[Federal Register Volume 68, Number 26 (Friday, February 7, 2003)]
[Rules and Regulations]
[Pages 6585-6593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2952]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-2106; File No. S7-38-02]
RIN 3235-AI65


Proxy Voting by Investment Advisers

AGENCY: Securities and Exchange Commission

ACTION: Final rule.

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SUMMARY: The Commission is adopting a new rule and rule amendments 
under the Investment Advisers Act of 1940 that address an investment 
adviser's fiduciary obligation to its clients when the adviser has 
authority to vote their proxies. The new rule requires an 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, and to disclose to 
clients how they may obtain information on how the adviser has voted 
their proxies. The rule amendments also require advisers to maintain 
certain records relating to proxy voting. The rule and rule amendments 
are designed to ensure that advisers vote proxies in the best interest 
of their clients and provide clients with information about how their 
proxies are voted.

DATES: Effective Date: March 10, 2003.

[[Page 6586]]

    Compliance Date: Advisers must comply with the new rule and 
amendments by August 6, 2003. Section III of this Release contains more 
information on the compliance date.

FOR FURTHER INFORMATION CONTACT: Daniel S. Kahl, Senior Counsel, or 
Jennifer L. Sawin, Assistant Director, at (202) 942-0719, Office of 
Investment Adviser Regulation, Division of Investment Management, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting new rule 206(4)-6 [17 CFR 275.206(4)-6] 
and amendments to rule 204-2 [17 CFR 275.204-2] under the Investment 
Advisers Act of 1940 [15 U.S.C. 80b] (``Advisers Act'' or ``Act'').\1\
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    \1\ Unless otherwise noted, when we refer to rule 204-2 or any 
paragraph of the rule, we are referring to 17 CFR 275.204-2 of the 
Code of Federal Regulations in which the rule is published, as 
amended by this release, and when we refer to rule 206(4)-6 or any 
paragraph of the rule, we are referring to 17 CFR 275.206(4)-6 of 
the Code of Federal Regulations as adopted by this release.
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Table of Contents

I. Background
II. Discussion
    A. Rule 206(4)-6, Proxy Voting
    1. Advisers Subject to the Rule
    2. Policies and Procedures
    a. Voting Client Proxies
    b. Resolving Conflicts of Interest
    3. Disclose How to Obtain Voting Information
    4. Describe Policies and Procedures
    B. Rule 204-2, Recordkeeping
III. Effective Date
IV. Cost-Benefit Analysis
V. Paperwork Reduction Act
VI. Summary of Final Regulatory Flexibility Analysis
VII. Consideration of Promotion of Efficiency, Competition, and 
Capital Formation
VIII. Statutory Authority
Text of Rule and Rule Amendments

