greater disclosure may encourage and enable shareholders to express 
their views on their funds' proxy decisions, that is an appropriate 
development. We agree, however, that fund shareholders could be 
adversely affected if, in fact, disclosure of fund proxy votes results 
in significant politicization of the proxy voting process by non-
shareholder interest groups and interference with funds' ability to 
change corporate governance practices through ``behind the scenes'' 
communications. Therefore, the Commission has asked the staff to 
monitor the effects of the disclosure and report back to the Commission 
on the operation of the rules, and whether there have been any 
unintended consequences as a result of the disclosure, no later than 
December 31, 2005.
    Fifth, we disagree with the argument that proxy voting disclosure 
will undermine the authority of funds' boards of directors, and that we 
instead should adopt amendments to require that boards be more involved 
in the proxy voting process. Disclosure of proxy votes is not 
inconsistent with, and, in fact, will promote recognition by fund 
boards of their obligation to exercise their proxy voting 
responsibilities in a manner that is consistent with shareholders' 
interests. Further, we believe that the additional requirements with 
respect to fund boards that some commenters suggested that we adopt in 
lieu of proxy voting disclosure are unnecessary. A fund's board of 
directors, acting on the fund's behalf, already has the obligation to 
vote proxies relating to the fund's portfolio securities. Although the 
board typically delegates this function to the fund's investment 
adviser, the adviser remains subject to the board's continuing 
oversight. By increasing transparency of proxy voting, the amendments 
will work in tandem with the existing obligation of fund boards.
    Finally, with respect to arguments that the disclosure may impose 
excessive costs, we note that several fund groups that currently 
provide disclosure of their complete proxy

[[Page 6569]]

voting records to their shareholders commented that although there are 
start-up costs for compliance systems, this cost decreases over time, 
and that the overall costs of the disclosure are minimal. We find these 
arguments made by funds that are providing this disclosure to be 
particularly persuasive and continue to believe that the costs of 
disclosure are reasonable. We also note that by requiring disclosure of 
the proxy voting record in filings with the Commission, with additional 
disclosure in the fund's SAI and annual and semi-annual reports to 
shareholders about how investors may obtain this voting record, we have 
tailored the disclosure requirement to allow those investors who are 
interested in this disclosure to access the information without 
imposing undue cost burdens. In addition, as discussed below, we have 
modified our proposals in order to further reduce the costs associated 
with this disclosure.\36\
---------------------------------------------------------------------------

    \36\ See discussion infra, ``Disclosure of Complete Proxy Voting 
Record.''
---------------------------------------------------------------------------

Disclosure of Complete Proxy Voting Record
    The Commission is adopting new rule 30b1-4 under the Investment 
Company Act to require that a fund file its complete proxy voting 
record on an annual basis.\37\ This rule will require a fund to file 
new Form N-PX, containing its complete proxy voting record for the 
twelve-month period ended June 30, by no later than August 31 of each 
year. Form N-PX will be a reporting form required under the Investment 
Company Act, and will be required to be signed by the fund, and on 
behalf of the fund by its principal executive officer or officers.\38\
---------------------------------------------------------------------------

    \37\ 17 CFR 270.30b1-4; General Instruction A and Item 1 to Form 
N-PX [17 CFR 274.129].
    \38\ General Instruction F.2.(a) to Form N-PX.
---------------------------------------------------------------------------

    We had proposed to require a fund to file its complete proxy voting 
record as part of its semi-annual reports on Form N-CSR, which will be 
used by registered management investment companies to file certified 
shareholder reports with the Commission under the Sarbanes-Oxley Act of 
2002.\39\ One commenter argued that this means of disclosure would 
impose unnecessary costs and substantial administrative complexity.\40\ 
The commenter noted that, under our proposed rules, fund complexes that 
have funds with staggered fiscal year ends would be required to file 
reports on Form N-CSR containing their proxy voting records as many as 
twelve times per year. We are persuaded that annual disclosure of a 
fund's proxy voting record is sufficient and that the filing does not 
need to be based on a fund's fiscal year end. Therefore, to reduce the 
burden of proxy vote disclosure, we are modifying our proposal to 
require that all funds file their voting records annually not later 
than August 31, for the twelve-month period ended June 30. This 
approach will have the advantages of making each fund's proxy voting 
record available within a relatively short period of time after the 
proxy voting season,\41\ and of providing disclosure of all funds' 
proxy voting records over a uniform period of time.
---------------------------------------------------------------------------

    \39\ Investment Company Act Release No. 25914 (Jan. 27, 2003) 
(adopting Form N-CSR).
    \40\ Memorandum from Paul G. Cellupica, Assistant Director, 
Office of Disclosure Regulation, Division of Investment Management, 
Securities and Exchange Commission re: Comments of Investment 
Company Institute (Jan. 15, 2003) (``ICI Memorandum'') (available in 
the comment file for File Nos. S7-36-02 and S7-38-02 and on the 
Commission's Web site, www.sec.gov).
    \41\ Based on information provided to the Commission staff by a 
third party that provides proxy voting services, the staff estimates 
that over 54% of shareholder meetings are held in the period from 
April through June of each year.
---------------------------------------------------------------------------

    Funds will be required to disclose the following information on 
Form N-PX 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.\42\
---------------------------------------------------------------------------

    \42\ Item 1 of Form N-PX.
---------------------------------------------------------------------------

    In response to commenters who noted that the exchange ticker symbol 
and CUSIP number may be difficult to obtain for certain portfolio 
securities, particularly foreign securities, we have added an 
instruction permitting a fund to omit this information if it is not 
available through reasonably practicable means.\43\
---------------------------------------------------------------------------

    \43\ Instruction 2 to Item 1 of Form N-PX. See ICI Memorandum, 
supra note ; Letter of Eric D. Roiter, Senior Vice President and 
General Counsel, Fidelity Management & Research Company (Dec. 6, 
2002).
---------------------------------------------------------------------------

    A fund also will be required to make its proxy voting record 
available to shareholders. However, we are modifying our proposal, in 
response to a comment, to allow a fund the flexibility to choose to 
make its proxy voting record available to shareholders either upon 
request or by making available an electronic version on or through the 
fund's Web site.\44\ The proposed amendments would have required a fund 
to send the proxy voting record upon request.\45\ This modification 
addresses concerns that the proposals would require funds with large 
numbers of holdings to produce lengthy proxy voting spreadsheets and to 
send them to investors who request them.\46\
---------------------------------------------------------------------------

    \44\ In addition, the fund's proxy voting record will be 
publicly available on the EDGAR section of the Commission's Web 
site.
    \45\ 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.
    \46\ Letter of Matthew P. Fink, President, Investment Company 
Institute (Jan. 21, 2003).
---------------------------------------------------------------------------

    As adopted, our amendments will require a fund to include in its 
annual and semi-annual reports to shareholders as well as its SAI a 
statement that information regarding how the fund voted proxies 
relating to portfolio securities during the most recent twelve-month 
period ended June 30 is available (1) without charge, upon request, by 
calling a specified toll-free (or collect) telephone number; or on or 
through the fund's Web site at a specified Internet address; or both; 
and (2) on the Commission's Web site.\47\ If a fund discloses that its 
proxy voting record is available by calling a toll-free (or collect) 
telephone number, it must send the information disclosed in the fund's 
most recently filed report on Form N-PX within three business days of 
receipt of a request for this information, by first-class mail or other

[[Page 6570]]

means designed to ensure equally prompt delivery.\48\
---------------------------------------------------------------------------

    \47\ Items 13(f), 22(b)(8), and 22(c)(6) of Form N-1A; Item 
18.16 and Instructions 4.h and 5.f to Item 23 of Form N-2; Item 
20(o) and Instructions 4(viii) and 5(vi) to Item 27(a) of Form N-3.
    If a fund is complying with this disclosure requirement, the 
inclusion of the fund's Web site address will not, by itself, 
include or incorporate by reference the information on the site into 
the fund's reports to shareholders or SAI, unless the fund otherwise 
acts to incorporate the information by reference. Cf. Securities Act 
Release No. 8128 (Sept. 5, 2002) [67 FR 58480, 58494 (Sept. 16, 
2002)] (noting that if a company is complying with the requirement 
to disclose its Web site address in its annual report on Form 10-K, 
inclusion of its Web site address would not, by itself, include or 
incorporate by reference the information on the Web site into the 
filing).
    \48\ Instruction 2 to Item 13(f), Instruction 1 to Item 
22(b)(8), and Instruction to Item 22(c)(6) of Form N-1A; Instruction 
2 to Item 18.16 and Instruction 6.b. to Item 23 of Form N-2; 
Instruction 2 to Item 20(o) and Instruction 6(ii) to Item 27(a) of 
Form N-3.
---------------------------------------------------------------------------

    If a fund discloses that its proxy voting record is available on or 
through its Web site, it must make available free of charge the 
information disclosed in the fund's most recently filed report on Form 
N-PX on or through its Web site as soon as reasonably practicable after 
filing the report with the Commission.\49\ We interpret the ``as soon 
as reasonably practicable'' standard to mean that the information would 
be available, barring unforeseen circumstances, on the same day as 
filing. We could revisit this requirement if posting on the same day 
does not generally occur.\50\ A fund would not be required to continue 
to make available on or through its Web site any information from 
reports on Form N-PX that precede the most recently filed report on 
Form N-PX.
---------------------------------------------------------------------------

    \49\ Instruction 3 to Item 13(f), Instruction 2 to Item 
22(b)(8), and Instruction to Item 22(c)(6) of Form N-1A; Instruction 
3 to Item 18.16 and Instruction 6.c. to Item 23 of Form N-2; 
Instruction 3 to Item 20(o) and Instruction 6(iii) to Item 27(a) of 
Form N-3.
    A fund could satisfy this requirement through hyperlinking to a 
third-party service or our EDGAR Web site. Cf. Securities Act 
Release No. 8128 (Sept. 5, 2002) [67 FR 58480, 58493 (Sept. 16, 
2002)]. We direct funds to this release for guidance concerning 
satisfaction of this requirement through hyperlinking.
    \50\ Cf. Securities Act Release No. 8128 (Sept. 5, 2002) [67 FR 
58480, 58493 (Sept. 16, 2002)] (construing the ``as soon as 
reasonably practicable'' standard to mean the same day as filing, 
barring unforeseen circumstances, with respect to the requirement 
that issuers disclose whether they make reports on Forms 10-K, 10-Q, 
and 8-K available on their Web sites as soon as reasonably 
practicable after filing of these reports with the Commission).
---------------------------------------------------------------------------

    These rules require that a fund's proxy voting record be publicly 
available through filings with us. They also require that this 
information be readily available to fund shareholders from the fund 
itself and that shareholders be apprised of how this information may be 
obtained. We believe that these rules strike an appropriate balance--
ensuring that a fund's proxy voting record is readily available to 
interested fund shareholders, while allowing funds the flexibility to 
choose how to make this information available in the most effective and 
cost-efficient manner.
    Some commenters recommended other specific modifications to our 
proposed disclosure requirements, which we are not adopting. Several of 
these commenters suggested that we require funds to provide additional 
disclosure with respect to situations where the fund's investment 
adviser has a conflict of interest, including, for example, disclosure 
of any business and financial relationship with the issuer and all fees 
received by the adviser or its affiliates from the issuer during a 
designated period of time.
    We have determined not to require additional disclosure regarding 
conflict of interest situations at the present time. We believe that 
disclosure of a fund's complete voting record will enable shareholders 
to monitor how the fund voted in specific instances and whether the 
vote is in the shareholders' best interests. Further, requiring 
additional public disclosure with respect to conflicts of interest 
would significantly increase the complexity and cost of the proxy vote 
disclosure.
    Several commenters argued that we should require a fund to provide 
its proxy vote disclosure in a uniform, web-accessible, downloadable 
format. Other commenters indicated that we should require a fund to 
disclose its proxy voting record on its Web site, if it has one. 
Commenters also suggested that we require funds to provide an executive 
summary of their votes, that might include, for example, the percentage 
of votes cast for and against management, sorted by the type of issue.
    We have determined not to modify our proposals in order to add 
these requirements, in order to minimize the cost to funds and their 
shareholders of providing disclosure of fund proxy voting records. As 
adopted, our requirements will allow funds the flexibility to determine 
the best manner in which to make their proxy voting records available 
to shareholders. We continue to believe that our disclosure 
requirements strike an appropriate balance by ensuring that a fund's 
proxy voting record, as well as its policies and procedures, is readily 
available to interested fund shareholders without imposing undue costs. 
We would, however, encourage funds to use their Web sites and other 
available means to make their proxy voting records readily accessible 
to shareholders in a user-friendly format.
    Other commenters, by contrast, requested that we limit the proposed 
disclosure regarding a fund's proxy voting record. For example, some 
commenters recommended that we require a fund to disclose information 
regarding only those proxy votes cast against management of the 
portfolio companies in which it invests, or where a conflict of 
interest exists.\51\ In addition, one commenter suggested that we 
require only a summary of all proxy votes in the aggregate arranged 
according to issue.\52\ We believe, however, that limiting disclosure 
of the proxy voting record to specific votes, or to a general summary 
of all votes, would significantly undercut the intent of our proposals, 
which is to enable fund shareholders to determine how a fund voted with 
respect to any particular proxy vote.
---------------------------------------------------------------------------

    \51\ See Letter of Peter C. Clapman, Senior Vice President and 
Chief Counsel, Teachers Insurance and Annuity Association of 
America/College Retirement and Equities Fund (Dec. 6, 2002) 
(recommending proxy vote disclosure in instances of potential 
conflict of interest); Letter of Leslie L. Ogg, President, Board 
Services Corporation (Nov. 22, 2002) (recommending disclosure when a 
fund votes against the recommendation of management and where a 
conflict of interest exists).
    \52\ Letter of Peter C. Clapman, Teachers Insurance and Annuity 
Association of America/College Retirement Equities Fund (Dec. 6, 
2002).
---------------------------------------------------------------------------

Disclosure of Proxy Votes That Are Inconsistent With Fund's Policies 
and Procedures
    The Commission has determined not to adopt the proposed requirement 
that a fund 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.\53\ Many 
commenters, including both those who generally supported the disclosure 
of funds' proxy voting records and those who generally opposed this 
disclosure, expressed concerns regarding the proposed requirements for 
disclosure of inconsistent votes. Proponents of proxy voting record 
disclosure argued that a requirement to disclose inconsistent votes 
might lead funds to draft overly broad policies and procedures to avoid 
triggering the required disclosure. Opponents of proxy voting record 
disclosure argued that the disclosure of inconsistent votes would be 
burdensome because it would require funds to analyze a large volume of 
proxy votes to determine whether any vote triggered the disclosure and 
then to provide a lengthy explanation to shareholders regarding each 
inconsistent vote, which would be expensive to prepare and not 
meaningful to investors. We find these arguments persuasive and have 
therefore determined not to adopt the requirement that funds disclose 
information regarding votes that are inconsistent with the fund's 
policies and procedures.
---------------------------------------------------------------------------

    \53\ 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.
---------------------------------------------------------------------------

III. Effective Date and Compliance Date

    The effective date of these amendments is April 14, 2003.

[[Page 6571]]

Registered management investment companies must file their first report 
on Form N-PX not later than August 31, 2004, for the twelve-month 
period beginning July 1, 2003, and ending June 30, 2004. Based on the 
comments, we believe that this will provide funds with sufficient time 
to make any necessary changes to existing software and internal systems 
in order to compile proxy voting information in the manner that will be 
required by new Form N-PX.
    All initial registration statements on Form N-1A, N-2, or N-3, and 
all post-effective amendments that are annual updates to effective 
registration statements on these forms, filed on or after July 1, 2003, 
must include the disclosure required by Item 13(f) of Form N-1A, Item 
18.16 of Form N-2, or Item 20(o) of Form N-3, as applicable, regarding 
the fund's proxy voting policies and procedures.\54\ Every annual 
report by a closed-end fund on Form N-CSR filed on or after July 1, 
2003, must include the disclosure required by Item 7 of Form N-CSR 
regarding the fund's proxy voting policies and procedures.
---------------------------------------------------------------------------

    \54\ We would not object if existing funds file their first 
annual update complying with the amendments pursuant to rule 485(b) 
under the Securities Act [17 CFR 230.485(b)], provided that the 
post-effective amendment otherwise meets the conditions for 
immediate effectiveness under the rule.
---------------------------------------------------------------------------

    All initial registration statements on Form N-1A, N-2, or N-3, and 
all post-effective amendments that are annual updates to effective 
registration statements on these forms, filed on or after August 31, 
2004, must include the disclosure required by Item 13(f) of Form N-1A, 
Item 18.16 of Form N-2, or Item 20(o) of Form N-3, as applicable, 
regarding the availability of the fund's proxy voting record. Every 
report to shareholders of a fund registered on Form N-1A, N-2, or N-3 
that is transmitted to shareholders on or after August 31, 2004, must 
include the disclosure required by Item 22(b)(8) and 22(c)(6) of Form 
N-1A, Instructions 4.h. and 5.f. to Item 23 of Form N-2, or 
Instructions 4(viii) and 5(vi) to Item 27(a) of Form N-3, as 
applicable, regarding the availability of a fund's proxy voting record. 
Every report to shareholders of a fund registered on Form N-1A, N-2, or 
N-3 that is transmitted to shareholders on or after the effective date 
of an initial registration statement or post-effective amendment that 
is required to include a description of the fund's proxy voting 
policies and procedures (or, in the case of a closed-end fund, the 
filing date of its first annual report on Form N-CSR filed on or after 
July 1, 2003) must include the disclosure required by Item 22(b)(7) and 
22(c)(5) of Form N-1A, Instructions 4.g. and 5.e. to Item 23 of Form N-
2, or Instructions 4(vii) and 5(v) to Item 27(a) of Form N-3 regarding 
the availability of the fund's proxy voting policies and procedures.

IV. Paperwork Reduction Act

    As explained in the Proposing Release, certain provisions of the 
amendments contain ``collection of information'' requirements within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA'') [44 U.S.C. 
3501 et seq.], and the Commission has submitted 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 that we have 
submitted 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''; (4) ``Form N-CSR--Certified 
Shareholder Report of Registered Management Investment Companies''; and 
(5) ``Rule 30e-1 under the Investment Company Act of 1940, Reports to 
Stockholders of Management Companies.'' OMB approved the collections of 
information for the amendments to Forms N-1A, N-2, and N-3, and rule 
30e-1. Because we have modified our proposals as described above, we 
are revising the burden estimate for Form N-CSR and rule 30e-1. We have 
submitted a revised collection of information for Form N-CSR to OMB, 
and have submitted the following additional collection of information 
to OMB: ``Form N-PX--Annual Report of Proxy Voting Record 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]. Form N-CSR (OMB 
Control No. 3235-0570) was adopted pursuant to Section 30 of the 
Investment Company Act [15 U.S.C. 80a-29] and Sections 13(a) and 15(d) 
of the Securities Exchange Act of 1934 (``Exchange Act'') [15 U.S.C. 
78m and 78o(d)]. Form N-PX is being adopted pursuant to Section 30 of 
the Investment Company Act [15 U.S.C. 80a-29]. Rule 30e-1 under the 
Investment Company Act (OMB Control No. 3235-0025) was adopted pursuant 
to Section 30(e) of the Investment Company Act [15 U.S.C. 80a-29(e)].
    As discussed above, the amendments will require that funds holding 
equity securities disclose the policies and procedures that they use to 
determine how to vote the proxies of their portfolio securities. The 
amendments also require funds 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. These 
changes are intended to 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.

Summary of Comment Letters and Revisions to Proposals

    We requested comment on the PRA analysis contained in the Proposing 
Release, and we received numerous comment letters concerning the 
proposed collection of information requirements, particularly with 
respect to the proposed requirement to disclose funds' actual proxy 
voting records. Many commenters, including in particular funds that 
currently provide disclosure of their proxy votes, indicated that the 
Commission's estimates of the burden of the proposed disclosure were 
reasonable, and that available technology and other resources would 
render record-keeping and reporting requirements relatively routine. 
Other commenters, including many other members of the fund industry, 
argued that the Commission's estimates substantially underestimated the 
burden of providing the proposed disclosure. Some of these commenters 
argued that the Commission's estimates omitted start-up and one-time 
transition costs for collecting proxy voting information and preparing 
it in the format that would be required by Form N-CSR.\55\
---------------------------------------------------------------------------

    \55\ See, e.g., Letter of Craig Tyle, General Counsel, 
Investment Company Institute (Dec. 6, 2002) (``ICI Letter'').
---------------------------------------------------------------------------

    Several commenters provided specific estimates of the costs of 
providing the disclosure of their proxy vote records. However, these 
commenters generally did not provide any breakdown of the components of 
these estimates (e.g., number of tasks required, persons

[[Page 6572]]

required to perform each task, wage rates for each person). One fund 
group which opposed the requirement to disclose its proxy voting record 
prepared a sample disclosure in the format prescribed by the proposed 
amendment to Form N-CSR for one of its funds which cast proxy votes on 
1,607 agenda items at 500 shareholder meetings during a six-month 
period.\56\ The fund group estimated that the collection of votes from 
its information systems would take four hours, reformatting the data to 
the format of Form N-CSR would take eight hours, and reconfirming that 
each vote was cast in accordance with the fund's proxy voting policies 
would take at least another two hours. Another fund group which 
recently began to post its proxy voting guidelines and proxy voting 
records for two of its funds on its Web site estimated that this task 
took approximately two days.\57\ These estimates are generally 
consistent with the estimate in the Proposing Release that the 
disclosure on Form N-CSR of a fund's proxy voting record would take 10 
hours per semi-annual filing on Form N-CSR, at an annual cost of $1,379 
per fund. By contrast, a fund industry trade group estimated, based on 
a survey of fund complexes conducted on its behalf by a third-party, 
that proxy voting record disclosure would cost approximately $3,380 per 
fund in start-up costs, and $5,530 per year in ongoing costs.\58\
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    \56\ Letter of Eric D. Roiter, Senior Vice President and General 
Counsel, Fidelity Management & Research Co. (Dec. 6, 2002).
    \57\ Letter of Timothy Smith, Senior Vice-President, Walden 
Asset Management (Nov. 20, 2002).
    \58\ ICI Letter, supra note 55, at 14-15.
---------------------------------------------------------------------------

    We note that we have modified our proposal in two significant ways, 
in part in response to concerns expressed about costs by commenters. 
First, the amendments will require disclosure of proxy votes cast in 
annual reports on new Form N-PX, rather than semi-annually on Form N-
CSR. Second, we are not adopting the proposed requirement that funds 
disclose in their annual and semi-annual reports to shareholders votes 
that were inconsistent with their proxy voting policies and procedures. 
Because of these modifications, we have revised our burden estimates 
for Form N-CSR and rule 30e-1. The burden estimate for disclosure of a 
fund's proxy voting record will be the burden estimated for new Form N-
PX. These revisions to the burden estimates are described below.