I. Background

    Investment advisers registered with us have discretionary authority 
to manage $19 trillion of assets on behalf of their clients, including 
large holdings in equity securities. In most cases, clients give these 
advisers authority to vote proxies relating to equity securities. This 
enormous voting power gives advisers significant ability collectively, 
and in many cases individually, to affect the outcome of shareholder 
votes and influence the governance of corporations. Advisers are thus 
in a position to significantly affect the future of corporations and, 
as a result, the future value of corporate securities held by their 
clients.
    The federal securities laws do not specifically address how an 
adviser must exercise its proxy voting authority for its clients. Under 
the Advisers Act, however, an adviser is a fiduciary that owes each of 
its clients duties of care and loyalty with respect to all services 
undertaken on the client's behalf, including proxy voting.\2\ The duty 
of care requires an adviser with proxy voting authority to monitor 
corporate events and to vote the proxies.\3\ To satisfy its duty of 
loyalty, the adviser must cast the proxy votes in a manner consistent 
with the best interest of its client and must not subrogate client 
interests to its own.
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    \2\ See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 
180, 194 (1963) (interpreting section 206 of the Advisers Act [15 
U.S.C. 80b-6]).
    \3\ As we discuss later in this Release, we do not mean to 
suggest that an adviser that does not exercise every opportunity to 
vote a proxy on behalf of its clients would thereby violate its 
fiduciary obligations to those clients under the Act.
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    An adviser may have a number of conflicts that can affect how it 
votes proxies. For example, an adviser (or its affiliate) may manage a 
pension plan, administer employee benefit plans, or provide brokerage, 
underwriting, insurance, or banking services to a company whose 
management is soliciting proxies.\4\ Failure to vote in favor of 
management may harm the adviser's relationship with the company. The 
adviser may also have business or personal relationships with 
participants in proxy contests, corporate directors or candidates for 
directorships. For example, an executive of the adviser may have a 
spouse or other close relative who serves as a director or executive of 
a company.\5\
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    \4\ The adviser may also have a business relationship not with 
the company but with a proponent of a proxy proposal that may affect 
how it casts votes on clients' securities. For example, the adviser 
may manage money for an employee group.
    \5\ Whether the adviser's relationships with these other parties 
creates a material conflict will depend on the facts and 
circumstances. However, even in the absence of efforts by these 
parties to persuade the adviser how to vote, the value of the 
relationship to the adviser can create a material conflict. The 
Supreme Court has made it clear that the Advisers Act was intended 
to eliminate or expose advisers' unconscious biases as well as 
conscious ones. Capital Gains, supra note 2, at 191-192.
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    Our concern with these conflicts and how they affect clients of 
advisers led us to propose, on September 20, 2002, new rule 206(4)-6 
and amendments to rule 204-2.\6\ The proposals were designed to prevent 
material conflicts of interest from affecting the manner in which 
advisers vote clients' proxies. We proposed to require advisers to 
adopt and implement policies and procedures for voting proxies in the 
best interest of clients, to describe the procedures to clients, and to 
tell clients how they may obtain information about how the adviser has 
actually voted their proxies.
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    \6\ Proxy Voting by Investment Advisers, Investment Advisers Act 
Release No. 2059 (Sept. 20, 2002) [67 FR 60841 (Sept. 26, 2002)] 
(``Proposing Release'').
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    We received several thousand comment letters; nearly all supported 
adoption of the rule.\7\ Commenters, including many advisers and groups 
representing advisers, agreed that advisers should have proxy voting 
procedures, and supported clients' right to information on how their 
proxies are voted. Several, however, urged that we revise the proposed 
recordkeeping requirements of rule 204-2 to make them less burdensome 
on advisers. We are today adopting rule 206(4)-6 as proposed, and are 
adopting amendments to rule 204-2 with certain changes that respond to 
issues raised by commenters.
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    \7\ The Proposing Release was issued with a companion release 
proposing amendments that would require mutual funds to disclose 
policies and procedures they use to vote proxies on their portfolio 
securities, and to make available to their shareholders the specific 
proxy votes they cast. 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 
60827 (Sept. 26, 2002)] (``Fund Proposing Release''). Commenters 
submitted ten different types of form letters; five of these 
(approximately 2800 letters) and a large number of other letters 
were submitted in response to both the Proposing Release and the 
Fund Proposing Release. In addition, some letters submitted in 
response to the Proposing Release also raised points pertaining to 
the Fund Proposing Release, and vice versa.
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II. Discussion

A. Rule 206(4)-6, Proxy Voting

    Under rule 206(4)-6, it is a fraudulent, deceptive, or manipulative 
act, practice or course of business within the meaning of section 
206(4) of the Act for an investment adviser to exercise voting 
authority with respect to client securities, unless (i) the adviser has 
adopted and implemented written policies and procedures that are 
reasonably designed to ensure that the adviser votes proxies in the 
best interest of its clients, (ii) the adviser describes its proxy 
voting procedures to its clients and provides copies on request, and 
(iii) the adviser discloses to clients how they may obtain information 
on how the adviser voted their proxies.\8\
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    \8\ Nothing in this rule reduces or alters any fiduciary 
obligation applicable to any investment adviser (or person 
associated with any investment adviser).
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1. Advisers Subject to the Rule
    The rule applies, as proposed, to all investment advisers 
registered with us that exercise proxy voting authority over client 
securities. While several commenters urged that we create exceptions, 
none offered persuasive