Form N-1A

    Form N-1A, including the 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.
    Prior to the proposed amendments, the estimated hour burden for 
preparing an initial registration statement on Form N-1A was 801 hours 
per portfolio, and the estimated hour burden for preparing post-
effective amendments on Form N-1A was 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 portfolios file 
post-effective amendments on Form N-1A. Thus, the total hour burden for 
the preparation and filing of Form N-1A, prior to the proposed 
amendments, was 899,568 hours.
    We estimated in the Proposing Release that the amendments would 
increase the hour burden per portfolio per filing of an initial 
registration statement by 8 hours, to 809 hours per portfolio, and 
would increase the hour burden per portfolio per filing of a post-
effective amendment to a registration statement by 2 hours, to 101 
hours per portfolio. Thus, the current total annual hour burden for all 
funds for preparation and filing of initial registration statements and 
post-effective amendments to Form N-1A is 916,162 hours.

Form N-2

    Form N-2, including the 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.
    Prior to the proposed amendments, the estimated hour burden for 
preparing an initial registration statement on Form N-2 was 536.7 
burden hours per filing, and the estimated annual hour burden for 
preparing post-effective amendments on Form N-2 was 101.7 hours per 
filing. The Commission estimates that, on an annual basis, 140 
respondents file an initial registration statement on Form N-2 and 38 
respondents file post-effective amendments on Form N-2. Thus, the total 
annual hour burden for the preparation and filing of Form N-2, prior to 
the proposed amendments, was 79,003 hours.
    We estimated in the Proposing Release that the amendments would 
increase the hour burden per filing of an initial registration 
statement on Form N-2 by 8 hours, to 544.7 hours per filing, and would 
increase the hour burden per filing of a post-effective amendment to a 
registration statement on Form N-2 by 2 hours, to 103.7 hours per 
filing. Thus, the current total annual hour burden for all funds for 
preparation and filing of initial registration statements and post-
effective amendments on Form N-2 is 80,198 hours.

Form N-3

    Form N-3, including the 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.
    Prior to the proposed amendments, the estimated hour burden for 
preparing an initial registration statement on Form N-3 was 907.2 hours 
per portfolio, and the estimated hour burden for preparing post-
effective amendments on Form N-1A was 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 filings on Form N-3 annually to 240. Thus, 
the total hour burden for the preparation and filing of Form N-3, prior 
to the proposed amendments, was 35,616 hours.
    We estimated in the Proposing Release that the amendments to Form 
N-3 would increase the hour burden per portfolio of an initial 
registration statement by 8 hours, to 915.2 hours per portfolio, and 
would increase the hour burden per portfolio of a post-effective 
amendment to a registration statement by 2 hours, to 150.4 hours per 
portfolio. Thus, the current total annual hour burden for all funds for 
preparation and filing of initial registration statements and post-
effective amendments on Form N-3 will be 36,096 hours.

Form N-CSR

    Form N-CSR, including the amendments, contains collection of 
information requirements. The

[[Page 6573]]

respondents to this information collection will be closed-end 
management investment companies subject to rule 30e-1 under the 
Investment Company Act of 1940 registering with the Commission on Form 
N-2. Compliance with the disclosure requirements of Form N-CSR is 
mandatory. Responses to the disclosure requirements are not 
confidential.
    The current estimated total hour burden for preparation of Form N-
CSR is 35,139 hours.\59\ In the Proposing Release, we estimated that 
3,700 registered investment companies would file Form N-CSR on a semi-
annual basis for a total of 7,400 filings.\60\ We estimated in the 
Proposing Release that the amendments to Form N-CSR would increase the 
hour burden per filing of each semi-annual report on Form N-CSR by 10 
hours, or 74,000 hours total. However, we have modified our proposal to 
require funds to disclose their proxy voting record in reports on new 
Form N-PX on an annual basis, rather than in reports on Form N-CSR on a 
semi-annual basis. As proposed, however, we are requiring registered 
closed-end management investment companies to include in their annual 
reports on Form N-CSR a description of the policies and procedures that 
they use to determine how to vote proxies relating to portfolio 
securities. We estimate that 663 closed-end management investment 
companies will file reports on Form N-CSR, and are revising our 
estimate of the increase in the hour burden resulting from the 
amendments to 2 hours per filing. We estimate that the total annual 
burden attributable to the disclosure of proxy voting policies and 
procedures for closed-end funds will be 1,326 hours. Thus, the new 
total annual hour burden for preparation and filing of Form N-CSR will 
be 36,465 hours.\61\
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    \59\ See Investment Company Act Release No. 25914 (Jan. 27, 
2003) (release adopting Form N-CSR).
    \60\ Investment Company Act Release No. 25739 (Sept. 20, 2002) 
[67 FR 60828 (Sept. 26, 2002)].
    \61\ The Commission has submitted additional collections of 
information to OMB for Form N-CSR in connection with Investment 
Company Act Release No. 25775 (Oct. 22, 2002) [67 FR 66208 (Oct. 30, 
2002)] (code of ethics and financial expert disclosure); Investment 
Company Act Release No. 25838 (Dec. 2, 2002) [67 FR 76780 (Dec. 13, 
2002)] (auditor independence provisions of the Sarbanes-Oxley Act); 
Investment Company Act Release No. 25845 (Dec. 10, 2002) [67 FR 
77593 (Dec. 18, 2002)] (revisions to rule 10b-18 under the Exchange 
Act); Investment Company Act Release No. 25870 (Dec. 18, 2002) [68 
FR 160 (Jan. 2, 2003)] (shareholder reports and quarterly portfolio 
disclosure); and Investment Company Act Release No. 25885 (Jan. 8, 
2003) [68 FR 2637 (Jan. 17, 2003)] (standards relating to listed 
company audit committees). These submissions are currently pending 
before OMB. If these submissions are approved, the approved total 
burden hours for Form N-CSR will be 195,472 hours. With the 
adjustment to reflect the modifications we are making here to our 
proposed amendments to Form N-CSR, the approved total burden hours 
for Form N-CSR would be 122,798 hours (195,472--(74,000--1,326)).
---------------------------------------------------------------------------

Shareholder Reports

    Rule 30e-1, including the amendments to Forms N-1A, N-2, and N-3, 
contains collection of information requirements.\62\ Compliance with 
the disclosure requirements of rule 30e-1 is mandatory. Responses to 
the disclosure requirements are not confidential.
---------------------------------------------------------------------------

    \62\ Rule 30e-1(a) under the Investment Company Act of 1940 [17 
CFR 270.30e-1(a)] requires funds to include in their shareholder 
reports the information that is required by the fund's registration 
statement form.
---------------------------------------------------------------------------

    There are approximately 3,700 funds subject to rule 30e-1. We 
estimated in the Proposing Release that the hour burden for preparing 
and filing semi-annual and annual shareholder reports in compliance 
with rule 30e-1, prior to the proposed amendments, was 202.5 hours per 
year, and that the amendments would increase the hour burden of 
complying with rule 30e-1 by 10 hours per fund per year for a total 
increase in burden hours of 37,000 hours. However, we have revised our 
proposed amendments to eliminate the proposed requirement that annual 
and semi-annual shareholder reports include disclosure of proxy votes 
that are inconsistent with the fund's proxy voting policies. Thus, we 
are revising our estimate of the increase in the hour burden of 
complying with rule 30e-1 attributable to the proposed amendments to 
3,700 hours, rather than 37,000 hours, to reflect the elimination of 
this proposed disclosure requirement. The total hour burden of 
complying with rule 30e-1 will be 203.5 hours per year, for a total 
annual burden to the industry of 752,950 hours.\63\
---------------------------------------------------------------------------

    \63\ We have submitted an additional collection of information 
to OMB in connection with Investment Company Act Release No. 25870 
(Dec. 18, 2002) [68 FR 160 (Jan. 2, 2003)] (proposing amendments 
regarding shareholder reports and quarterly portfolio disclosure). 
This submission is currently pending before OMB. If the submission 
is approved, the approved total burden hours for complying with rule 
30e-1 will be 926,350 hours. With the adjustment to reflect the 
modifications we are making here to our proposed amendments to Forms 
N-1A, N-2, and N-3, the approved total burden hours for complying 
with rule 30e-1 would be 893,050 hours (926,350-(37,000-3,700)).
---------------------------------------------------------------------------

Rule 30b1-4

    The purpose of rule 30b1-4 is to improve the transparency of 
information about funds' proxy voting records. Rule 30b1-4 will require 
a fund to file Form N-PX, containing its complete proxy voting record 
for the twelve-month period ended June 30, by no later than August 31 
of each year. The respondents to rule 30b1-4 will be registered 
management investment companies, other than small business investment 
companies registered with the Commission on Form N-5.
    We estimate that there are approximately 3,700 funds that will be 
affected by the rule. Each of these 3,700 funds will be required by 
rule 30b1-4 to file complete proxy voting records with the Commission 
on Form N-PX. For purposes of this PRA analysis, the burden associated 
with the requirement of Rule 30b1-4 has been included in the collection 
of information required by Form N-PX, rather than the rule. Compliance 
with rule 30b1-4 is mandatory for every registered management 
investment company, other than a small business investment company 
registered with the Commission on Form N-5. Responses to the disclosure 
requirements are not confidential.

Form N-PX

    Form N-PX contains collection of information requirements. The 
respondents to this information collection will be registered 
management investment companies, other than small business investment 
companies registered with the Commission on Form N-5. Compliance with 
the disclosure requirements of Form N-PX is mandatory. Responses to the 
disclosure requirements are not confidential.
    Every registered management investment company, other than a small 
business investment company registered with the Commission on Form N-5, 
will be required to file Form N-PX, containing its complete proxy 
voting record for the twelve-month period ended June 30, by no later 
than August 31 of each year. We estimate that there are approximately 
3,700 funds registered with the Commission, with 5,200 fund portfolios 
that hold equity securities that will be required to file Form N-
PX.\64\ We further estimate that for each of these funds the disclosure 
of its proxy voting record in filings on Form N-PX as of the end of 
each twelve-month period ended June 30 will require, on average, 14.4 
hours per filing per equity portfolio, for a total annual

[[Page 6574]]

burden of 74,880 hours (14.4 hours per filing x 5,200 equity 
portfolios).\65\
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    \64\ The estimate of 3,700 funds is based on the number of 
management investment companies currently registered with the 
Commission. We estimate, based on data from the Investment Company 
Institute and other sources, that there are approximately 4,700 fund 
portfolios that invest primarily in equity securities and 500 
``hybrid'' or bond portfolios that may hold some equity securities, 
for a total of 5,200 portfolios holding equity securities.
    \65\ The estimate of 14.4 hours per equity portfolio is based on 
the staff's consultations with funds that currently provide 
disclosure of their proxy voting records, and estimates that the 
average equity fund will cast votes at 144 shareholder meetings 
during a twelve-month reporting period, and will vote on three 
matters at each shareholder meeting, for a total of 432 matters 
voted on per year. The estimate of the number of shareholder 
meetings per equity fund is based on the staff's analysis of data on 
the average number of equities held per fund from the December 2002 
edition of the Morningstar Principia Pro database. The estimate of 
the number of matters voted on at each shareholder meeting is based 
on information provided to the staff by a third-party provider of 
proxy voting services for funds and other institutional investors.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the hour burden imposed 
by the proposed amendments to Form N-CSR, including the requirement for 
a fund to disclose its proxy voting record on Form N-CSR, would 
increase the hour burden per filing of a Form N-CSR by 10 hours, or 
74,000 hours total.\66\ This total burden hour estimate is comparable 
to our estimate of 74,880 total burden hours for filing Form N-PX. 
However, our estimate of the hour burden per filing of Form N-PX 
differs from the estimated hour burden per filing of Form N-CSR, in 
part because Form N-PX will be filed annually rather than semi-
annually, and in part because we are calculating the hour burden for 
Form N-PX by portfolio, rather than by fund.\67\
---------------------------------------------------------------------------

    \66\ Proposing Release, supra note 4, 67 FR at 60834.
    \67\ We believe it is more appropriate to estimate the burden of 
complying with Form N-PX by portfolio, rather than by fund, as we 
estimated the burden of complying with Form N-CSR in the Proposing 
Release. We note that many funds do not have portfolios that hold 
equity securities, while many funds have multiple equity portfolios. 
Funds with multiple equity portfolios would be required to report 
their proxy voting records for each portfolio holding equity 
securities.
---------------------------------------------------------------------------

Request for Comments

    We request comments on the accuracy of our estimates with respect 
to Form N-PX. 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. The amendments we are adopting will require funds to provide 
disclosure about how they vote proxies of the portfolio securities they 
hold. A fund will be required to disclose in its registration statement 
the policies and procedures that it uses 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 will be included in the fund's Statement of Additional 
Information (``SAI'') (and on Form N-CSR also, in the case of a closed-
end fund's policies and procedures), which is not part of the fund's 
prospectus but is delivered to investors free of charge upon request. 
We are also requiring a fund to file with the Commission an annual 
report on Form N-PX, containing the fund's complete proxy voting record 
for the twelve-month period ended June 30, by no later than August 31 
of each year. Our amendments will also require a fund to include in its 
annual and semi-annual reports to shareholders disclosure that 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. In addition, a fund will be 
required to state in its registration statement and reports to 
shareholders that its proxy voting record is available (i) without 
charge, upon request, by calling a specified toll-free (or collect) 
telephone number; or on or through the fund's Web site at a specified 
Internet address; or both; and (ii) on the SEC Web site.
    In the Proposing Release, we analyzed the costs and benefits of our 
proposals and requested comments and data regarding the costs and 
benefits of the proposed form amendments. These comments are summarized 
below.

A. Benefits

    The amendments to the registration statement and reporting forms 
that we are adopting will benefit fund investors, by providing them 
with access to information about how funds vote their proxies.
    First, the amendments will provide better information to investors 
who wish to determine:
    [sbull] To which fund managers they should allocate their capital, 
and
    [sbull] Whether their existing fund managers are adequately 
maximizing the value of their shares.

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.'' 
\68\ 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.\69\ The increased 
transparency resulting from proxy voting disclosure may increase 
investors' confidence that their fund managers are voting proxies in 
accordance with their fiduciary duties. Without disclosure about how 
the fund votes proxies, fund shareholders cannot evaluate this aspect 
of their managers' performance. To the extent that investors choose 
among funds based on their proxy voting policies and records, in 
addition to other factors such as expenses, performance, and investment 
policies, investors will be better able to select funds that suit their 
preferences. Further, insofar as investors may over-emphasize certain 
of these factors, e.g., past performance, in selecting funds, it may be 
beneficial to provide additional

[[Page 6575]]

information to use in selecting funds. On a related point, we 
anticipate that over time, commercial third-party information providers 
will offer services that will enable investors to better analyze proxy 
voting by funds. These developments will further facilitate the 
benefits to fund investors from proxy vote disclosure.
---------------------------------------------------------------------------

    \68\ 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).
    \69\ See Investment Advisers Act Release No. 2106, supra note 5. 
See also SEC, Staff Report on Corporate Accountability, supra note 
10, 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).
---------------------------------------------------------------------------

    Second, in some situations the interests of a 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. The amendments require funds to disclose how 
they address such conflicts of interest in determining how to vote 
their proxies. This disclosure requirement may 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. Further, the increased transparency 
resulting from proxy voting disclosure may increase investors' 
confidence that their fund managers are voting proxies in accordance 
with their fiduciary duties.
    A third significant benefit of the amendments comes from providing 
stronger incentives to fund managers to vote their proxies 
conscientiously. The amendments could increase the incentives for fund 
managers to vote their proxies carefully, and thereby improve corporate 
performance and enhance shareholder value. The improved corporate 
performance that could result from better decisionmaking in corporate 
governance matters may benefit fund investors. In addition, other 
equity holders may benefit from the improvement to corporate governance 
that results from more conscientious proxy voting by fund managers. We 
note that assets held in equity funds account for approximately 18% of 
the $11 trillion market capitalization of all publicly traded U.S. 
corporations, and therefore funds exercise a considerable amount of 
influence in proxy votes affecting the value of these corporations.\70\
---------------------------------------------------------------------------

    \70\ See Flow of Funds Accounts, supra note 7.
---------------------------------------------------------------------------

    The benefits to the economy that will result from improved 
corporate governance are difficult to measure. While measuring the 
effects of such a rule involves a high degree of uncertainty, the scale 
of the aggregate portfolio holdings involved suggests that they may be 
substantial.\71\
---------------------------------------------------------------------------

    \71\ Id.
---------------------------------------------------------------------------

    A number of commenters addressed the benefits of the proposals 
identified in the Proposing Release. Most commenters who addressed the 
costs and benefits of our proposals concurred with our assessment of 
the benefits of the proposed requirements to disclose the policies and 
procedures that funds use to determine how to vote proxies relating to 
securities held in their portfolios.
    Our proposals to require disclosure of the actual votes cast by 
funds generated divergent views as to the possible benefits of this 
disclosure. Many commenters, including individual investors, labor 
unions, trustees of pension and retirement plans, and funds that 
currently make their proxy voting records available to their 
shareholders agreed with our assessment of the benefits of this 
disclosure, and argued that these benefits would be substantial. These 
commenters stated that investors would benefit from the increased 
transparency resulting from disclosure of proxy voting records, by 
allowing investors to consider a fund's proxy voting record when making 
an investment decision.\72\ In addition, commenters argued that 
disclosure of proxy votes cast would have beneficial effects across the 
entire U.S. economy, by encouraging better decisionmaking in corporate 
governance matters, which would enhance shareholder value of the 
issuers of portfolio securities and, in turn, benefit both investors in 
the fund and other investors in these issuers.
---------------------------------------------------------------------------

    \72\ See, e.g., Letter of Mercer Bullard, Fund Democracy, LLC 
(Oct. 21, 2002).
---------------------------------------------------------------------------

    Many other commenters, however, argued that the disclosure of proxy 
votes cast would not benefit fund investors. These commenters, who 
consisted primarily of funds, investment advisers, and members of 
boards of directors of funds, argued that the funds with which they are 
associated have received virtually no requests from their shareholders 
for proxy voting information.\73\ They also argued that investors who 
care about proxy vote disclosure can decide to invest in those funds 
that choose to disclose their votes.
---------------------------------------------------------------------------

    \73\ See, e.g., ICI Letter, supra note 55, at 9; Letter of 
Robert D. Neary, Chairman of the Board, Armada Funds, at 2 (Dec. 4, 
2002); Letter of Domenick Pugliese, Senior Vice President, Alliance 
Capital Management L.P. (Dec. 5, 2002).
---------------------------------------------------------------------------

    The arguments of these commenters do not address two important 
considerations, however. First, investors consider many factors besides 
proxy voting histories when choosing their investment managers. If 
other factors--for example, fund performance--are more important to 
them than proxy voting, competitive pressures alone may cause few funds 
to reveal their proxy votes. The fact that market pressure has not 
forced many funds to reveal their votes merely suggests that investors 
do not value transparency of proxy votes as much as they value other 
factors. That does not mean that investors do not value transparency of 
proxy votes. In addition, the availability of proxy voting information 
may increase shareholder interest in the future. Second, these 
arguments do not consider the external benefits that all fund investors 
may obtain if, as discussed above, disclosure increases the incentives 
for fund managers to vote their proxies more carefully, and thereby 
improve corporate performance and enhance shareholder value.
    Commenters who objected to the proposed disclosure requirement also 
questioned whether disclosure of proxy voting records would benefit 
investors by discouraging voting motivated by conflicts of interest, 
and noted that the Proposing Release did not provide any evidence of 
any fund failing to vote its proxies in its shareholders' best 
interests due to a conflict of interest. However, as noted above, funds 
may have strong incentives to vote in a certain way when, for example, 
a fund's adviser also manages or seeks to manage the retirement plan 
assets of a company whose securities are held by the fund. It may be 
difficult to prove that a particular vote in such a situation was 
motivated by a conflict of interest, and therefore disclosure may be 
the most effective means of deterring these conflicts.
    In addition, commenters objected to the argument that proxy voting 
disclosure would result in benefits to all investors by encouraging 
funds to be more engaged in corporate governance of issuers held in 
their portfolios. The commenters asserted that funds were already 
sufficiently engaged in corporate governance issues, and that requiring 
disclosure of proxy votes by funds, but not other institutional 
investors, would unfairly single out one class of investors and force 
them to bear the burdens of the Commission's broader objectives with 
respect to the improvement of corporate governance.\74\
---------------------------------------------------------------------------

    \74\ See, e.g., ICI Letter, supra note 55, at 12.
---------------------------------------------------------------------------

    We recognize that while the costs of the disclosure requirements 
will be borne by funds, the benefits of improved corporate governance 
resulting from the disclosure will accrue to all investors. We note, 
however, that investors in a fund may benefit from any improved

[[Page 6576]]

oversight of its portfolio companies resulting from more careful proxy 
voting by other funds. In addition, we note that some of the other 
positive effects resulting from the disclosure, such as allowing 
investors to better evaluate whether their fund managers are voting 
proxies in accordance with their fiduciary duties, are benefits to fund 
investors.
    We also note that, as adopted, the disclosure required by the 
amendments will provide the same benefits to investors as the proposal. 
However, the modifications to the proposal will mitigate the costs of 
disclosure, for funds and fund investors, by requiring a fund to file 
its proxy voting record on Form N-PX annually, by allowing a fund 
flexibility in determining how to disclose its proxy voting record to 
shareholders, and by not requiring a fund to disclose votes that are 
inconsistent with its policies and procedures.