[[Page 6587]]

arguments why an adviser that accepts voting authority ought not be 
required to have procedures in place to ensure that it meets its 
fiduciary obligations to clients.\9\
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    \9\ We note that, while we are not creating an exception for 
smaller firms, as some commenters suggested, smaller firms without 
financial industry affiliates are likely to have few or even no 
potential conflicts of interest relating to proxy voting, in which 
case their procedures could be much simpler and compliance with the 
rule would be commensurately less burdensome.
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    Advisers that have implicit as well as explicit voting authority 
must comply with rule 206(4)-6. The rule thus applies when the advisory 
contract is silent but the adviser's voting authority is implied by an 
overall delegation of discretionary authority.\10\ The rule does not 
apply, however, to advisers that provide clients with advice about 
voting proxies but do not have authority to vote the proxies.\11\
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    \10\ Several commenters argued that the rule should not apply to 
advisers that have not received explicit authority to vote proxies. 
Advisers who believe that the application of the rule to them would 
be inappropriate could revise their advisory contracts (or make 
other disclosure to clients) to make explicit their responsibility 
(or lack of responsibility) for voting proxies.
    \11\ The Advisers Act's general anti-fraud provisions would, 
however, continue to require such advisers to disclose any material 
conflict to the clients receiving the advice.
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2. Policies and Procedures
    Under rule 206(4)-6, advisers that exercise voting authority with 
respect to client securities must adopt proxy voting policies and 
procedures.\12\ The policies and procedures must be in writing. They 
must be reasonably designed to ensure that the adviser votes in the 
best interest of clients.\13\ And they must describe how the adviser 
addresses material conflicts between its interests and those of its 
clients with respect to proxy voting.\14\ Most commenters supported 
these requirements, and many advisers informed us that they already had 
written policies in place.
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    \12\ Rule 206(4)-6(a).
    \13\ Nothing in the rule prevents an adviser from having 
different policies and procedures for different clients. Thus, the 
board of directors of an investment company could adopt and require 
an investment adviser to use different policies and procedures than 
the adviser uses with respect to its other clients.
    \14\ Advisers' proxy voting policies and procedures should 
address (although the rule does not require) how the adviser will 
vote proxies (or what factors it will take into consideration) when 
voting on particular types of matters, such as changes in corporate 
governance structures, adoption or amendments to compensation plans 
(including stock options) and matters involving social issues or 
corporate responsibility. The policies and procedures of an adviser 
whose advisory activities are limited to investments in investment 
companies would, of course, address different matters, including, 
for example, approval of advisory contracts, distribution plans 
(``12b-1 plans''), and mergers.
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    We did not propose, and are not adopting, specific policies or 
procedures for advisers. Nor are we, as some commenters requested, 
providing a list of approved procedures. Investment advisers registered 
with us are so varied that a ``one-size-fits-all'' approach is 
unworkable. By not mandating specific policies and procedures, we leave 
advisers the flexibility to craft policies and procedures suitable to 
their businesses and the nature of the conflicts they face. As noted by 
some commenters, some advisers (including many smaller firms) are 
unlikely to face any material conflicts of interest, in which case 
their procedures could be very simple.\15\
    An adviser's proxy voting policies and procedures should be 
designed to enable the firm to resolve material conflicts of interest 
with its clients before voting their proxies. As we discussed above, 
these obligations involve both a duty to vote client proxies and a duty 
to vote them in the best interest of clients.\16\
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    \15\ Even the smallest firm, however, may from time to time have 
conflicts of interests with clients. For example, an adviser that is 
solicited to vote client proxies approving an increase in fees 
deducted from mutual fund assets pursuant to a 12b-1 plan has a 
conflict of interest with its clients invested in the fund if the 
fees are a source of compensation for the adviser.
    \16\ While the rule allows for flexibility, it does not allow 
for mere boilerplate. Procedures that merely declare that all 
proxies will be voted in the best interests of clients would not be 
sufficient to meet the rule's requirements.
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a. Voting Client Proxies