B. Costs

    The amendments will lead to some additional costs for funds, which 
may be passed on to fund shareholders. As discussed below, the 
amendments require new disclosure by a fund regarding how it votes 
proxies relating to portfolio securities it holds, in its SAI (and in 
Form N-CSR for closed-end funds), in annual reports on new Form N-PX, 
and in the fund's annual and semi-annual reports to shareholders. The 
direct costs of this disclosure will 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 typesetting, printing, and mailing of the 
disclosure).
    First, the amendments 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 (and in the case of a closed-end 
fund, disclosure of its policies and procedures on Form N-CSR 
also).\75\ Because the SAI is typically not typeset and is only 
provided to shareholders upon request, we estimate that the external 
costs per fund of this additional disclosure in the SAI will be 
minimal. Similarly, because the disclosure in Form N-CSR will only be 
required to be provided to shareholders upon request, we estimate that 
the external costs of this disclosure on Form N-CSR will be minimal as 
well. For purposes of the Paperwork Reduction Act, we have estimated 
that the disclosure requirements will add 19,596 hours to the burden of 
completing Forms N-1A, N-2, N-3, and N-CSR.\76\ We estimate that this 
additional burden will equal total internal costs of $1,350,948 
annually, or $365 per fund.\77\
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    \75\ 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, they will be required to disclose their proxy voting policies 
and procedures in their annual reports on Form N-CSR. We are not 
requiring closed-end funds to provide disclosure about the 
availability of their proxy voting policies and records on Form N-
CSR.
    \76\ This represents 16,594 additional hours for Form N-1A, 
1,196 additional hours for Form N-2, 480 additional hours for Form 
N-3, and 1,326 additional hours for Form N-CSR. The estimated total 
hour burden for disclosure of proxy voting policies and procedures 
differs from the figure of 18,270 hours used in the Proposing 
Release, because here we are including the estimated hour burden for 
disclosure of policies and procedures by closed-end funds on Form N-
CSR as well.
    \77\ These figures are based on a Commission estimate that 
approximately 3,700 management investment companies are subject to 
the amendments and an estimated hourly wage rate of $68.94. The 
estimate of the number of funds 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 will 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.
---------------------------------------------------------------------------

    Second, the amendments will require a fund to file with the 
Commission an annual report on new Form N-PX, containing the fund's 
complete proxy voting record for the twelve month period ended June 30, 
by no later than August 31 of each year, and to make available to its 
shareholders the information contained in Form N-PX. We estimate that 
because this information will be available on the Commission's Web 
site, and because we anticipate that many funds will choose to make 
this information available to their shareholders on or through their 
Web sites, the external costs to funds (for typesetting, printing, and 
mailing) of providing this disclosure to shareholders will be minimal. 
For purposes of the Paperwork Reduction Act, we estimate that funds 
will spend 74,880 hours to comply with Form N-PX, or 14.4 hours per 
equity fund portfolio filing on Form N-PX annually.\78\ Further, we 
estimate that funds will file reports on Form N-PX for 5,200 portfolios 
holding equity securities.\79\ Thus, we estimate that the burden of 
filing Form N-PX will equal $5,162,227 in total internal costs 
annually, or $992 per equity fund portfolio.\80\ We had originally 
proposed to require a fund to file its complete proxy voting record as 
part of its semi-annual reports on Form N-CSR. However, we modified our 
proposal in response to one commenter who suggested that requiring 
disclosure on Form N-CSR would impose unnecessary costs and substantial 
administrative complexity for fund complexes that have funds with 
staggered fiscal year ends.
---------------------------------------------------------------------------

    \78\ The estimate of 14.4 hours per equity portfolio is based on 
the staff's consultations with funds that currently provide 
disclosure of their proxy voting records, and estimates that the 
average equity fund will cast votes at 144 shareholder meetings 
during a twelve-month reporting period, and will vote on three 
matters at each shareholder meeting, for a total of 432 matters 
voted on per year. The estimate of the number of shareholder 
meetings per equity fund is based on the staff's analysis of data on 
the average number of equities held per fund from the December 2002 
edition of the Morningstar Principia Pro database. The estimate of 
the number of matters voted on at each shareholder meeting is based 
on information provided to the staff by a third-party provider of 
proxy voting services for funds and other institutional investors.
    \79\ This estimate is based on the staff's analysis of data from 
the Investment Company Institute and other sources indicating that 
there are approximately 4,700 fund portfolios that invest primarily 
in equity securities and 500 ``hybrid'' or bond portfolios that may 
hold some equity securities.
    \80\ These figures are based on the Commission's estimate that 
approximately 3,700 funds, with 5,200 portfolios holding equity 
securities, will report their proxy voting records on Form N-PX, an 
estimate of 14.4 hours per equity fund portfolio filing on Form N-
PX, and an estimated hourly wage rate of $68.94. See supra note 77.
---------------------------------------------------------------------------

    Third, with respect to reports to shareholders, funds will be 
required to include in their annual and semi-annual reports to 
shareholders disclosure about the availability of information regarding 
the fund's proxy voting policies and procedures, and the fund's proxy 
voting record. We estimate that to comply with these disclosure 
requirements, a typical fund will 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.\81\ We estimate that a typical fund may have, on average, 30,000 
shareholder accounts; \82\ therefore, the additional disclosure in 
shareholder reports will cost approximately $1,610 (($0.025 x 30,000 
shareholder accounts, plus $55) x 2 reports per year) in external costs 
per fund. Based on the Commission's

[[Page 6577]]

estimate of 3,700 funds that are required to transmit annual and semi-
annual reports to shareholders, we estimate these external costs will 
be $5,957,000 for the industry as a whole. In addition, we estimate for 
purposes of the Paperwork Reduction Act that these disclosure 
requirements will add 3,700 burden hours for funds required to transmit 
shareholder reports, or one hour per fund, equal to internal costs of 
$255,078 for the industry annually, or $69 per investment company.\83\
---------------------------------------------------------------------------

    \81\ 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.
    \82\ 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 9, at 63, 64.
    \83\ These figures are based on a Commission estimate that 
approximately 3,700 investment companies will be subject to the 
amendments and an estimated hourly wage rate of $68.94. See supra 
note 77.
---------------------------------------------------------------------------

    Therefore, based on this analysis, we estimate that the total 
external and internal direct costs of the additional disclosure 
required by the amendments will be $12,725,253.\84\ Because the 
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 or all of these expenses may be passed on to shareholders.
---------------------------------------------------------------------------

    \84\ The Commission has modified its estimate of the total 
external and internal costs of the additional disclosure required by 
the amendments from the estimate in the Proposing Release, to 
reflect that it is not adopting the proposal to require a fund 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, and that it is requiring funds 
to disclose their proxy voting records annually on Form N-PX rather 
than semi-annually on Form N-CSR.
---------------------------------------------------------------------------

    Numerous commenters responded to the Commission's request for 
comment on the potential costs of the proposed disclosure requirements, 
particularly with respect to the required disclosure of their complete 
proxy voting records in reports on Form N-CSR, and the proposed 
disclosure of inconsistent votes in annual and semi-annual reports to 
shareholders. A number of commenters, principally members of the fund 
industry, argued that the Commission's estimates substantially 
underestimated the direct costs of the proposed disclosure 
requirements. First, commenters argued that the estimates omitted any 
start-up or one-time transition costs, noting that fund groups would 
need to establish systems or make arrangements with outside vendors to 
capture the information on proxy votes cast.\85\ Second, a commenter 
argued that while some fund groups rely on outside service providers to 
vote their proxies, and these service providers may provide proxy 
voting records in electronic form, many fund groups do not use such 
outside service providers, and hence may have higher costs to compile 
their proxy voting records in electronic form.\86\ Third, commenters 
argued that the costs of preparing the voting record disclosure may be 
higher for funds with significant holdings in foreign securities, 
because foreign proxies typically contain more proposals than those of 
U.S. issuers, and certain required data, such as ticker symbols and 
sponsorship of proposals, is not readily available for meetings of 
foreign portfolio companies.\87\ Fourth, some fund groups also stated 
that they would incur costs by having to hire and train shareholder 
servicing personnel in order to respond to requests from shareholders 
for the proxy voting records disclosed in Form N-CSR.
---------------------------------------------------------------------------

    \85\ See, e.g., ICI Letter, supra note 55, at 14.
    \86\ ICI Letter, supra note 55, at 14-15.
    \87\ See, e.g., Letter of Eric D. Roiter, Senior Vice President 
and General Counsel, Fidelity Management & Research Co., at 4 (Dec. 
6, 2002).
---------------------------------------------------------------------------

    We continue to believe that our estimates of the direct costs 
imposed by the disclosure are reasonable. First, we note that our cost 
estimates, which were based in part on the costs of funds that 
currently disclose their proxy votes, incorporate start-up costs and 
one-time transition costs amortized over time. In addition, we believe 
that start-up costs should be limited in most cases, because most funds 
currently keep track of information regarding their proxy votes. 
Second, our cost estimates are derived both from funds that outsource 
the collection and disclosure of proxy voting information, and from 
funds that perform these tasks internally. We anticipate that funds 
will choose to provide the required proxy voting information in the 
most cost-efficient manner. Third, with respect to the argument that 
the costs incurred by funds with significant foreign holdings may be 
higher than estimated, we note that we have modified our proposal to 
include an instruction permitting a fund to omit exchange ticker 
symbols and CUSIP numbers if they are not available through reasonably 
practicable means.\88\ Finally, with respect to the argument that funds 
would incur costs by having to hire and train personnel to respond to 
requests for their proxy voting records, we note that we have modified 
our proposals to allow funds to choose to provide their proxy voting 
records to shareholders through Web site disclosure or upon request, 
which should reduce the number of shareholder requests received by 
phone.
---------------------------------------------------------------------------

    \88\ Instruction 2 to Item 1 of Form N-PX.
---------------------------------------------------------------------------

    Other commenters argued that the estimates of direct costs in the 
Proposing Release were reasonable. Several fund groups which currently 
disclose proxy voting records on their Web sites as well as through 
hard copy stated that based on their experience the costs of the 
proposed disclosure requirements would be minimal.\89\ These commenters 
argued that funds should already be keeping track of their proxy votes 
internally, so that providing the required disclosure should be a 
matter of converting existing data to new fields for web interface.\90\ 
One commenter noted that the expense ratios of funds that disclose 
their proxy votes are not higher than those of funds in general.\91\
---------------------------------------------------------------------------

    \89\ See, e.g., Letter of Amy Domini, CEO, Domini Social 
Investments LLC (Nov. 1, 2002); Letter of Thomas W. Grant, 
President, and Laurence A. Shadek, Chairman, Pax World Funds (Nov. 
26, 2002); Letter of Timothy Smith, Senior Vice President, Walden 
Asset Management (Nov. 20, 2002).
    \90\ See, e.g., Letter of Timothy H. Smith, President and Chair, 
Social Investment Forum (Nov. 11, 2002).
    \91\ See, e.g., Letter of Mercer Bullard, Fund Democracy, LLC 
(Oct. 21, 2002).
---------------------------------------------------------------------------

    A few commenters, including supporters and opponents of the 
proposed requirement to disclose proxy voting records, provided 
specific estimates of the direct costs of providing this disclosure. 
One fund group which opposed the requirement to disclose its proxy 
voting record prepared a sample disclosure in the format prescribed by 
the proposed amendment to Form N-CSR, and estimated that the collection 
of votes from its information systems would take four hours, 
reformatting the data to the format of Form N-CSR would take eight 
hours, and that reconfirming that each vote was cast in accordance with 
the fund's proxy voting policies would take at least another two 
hours.\92\ Another fund group which recently began to post its proxy 
voting guidelines and proxy voting records for two of its funds on its 
Web site estimated that this task took approximately two days.\93\ 
These estimates are generally consistent with our estimate that proxy 
vote disclosure on Form N-PX will take 14.4 hours per equity portfolio 
per filing, at an annual cost of $992 per equity portfolio.\94\ By

[[Page 6578]]

contrast, a fund industry trade group estimated, based on a survey of 
eight fund complexes conducted on its behalf by a third-party, that 
proxy voting record disclosure would cost approximately $3,380 per fund 
in start-up costs, and $5,530 per year in ongoing costs.\95\
---------------------------------------------------------------------------

    \92\ Letter of Eric D. Roiter, Senior Vice President and General 
Counsel, Fidelity Management & Research Co., at 3 (Dec. 6, 2002).
    \93\ Letter of Timothy Smith, Senior Vice President, Walden 
Asset Management (Nov. 20, 2002).
    \94\ By comparison, a third-party service provider of proxy 
voting services to funds and other institutional investors indicated 
to the staff that for a basic vote disclosure Web site it charges a 
$3,000 setup fee, a $12,000 base fee for disclosure for the first 
fund in the complex, and $1,000 for additional funds after the first 
fund. Thus, a fund complex with 20 funds would pay $34,000 ($3,000 + 
$12,000 + (19 x $1,000)), or $1,700 per fund.
    \95\ ICI Letter, supra note 55, at 14-15.
---------------------------------------------------------------------------

    We also note, as discussed above, that we have modified our 
proposals in three significant ways, in part in response to concerns 
expressed about costs by commenters. First, the amendments will require 
disclosure of proxy votes cast in annual reports on Form N-PX, rather 
than semi-annually on Form N-CSR. Second, we are not adopting the 
proposed requirement that funds disclose in their annual and semi-
annual reports to shareholders votes that were inconsistent with their 
proxy voting policies and procedures. Third, rather than requiring 
funds to send their proxy voting records without charge and upon 
request, we are permitting them to choose to make their records 
available either upon request or by making available an electronic 
version on or through their Web sites.
    The rules may also impose potential indirect costs on fund 
managers. Several commenters identified certain indirect costs that 
they argued were not addressed by the cost-benefit analysis in the 
Proposing Release. First, commenters argued that depriving funds of 
confidential voting would subject them to possible retaliatory actions 
by corporate management of the issuers of portfolio securities, such as 
restricting access by portfolio managers to corporate personnel.\96\ 
These costs are difficult to quantify. Further, these commenters did 
not provide any evidence that this retaliatory action has occurred or 
might occur as a result of proxy vote disclosure. We also note that 
while it is possible that corporations could retaliate against fund 
managers if they knew that those fund managers had voted against them 
in the past, it is also possible that corporations could react by 
trying to work harder to develop cooperative relationships with fund 
managers. One additional advantage of the amendments is that they will 
permit fund managers to demonstrate credibly to management of a 
portfolio company that they have been willing to vote against the 
recommendations of corporate management in other cases.
---------------------------------------------------------------------------

    \96\ See, e.g., Letter of Richard Mason, General Counsel, Mosaic 
Funds (Nov. 27, 2002).
---------------------------------------------------------------------------

    Second, several commenters, including funds, claimed that required 
disclosure of proxy voting records would politicize the process of 
proxy voting and thereby impose costs on funds in order to address 
orchestrated campaigns in the media and elsewhere by special interest 
groups, which would detract from a fund's ability to concentrate on the 
management of its portfolio.\97\ These commenters did not provide any 
estimates of the magnitude of these costs, however. Some commenters 
argued that proxy vote disclosure might lead to certain groups 
threatening to encourage their members and others to withdraw their 
investments from a fund complex unless the funds' adviser voted in a 
certain way.\98\ To the extent that this possibility is real, and that 
fund managers may be pressured by large or influential shareholders to 
vote as directed, making voting policies and procedures available to 
investors will mitigate this influence to a large degree. Because of 
the disclosure requirements we are adopting, shareholders will be able 
to evaluate how closely fund managers follow their stated proxy voting 
policies, and to react adversely to fund managers who vote 
inconsistently with these policies.
---------------------------------------------------------------------------

    \97\ See, e.g., Letter of Eric D. Roiter, Senior Vice President 
and General Counsel, Fidelity Management & Research Co., at 6-7 
(Dec. 6, 2002); Letter of Philip L. Kirstein, General Counsel, 
Merrill Lynch Investment Managers, L.P., at 7 (Dec. 6, 2002).
    \98\ See, e.g., Jonathan S. Bowater, Paul S. Lowengrub, and 
James C. Miller III, The SEC's Proposal to Require Mutual Funds to 
Publish Proxy Votes, at 23, attachment to Letter of Craig Tyle, 
General Counsel, Investment Company Institute (Jan. 16, 2003).
---------------------------------------------------------------------------

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.\99\ 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.\100\ The Commission has considered 
these factors.
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 78w(a)(2).
    \100\ 15 U.S.C. 77(b), 78c(f), and 80a-2(c).
---------------------------------------------------------------------------

    The amendments requiring disclosure of funds' proxy voting policies 
and procedures and actual proxy voting records are intended to provide 
greater transparency for fund shareholders regarding the management of 
their investments in funds. The amendments may improve efficiency. The 
enhanced disclosure requirements will provide shareholders with greater 
access to information regarding the proxy voting policies and decisions 
of the funds in which they invest, which should promote more efficient 
allocation of investments by investors and more efficient allocation of 
assets among competing funds. The amendments may also improve 
competition, as enhanced disclosure may prompt funds to seek to 
differentiate themselves based on their proxy voting policies and 
practices. Finally, the effects of the amendments on capital formation 
are unclear. Although, as noted above, we believe that the amendments 
will benefit investors, the magnitude of the effect of the amendments 
on efficiency, competition, and capital formation is difficult to 
quantify.
    In the Proposing Release, we requested comment on whether the 
proposed amendments would promote efficiency, competition, and capital 
formation, or, conversely, would impose a burden on competition. The 
Commission received several letters addressing the effect of the 
proposed amendments on efficiency, competition, and capital formation. 
A number of commenters expressed concern that the required disclosure, 
particularly the requirements that funds disclose their proxy votes 
cast and any votes that are inconsistent with their proxy voting 
policies, may have adverse effects on competition and capital formation 
among funds. Commenters argued that the amendments would disadvantage 
funds relative to other institutional investors such as banks and 
pension funds, because funds would be the only class of investors not 
allowed to vote confidentially. Further, the commenters argued, 
depriving funds of confidential voting would subject them to possible 
retaliatory actions by corporate management of the issuers of portfolio 
securities, such as restricting access by portfolio managers to 
corporate personnel. Commenters also argued that requiring funds to 
disclose their proxy votes would subject them to orchestrated campaigns 
in the media and elsewhere by special interest groups with social or 
political agendas different from those of fund shareholders, which 
would detract from a fund's ability to

[[Page 6579]]

concentrate on the management of its portfolio and ultimately harm fund 
shareholders. Finally, commenters asserted that the proposed disclosure 
requirements would impose substantial costs on funds, which would be 
passed on to their shareholders.
    Other commenters, however, argued that proxy voting disclosure 
would improve competition by allowing investors who wish to consider 
proxy voting policies and records when deciding between two funds to do 
so. According to one such commenter, mandating proxy voting disclosure 
would thereby allow proxy voting policies and records to be fully 
``valued'' by the marketplace.\101\ Many commenters also asserted that 
because funds hold a significant percentage of equity securities, 
requiring proxy vote disclosure by funds would improve corporate 
governance and accountability among issuers of portfolio securities, 
which would benefit investors broadly. With respect to the argument 
that disclosure would harm funds by ``politicizing'' the proxy voting 
process, one commenter argued that to the extent that this meant funds 
would come under market pressure for behavior that their investors 
disapprove of, this would be a positive, not a negative, result.\102\
---------------------------------------------------------------------------

    \101\ Letter of Mercer Bullard, Fund Democracy, LLC (Oct. 21, 
2002).
    \102\ Letter of Richard L. Trumka, Secretary-Treasurer, AFL-CIO, 
at 4 (Dec. 6, 2002).
---------------------------------------------------------------------------

    As discussed in more detail in the Cost-Benefit Analysis above, we 
continue to believe that the proxy vote disclosure required by the 
amendments will provide several benefits to fund investors. The 
amendments will provide better information to investors to use in 
selecting funds, and in determining whether fund managers are 
adequately maximizing the value of their shares. The amendments may 
also deter votes motivated by conflicts of interest. In addition, the 
amendments may provide stronger incentives to fund managers to vote 
their proxies carefully, which could thereby improve corporate 
performance and enhance shareholder value. With respect to the 
commenters' argument that the amendments may disadvantage funds by 
depriving them of confidential voting, we note that there is no 
evidence that retaliatory action by portfolio company management has 
occurred or might occur as a result of proxy vote disclosure, and that 
it is possible that this disclosure will encourage corporations to work 
harder to develop cooperative relationships with fund managers. With 
respect to the argument that disclosure of a fund's proxy voting record 
may subject it to pressure from special interest groups to vote in a 
certain manner, we note that to the extent that this possibility is 
real, making voting policies and procedures available to investors will 
mitigate this influence to a large degree. With respect to the argument 
that the proposed disclosure requirements would impose substantial 
costs on funds, we have modified certain of our proposals to mitigate 
costs by requiring a fund to file its proxy voting record annually on 
new Form N-PX rather than semi-annually on Form N-CSR, by eliminating 
the requirement that a fund disclose its proxy votes (or failures to 
vote) that are inconsistent with its proxy voting policies and 
procedures, and by permitting a fund to choose to make available to its 
shareholders its record of how it voted proxies relating to portfolio 
securities on or through its Web site or upon request.

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with 5 U.S.C. 604, and relates to the 
Commission's rule and 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 amendments, a fund will be required to disclose in 
its registration statement the policies and procedures that it uses to 
determine how to vote the proxies of portfolio securities. The 
amendments also require a fund to file with the Commission on new Form 
N-PX, and to make available to its shareholders, on or through its Web 
site or upon request, its record of how it voted proxies relating to 
portfolio securities.
    Specifically, a fund will 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.\103\ The amendments also require a fund 
to file with the Commission, in an annual report on Form N-PX, its 
complete proxy voting record for the most recent twelve-month period 
ended June 30. The amendments require a fund to include in its annual 
and semi-annual reports to shareholders disclosure that 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. The amendments also require a fund to 
state in its registration statement and reports to shareholders that 
its proxy voting record is available (i) without charge, upon request, 
by calling a specified toll-free (or collect) telephone number; or on 
or through the fund's Web site at a specified Internet address; or 
both; and (ii) on the SEC Web site. The Commission prepared an Initial 
Regulatory Flexibility Analysis (``IRFA'') in accordance with 5 U.S.C. 
603 in conjunction with the Proposing Release, which was made available 
to the public. The Proposing Release included the IRFA and solicited 
comments on it.
---------------------------------------------------------------------------

    \103\ 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, they will be required to disclose their proxy voting policies 
and procedures in their annual reports on Form N-CSR.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, Amendments

    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 adopting 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 
efficiently at minimal cost because of recent advances in technology, 
such as the Internet.