    The duty of care requires an adviser with voting authority to 
monitor corporate actions and vote client proxies. Therefore, the 
adviser should have procedures in place designed to ensure that it 
fulfills these duties.\17\ We do not suggest that an adviser that fails 
to vote every proxy would necessarily violate its fiduciary 
obligations. There may even be times when refraining from voting a 
proxy is in the client's best interest, such as when the adviser 
determines that the cost of voting the proxy exceeds the expected 
benefit to the client.\18\ An adviser may not, however, ignore or be 
negligent in fulfilling the obligation it has assumed to vote client 
proxies.\19\
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    \17\ We suggested in the Proposing Release that effective 
procedures should identify personnel responsible for monitoring 
corporate actions, those responsible for making voting decisions, 
and those responsible for ensuring that proxies are submitted 
timely. Commenters felt that less detail could suffice and asked 
whether it was necessary for procedures to name individuals. Under 
the rule, advisers can write procedures that fit their firm. In a 
firm with few employees, those roles may be self-evident. Large 
firms, however, may need to clarify which department or group of 
employees has what responsibility in order to guard against non-
compliance.
    \18\ For example, casting a vote on a foreign security may 
involve additional costs such as hiring a translator or traveling to 
the foreign country to vote the security in person.
    \19\ The scope of an adviser's responsibilities with respect to 
voting proxies would ordinarily be determined by the adviser's 
contracts with its clients, the disclosures it has made to its 
clients, and the investment policies and objectives of its clients. 
An adviser's fiduciary duties to a client do not necessarily require 
the adviser to become a ``shareholder activist'' by, for example, 
actively engaging in soliciting proxies or supporting or opposing 
matters before shareholders. As a practical matter, advisers will 
determine whether to engage in such activism based on its costs and 
expected benefits to clients. Cf. Department of Labor, Interpretive 
Bulletin Relating to Written Statements of Investment Policy, 
Including Proxy Voting Guidelines, 29 CFR 2509.94-2 at Sec.  3 
(2001).
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b. Resolving Conflicts of Interest

    An adviser's policies and procedures under the rule must also 
address how the adviser resolves material conflicts of interest with 
its clients. Some commenters urged us to approve methods that would 
resolve material conflicts. Clearly, an adviser's policy of disclosing 
the conflict to clients and obtaining their consents before voting 
satisfies the requirements of the rule and, when implemented, fulfills 
the adviser's fiduciary obligations under the Advisers Act.\20\ In the 
absence of client disclosure and consent,\21\ we believe that an 
adviser that has a material conflict of interest with its clients must 
take other steps designed to ensure, and must be able to demonstrate 
that those steps resulted in, a decision to vote the proxies that was 
based on the clients' best interest and was not the product of the 
conflict.\22\
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    \20\ In this regard, we believe that an adviser to an investment 
company would satisfy its fiduciary obligations under the Advisers 
Act if, before voting the proxies, it fully discloses its conflict 
to the investment company's board of directors or a committee of the 
board and obtains the board's or committee's consent or direction to 
vote the proxies.
    \21\ An adviser seeking a client's consent must provide the 
client with sufficient information regarding the matter before 
shareholders and the nature of the adviser's conflict to enable the 
client to make an informed decision to consent to the adviser's 
vote. Boilerplate disclosure in a client brochure regarding 
generalized conflicts would be inadequate.
    \22\ Courts have taken a similar approach with respect to the 
business judgment rule afforded directors of corporations. When 
corporate directors take action notwithstanding their conflict of 
interest, they lose the deference that they normally receive under 
the ``business judgment rule,'' and must demonstrate that their 
corporate action was fair to the corporation and its shareholders. 
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). 
``The rationale for employing the intrinsic fairness standard is 
that where corporate fiduciaries, because of a conflict, are 
disabled from safeguarding the interests of the stockholders to whom 
they owe a duty, the Court will furnish compensatory procedural 
safeguards by imposing upon the fiduciaries an exacting burden of 
establishing the utmost propriety and fairness of their actions.'' 
Van de Walle v. Unimation, Inc. 1991 Del. Ch. LEXIS 27, at 30 (Mar. 
6, 1991).