B. Significant Issues Raised by Public Comment

    No comments specifically addressed the IRFA. However, a few 
commenters asserted that the proposed amendments that would require 
disclosure of a fund's proxy voting record would have a negative impact 
on small entities.\104\ These commenters noted that the loss of 
confidential voting that would result from the disclosure of proxy 
votes would raise the risk that portfolio company management might 
retaliate against a fund, and that this risk of retaliation would be 
disproportionately greater for small funds. One commenter

[[Page 6580]]

argued that small funds should not be required to bear the burden and 
costs of providing proxy voting disclosure, when many much larger 
institutional investors, such as pension plans, insurance companies, 
common and collective trust funds, and hedge funds would not be 
required to do so.\105\ On the other hand, an association of ``socially 
responsible'' funds commented that some smaller fund companies have 
been providing proxy voting disclosure for some time, with little cost 
to their investors.\106\
---------------------------------------------------------------------------

    \104\ See, e.g., Letter of Richard Mason, General Counsel, 
Mosaic Funds (Nov. 27, 2002); ICI Letter, supra note 55, at 16.
    \105\ Letter of Richard Mason, General Counsel, Mosaic Funds 
(Nov. 27, 2002).
    \106\ Letter of Timothy H. Smith, President and Chair, Social 
Investment Forum, at 3 (Nov. 11, 2002).
---------------------------------------------------------------------------

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.\107\ Approximately 205 out of 3700 investment companies that will 
be affected by this rule meet this definition.\108\
---------------------------------------------------------------------------

    \107\ 17 CFR 270.0-10.
    \108\ This estimate is based on figures compiled by the 
Commission's staff regarding investment companies registered on Form 
N-1A, Form N-2, and Form N-3.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The amendments require a fund to disclose in its SAI (and in Form 
N-CSR, in the case of a closed-end fund) the policies and procedures it 
uses to determine how to vote proxies for the securities held in its 
portfolio, and to provide disclosure in its SAI regarding the 
availability of its proxy voting record to shareholders. The amendments 
also require a fund to file with the Commission, on Form N-PX, its 
complete proxy voting record for its most recent twelve-month period 
ended June 30. Finally, the amendments require a fund to include in its 
annual and semi-annual reports to shareholders disclosure that a 
description of the policies and procedures that the fund uses to 
determine how to vote proxies relating to portfolio securities 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 SEC Web site. The amendments also 
require a fund to state in its registration statement and reports to 
shareholders that its proxy voting record is available (i) without 
charge, upon request, by calling a specified toll-free (or collect) 
telephone number; or on or through the fund's Web site at a specified 
Internet address; or both; and (ii) on the SEC Web site.
    The Commission estimates some one-time formatting and ongoing costs 
and burdens that will 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 Form 
N-PX; and disclosing voting records through Web site disclosure or upon 
request. These costs 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 the collection of proxy voting information on a basis at 
least as current as annually and, therefore, that the marginal cost 
increases for most funds will be minimal.

E. Agency Action To Minimize Effect on 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 disclosure amendments will provide 
shareholders with greater transparency regarding a fund's proxy voting 
polices 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 required by the amendments to be provided to 
shareholders by all funds, not just funds that are not considered small 
entities.
    We have endeavored through the 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 amendments to the same degree as 
other investment companies. Further clarification, consolidation, or 
simplification of the amendments 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.
    We note, however, that we have modified our proposals in response 
to comments, in part to reduce the regulatory burden on funds, 
including small funds. As adopted, our amendments will require a fund 
to provide disclosure of its proxy voting record annually on Form N-PX, 
rather than semi-annually. In addition, we are not adopting the 
proposed requirement that a fund's annual and semi-annual reports to 
shareholders include all votes that are inconsistent with the fund's 
proxy voting policies and procedures. Further, we are modifying our 
proposed requirement that a fund must send its proxy voting record 
without charge and upon request, by permitting a fund to make its proxy 
voting record available on or through its Web site instead.

VIII. Statutory Authority

    The Commission is adopting 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]. The Commission is adopting new 
rule 30b1-4 and new Form N-PX pursuant to authority set forth in 
Sections 8, 30, 31, and 38 of the Investment Company Act [15 U.S.C. 
80a-8, 80a-29, 80a-30, and 80a-37].

List of Subjects

17 CFR Parts 239 and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rule and Form Amendments

    For the reasons set out in the preamble, the Commission amends 
Title 17, Chapter II of the Code of Federal Regulations as follows:

[[Page 6581]]

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.
* * * * *
    Section 249.331 is also issued under secs. 3(a), 202, 208, 302, 
406, and 407, Pub. L. No. 107-204, 116 Stat. 745.

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

    3. The general authority citation for part 270 continues to read as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *

    4. Section 270.30b1-4 is added to read as follows:


Sec.  270.30b1-4  Report of proxy voting record.

    Every registered management investment company, other than a small 
business investment company registered on Form N-5 (Sec. Sec.  239.24 
and 274.5 of this chapter), shall file an annual report on Form N-PX 
(Sec.  274.129 of this chapter) not later than August 31 of each year, 
containing the registrant's proxy voting record for the most recent 
twelve-month period ended June 30.

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



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

    5. The authority citation for Part 274 is amended by revising the 
sectional authority for Sec.  274.128 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 274.128 is also issued under secs. 3(a), 202, 208, 302, 
406, and 407, Pub. L. No. 107-204, 116 Stat. 745.

    6. 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 additions 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 information regarding how the Fund voted proxies 
relating to portfolio securities during the most recent 12-month period 
ended June 30 is available (1) without charge, upon request, by calling 
a specified toll-free (or collect) telephone number; or on or through 
the Fund's Web site at a specified Internet address; or both; and (2) 
on the Commission's Web site at http://www.sec.gov.
    Instructions.
    1. A Fund may satisfy the requirement to provide a description of 
the policies and procedures that it uses to determine how to vote 
proxies relating to portfolio securities by including a copy of the 
policies and procedures themselves.
    2. If a Fund discloses that the Fund's proxy voting record is 
available by calling a toll-free (or collect) telephone number, and the 
Fund (or financial intermediary through which shares of the Fund may be 
purchased or sold) receives a request for this information, the Fund 
(or financial intermediary) must send the information disclosed in the 
Fund's most recently filed report on Form N-PX, within three business 
days of receipt of the request, by first-class mail or other means 
designed to ensure equally prompt delivery.
    3. If a Fund discloses that the Fund's proxy voting record is 
available on or through its Web site, the Fund must make available free 
of charge the information disclosed in the Fund's most recently filed 
report on Form N-PX on or through its Web site as soon as reasonably 
practicable after filing the report with the Commission. The 
information disclosed in the Fund's most recently filed report on Form 
N-PX must remain available on or through the Fund's Web site for as 
long as the Fund remains subject to the requirements of Rule 30b1-4 (17 
CFR 270.30b1-4) and discloses that the Fund's proxy voting record is 
available on or through its Web site.
* * * * *

Item 22. Financial Statements

* * * * *
    (b) * * *
    (7) A statement that a description of the policies and procedures 
that the Fund uses to determine how to vote proxies relating to 
portfolio securities 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 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 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 13(f) of this 
Form, within three business days of receipt of the request, by first-
class mail or other means designed to ensure equally prompt delivery.
    (8) A statement that information regarding how the Fund voted 
proxies relating to portfolio securities during the most recent 12-
month period ended June 30 is available (i) without charge, upon 
request, by calling a specified toll-free (or collect) telephone 
number; or on or through the Fund's Web site at a specified Internet 
address; or both; and (ii) on the Commission's Web site at http://www.sec.gov.
    Instructions.
    1. If a Fund discloses that the Fund's proxy voting record is 
available by calling a toll-free (or collect) telephone number, and the 
Fund (or financial intermediary through which shares of the Fund may be 
purchased or sold) receives a request for this information, the Fund 
(or financial intermediary) must send the information disclosed in the 
Fund's most recently filed report on

[[Page 6582]]

Form N-PX, within three business days of receipt of the request, by 
first-class mail or other means designed to ensure equally prompt 
delivery.
    2. If a Fund discloses that the Fund's proxy voting record is 
available on or through its Web site, the Fund must make available free 
of charge the information disclosed in the Fund's most recently filed 
report on Form N-PX on or through its Web site as soon as reasonably 
practicable after filing the report with the Commission. The 
information disclosed in the Fund's most recently filed report on Form 
N-PX must remain available on or through the Fund's Web site for as 
long as the Fund remains subject to the requirements of Rule 30b1-4 (17 
CFR 270.30b1-4) and discloses that the Fund's proxy voting record is 
available on or through its Web site.
    (c) * * *
    (5) A statement that a description of the policies and procedures 
that the Fund uses to determine how to vote proxies relating to 
portfolio securities 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 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 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 13(f) of this 
Form, within three business days of receipt of the request, by first-
class mail or other means designed to ensure equally prompt delivery.
    (6) A statement that information regarding how the Fund voted 
proxies relating to portfolio securities during the most recent 12-
month period ended June 30 is available (i) without charge, upon 
request, by calling a specified toll-free (or collect) telephone 
number; or on or through the Fund's Web site at a specified Internet 
address; or both; and (ii) on the Commission's Web site at http://www.sec.gov.
    Instruction. Instructions 1 and 2 to Item 22(b)(8) also apply to 
this Item 22(c)(6).
* * * * *
    7. 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 Instruction 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 additions 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 information regarding how the Registrant voted proxies 
relating to portfolio securities during the most recent 12-month period 
ended June 30 is available (i) without charge, upon request, by calling 
a specified toll-free (or collect) telephone number; or on or through 
the Registrant's Web site at a specified Internet address; or both; and 
(ii) on the Commission's Web site at http://www.sec.gov.
    Instructions.
    1. A Registrant may satisfy the requirement to provide a 
description of the policies and procedures that it uses to determine 
how to vote proxies relating to portfolio securities by including a 
copy of the policies and procedures themselves.
    2. If a Registrant discloses that the Registrant's proxy voting 
record is available by calling a toll-free (or collect) telephone 
number, and the Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives a request 
for this information, the Registrant (or financial intermediary) must 
send the information disclosed in the Registrant's most recently filed 
report on Form N-PX, within three business days of receipt of the 
request, by first-class mail or other means designed to ensure equally 
prompt delivery.
    3. If a Registrant discloses that the Registrant's proxy voting 
record is available on or through its Web site, the Registrant must 
make available free of charge the information disclosed in the 
Registrant's most recently filed report on Form N-PX on or through its 
Web site as soon as reasonably practicable after filing the report with 
the Commission. The information disclosed in the Registrant's most 
recently filed report on Form N-PX must remain available on or through 
the Registrant's Web site for as long as the Registrant remains subject 
to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-
4) and discloses that the Registrant's proxy voting record is available 
on or through its Web site.
* * * * *

Item 23. Financial Statements

* * * * *
    Instructions:
* * * * *
    4. * * *
    g. a statement that a description of the policies and procedures 
that the Registrant uses to determine how to vote proxies relating to 
portfolio securities is 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. a statement that information regarding how the Registrant voted 
proxies relating to portfolio securities during the most recent 12-
month period ended June 30 is available (1) without charge, upon 
request, by calling a specified toll-free (or collect) telephone 
number; or on or through the Registrant's Web site at a specified 
Internet address; or both; and (2) on the Commission's Web site at 
http://www.sec.gov.
    5. * * *
    e. a statement that a description of the policies and procedures 
that the Registrant uses to determine how to vote

[[Page 6583]]

proxies relating to portfolio securities is 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. a statement that information regarding how the Registrant voted 
proxies relating to portfolio securities during the most recent 12-
month period ended June 30 is available (1) without charge, upon 
request, by calling a specified toll-free (or collect) telephone 
number; or on or through the Registrant's Web site at a specified 
Internet address; or both; and (2) on the Commission's Web site at 
http://www.sec.gov.
    6. a. When a Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives 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 most recently disclosed in 
response to Item 18.16 of this Form or Item 7 of Form N-CSR within 
three business days of receipt of the request, by first-class mail or 
other means designed to ensure equally prompt delivery.
    b. If a Registrant discloses that the Registrant's proxy voting 
record is available by calling a toll-free (or collect) telephone 
number, and the Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives a request 
for this information, the Registrant (or financial intermediary) must 
send the information disclosed in the Registrant's most recently filed 
report on Form N-PX, within three business days of receipt of the 
request, by first-class mail or other means designed to ensure equally 
prompt delivery.
    c. If a Registrant discloses that the Registrant's proxy voting 
record is available on or through its Web site, the Registrant must 
make available free of charge the information disclosed in the 
Registrant's most recently filed report on Form N-PX on or through its 
Web site as soon as reasonably practicable after filing the report with 
the Commission. The information disclosed in the Registrant's most 
recently filed report on Form N-PX must remain available on or through 
the Registrant's Web site for as long as the Registrant remains subject 
to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-
4) and discloses that the Registrant's proxy voting record is available 
on or through its Web site.
* * * * *
    8. Form N-3 (referenced in Sec. Sec.  239.17a 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 additions 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 information regarding how the Registrant voted proxies 
relating to portfolio securities during the most recent 12-month period 
ended June 30 is available (1) without charge, upon request, by calling 
a specified toll-free (or collect) telephone number; or on or through 
the Registrant's Web site at a specified Internet address; or both; and 
(2) on the Commission's Web site at http://www.sec.gov.
    Instructions:
    1. A Registrant may satisfy the requirement to provide a 
description of the policies and procedures that it uses to determine 
how to vote proxies relating to portfolio securities by including a 
copy of the policies and procedures themselves.
    2. If a Registrant discloses that the Registrant's proxy voting 
record is available by calling a toll-free (or collect) telephone 
number, and the Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives a request 
for this information, the Registrant (or financial intermediary) must 
send the information disclosed in the Registrant's most recently filed 
report on Form N-PX, within three business days of receipt of the 
request, by first-class mail or other means designed to ensure equally 
prompt delivery.
    3. If a Registrant discloses that the Registrant's proxy voting 
record is available on or through its Web site, the Registrant must 
make available free of charge the information disclosed in the 
Registrant's most recently filed report on Form N-PX on or through its 
Web site as soon as reasonably practicable after filing the report with 
the Commission. The information disclosed in the Registrant's most 
recently filed report on Form N-PX must remain available on or through 
the Registrant's Web site for as long as the Registrant remains subject 
to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-
4) and discloses that the Registrant's proxy voting record is available 
on or through its Web site.
* * * * *

Item 27. Financial Statements

    (a) * * *
    Instructions:
* * * * *
    4. * * *
    (vii) a statement that a description of the policies and procedures 
that the Registrant uses to determine how to vote proxies relating to 
portfolio securities is 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) a statement that information regarding how the Registrant 
voted proxies relating to portfolio securities during the most recent 
12-month period ended June 30 is available (A) without charge, upon 
request, by calling a specified toll-free (or collect) telephone 
number; or on or through the

[[Page 6584]]

Registrant's Web site at a specified Internet address; or both; and (B) 
on the Commission's Web site at http://www.sec.gov.
    5. * * *
    (v) a statement that a description of the policies and procedures 
that the Registrant uses to determine how to vote proxies relating to 
portfolio securities is 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) a statement that information regarding how the Registrant 
voted proxies relating to portfolio securities during the most recent 
12-month period ended June 30 is available (A) without charge, upon 
request, by calling a specified toll-free (or collect) telephone 
number; or on or through the Registrant's Web site at a specified 
Internet address; or both; and (B) on the Commission's Web site at 
http://www.sec.gov.
    6. (i) When a Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives 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 
20(o) of this Form, within three business days of receipt of the 
request, by first-class mail or other means designed to ensure equally 
prompt delivery.
    (ii) If a Registrant discloses that the Registrant's proxy voting 
record is available by calling a toll-free (or collect) telephone 
number, and the Registrant (or financial intermediary through which 
shares of the Registrant may be purchased or sold) receives a request 
for this information, the Registrant (or financial intermediary) must 
send the information disclosed in the Registrant's most recently filed 
report on Form N-PX, within three business days of receipt of the 
request, by first-class mail or other means designed to ensure equally 
prompt delivery.
    (iii) If a Registrant discloses that the Registrant's proxy voting 
record is available on or through its Web site, the Registrant must 
make available free of charge the information disclosed in the 
Registrant's most recently filed report on Form N-PX on or through its 
Web site as soon as reasonably practicable after filing the report with 
the Commission. The information disclosed in the Registrant's most 
recently filed report on Form N-PX must remain available on or through 
the Registrant's Web site for as long as the Registrant remains subject 
to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-
4) and discloses that the Registrant's proxy voting record is available 
on or through its Web site.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

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

    9. Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128) is 
amended by adding new Item 7 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 7. Disclosure of Proxy Voting Policies and Procedures for Closed-
End Management Investment Companies

    A closed-end management investment company that is filing an annual 
report on this Form N-CSR 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.
    Instruction. A company may satisfy the requirement to provide a 
description of the policies and procedures that it uses to determine 
how to vote proxies relating to portfolio securities by including a 
copy of the policies and procedures themselves.
* * * * *

    10. Section 274.129 is added to read as follows:


Sec.  274.129  Form N-PX, annual report of proxy voting record of 
registered management investment company.

    This form shall be used by registered management investment 
companies, other than small business investment companies registered on 
Form N-5 (Sec. Sec.  239.24 and 274.5 of this chapter), for annual 
reports to be filed not later than August 31 of each year, containing 
the company's proxy voting record for the most recent twelve-month 
period ended June 30, pursuant to section 30 of the Investment Company 
Act of 1940 and Sec.  270.30b1-4 of this chapter.

    11. Add Form N-PX (referenced in Sec.  274.129) to read as follows:

    Note: The text of Form N-PX will not appear in the Code of 
Federal Regulations.

OMB Approval
    OMB Number:
    Expires:
    Estimated average burden hours per response:

United States Securities and Exchange Commission, Washington, DC 20549

Form N-PX--Annual Report of Proxy Voting Record of Registered 
Management Investment Company

Investment Company Act file number ----------

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(Exact name of registrant as specified in charter)

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(Address of principal executive offices) (Zip code)

 (Name and address of agent for service)-------------------------------

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Registrant's telephone number, including area code:
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Date of fiscal year end:
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Date of reporting period:

    Form N-PX is to be used by a registered management investment 
company, other than a small business investment company registered on 
Form N-5 (Sec. Sec.  239.24 and 274.5 of this chapter), to file reports 
with the Commission, not later than August 31 of each year, containing 
the registrant's proxy voting record for the most recent twelve-month 
period ended June 30, pursuant to section 30 of the Investment Company 
Act of 1940 and rule 30b1-4 thereunder (17 CFR 270.30b1-4). The 
Commission may use the information provided on Form N-PX in its 
regulatory, disclosure review, inspection, and policymaking roles.
    A registrant is required to disclose the information specified by 
Form N-PX, and the Commission will make this information public. A 
registrant is not

[[Page 6585]]

required to respond to the collection of information contained in Form 
N-PX unless the Form displays a currently valid Office of Management 
and Budget (``OMB'') control number. Please direct comments concerning 
the accuracy of the information collection burden estimate and any 
suggestions for reducing the burden to the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
The OMB has reviewed this collection of information under the clearance 
requirements of 44 U.S.C. Sec.  3507.

General Instructions

A. Rule as to Use of Form N-PX

    Form N-PX is to be used for reports pursuant to Section 30 of the 
Investment Company Act of 1940 (the ``Act'') and Rule 30b1-4 under the 
Act (17 CFR 270.30b1-4) by all registered management investment 
companies, other than small business investment companies registered on 
Form N-5 (Sec. Sec.  239.24 and 274.5 of this chapter), to file their 
complete proxy voting record not later than August 31 of each year for 
the most recent twelve-month period ended June 30.

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act contain certain 
general requirements that are applicable to reporting on any form under 
the Act. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this form, except 
that any provision in the form or in these instructions shall be 
controlling.

C. Preparation of Report

    1. This Form is not to be used as a blank form to be filled in, but 
only as a guide in preparing the report in accordance with Rules 8b-11 
(17 CFR 270.8b-11) and 8b-12 (17 CFR 270.8b-12) under the Act. The 
Commission does not furnish blank copies of this form to be filled in 
for filing.
    2. These general instructions are not to be filed with the report.

D. Incorporation by Reference

    No items of this Form shall be answered by incorporating any 
information by reference.

E. Definitions

    Unless the context clearly indicates the contrary, terms used in 
this Form N-PX have meanings as defined in the Act and the rules and 
regulations thereunder. Unless otherwise indicated, all references in 
the form to statutory sections or to rules are sections of the Act and 
the rules and regulations thereunder.

F. Signature and Filing of Report

    1. If the report is filed in paper pursuant to a hardship exemption 
from electronic filing (see Item 201 et seq. of Regulation S-T (17 CFR 
232.201 et seq.)), eight complete copies of the report shall be filed 
with the Commission. At least one complete copy of the report filed 
with the Commission must be manually signed. Copies not manually signed 
must bear typed or printed signatures.
    2.(a) The report must be signed by the registrant, and on behalf of 
the registrant by its principal executive officer or officers.
    (b) The name and title of each person who signs the report shall be 
typed or printed beneath his or her signature. Attention is directed to 
Rule 8b-11 under the Act (17 CFR 270.8b-11) concerning manual 
signatures and signatures pursuant to powers of attorney.
Item 1. Proxy Voting Record
    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 
registrant was entitled to vote:
    (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); 
and
    (i) Whether the registrant cast its vote for or against management.

Instructions

    1. 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 Act (17 CFR 270.18f-2(a)).
    2. The exchange ticker symbol or CUSIP number required by paragraph 
(b) or (c) of this Item may be omitted if it is not available through 
reasonably practicable means, e.g., in the case of certain securities 
of foreign issuers.

Signatures

[See General Instruction F]

    Pursuant to the requirements of the Investment Company Act of 1940, 
the registrant has duly caused this report to be signed on its behalf 
by the undersigned, thereunto duly authorized.

 (Registrant)----------------------------------------------------------
 By (Signature and Title)*---------------------------------------------
 Date------------------------------------------------------------------


    * Print the name and title of each signing officer under his or 
her signature.

    Dated: January 31, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2951 Filed 2-6-03; 8:45 am]
BILLING CODE 8010-01-P