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    Advisers today use various means of ensuring that proxy votes are 
voted in their clients' best interest and not affected by the advisers' 
conflicts of interest.\23\ An adviser that votes securities based on a 
pre-determined voting policy could demonstrate that its vote was not a 
product of a conflict of interest if the application of the policy to 
the matter presented to shareholders involved little discretion on the 
part of the adviser.\24\ Similarly, an adviser could demonstrate that 
the vote was not a product of a conflict of interest if it voted client 
securities, in accordance with a pre-determined policy, based upon the 
recommendations of an independent third party. An adviser could also 
suggest that the client engage another party to determine how the 
proxies should be voted, which would relieve the adviser of the 
responsibility to vote the proxies.\25\ Other policies and procedures 
are also available; their effectiveness (and the effectiveness of any 
policies and procedures) will turn on how well they insulate the 
decision on how to vote client proxies from the conflict.
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    \23\ We believe an adviser that has assumed the responsibility 
of voting client proxies cannot fulfill its fiduciary 
responsibilities to its clients by merely refraining from voting the 
proxies. Such proxies would not be voted in the best interest of the 
clients.
    \24\ Of course, the pre-determined policy must be designed to 
further the interests of clients rather than the adviser. Thus, an 
adviser could not, consistent with its duty, adopt a pre-determined 
policy of voting proxies in favor of the management of companies 
with which it does business. We recognize, however, that in many 
cases, voting policies are not sufficiently specific to determine 
how the vote will be cast.
    \25\ See, e.g., Evergreen Investment Management Company, LLC, 
SEC Staff No-Action Letter at n. 6 (Feb. 13, 2002) (client mutual 
fund hired third party to vote proxies in merger contest involving 
the adviser's parent corporation).
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3. Disclose How To Obtain Voting Information
    Rule 206(4)-6 requires advisers to disclose to clients how they can 
obtain information from the adviser on how their securities were 
voted.\26\ Commenters supported advisers' disclosure of actual 
votes.\27\ Many advisers indicated that their clients, particularly 
institutional clients, do request this information and that the 
advisers already have procedures in place to facilitate clients' access 
to this information.
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    \26\ Rule 206(4)-6(b). We expect most advisers will make this 
disclosure in their written brochure required under rule 204-3 [17 
CFR 275.204-3].
    \27\ The rule does not prescribe a client's right to this 
information because we do not believe a prescription is necessary. 
Although a few commenters suggested that the rule should prescribe a 
right, other commenters including investment advisers agreed with us 
that a client already has the right to information about how that 
client's securities were voted. See Restatement (Second) of Agency 
Sec.  381.
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    Many investors urged that rule 206(4)-6 require that advisers 
publicly disclose how they vote their client proxies. In a companion 
release, we are today adopting rules requiring that investment 
companies publicly disclose how they vote their proxies.\28\ We are 
requiring public disclosure as a means of informing fund shareholders 
how the fund (or its adviser) voted proxies of the shareholders' fund. 
Public disclosure is unnecessary for advisers to communicate to each 
client how the adviser has voted that client's proxies. Moreover, 
public disclosure of proxy votes by some advisers would reveal client 
holdings and thus client confidences. We have determined, therefore, 
not to require advisers to disclose their votes publicly.
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    \28\ Disclosure of Proxy Voting Policies and Proxy Voting 
Records by Registered Management Investment Companies, Investment 
Company Act Release No. 25922 (Jan. 31, 2003).
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4. Describe Policies and Procedures
    Rule 206(4)-6 also requires advisers to describe their proxy voting 
policies and procedures to clients, and upon request, to provide 
clients with a copy of those policies and procedures.\29\ Commenters 
strongly supported this requirement, which we are adopting as proposed. 
The description should be a concise summary of the adviser's proxy 
voting process rather than a reiteration of the adviser's policies and 
procedures, and should indicate that a copy of the policies and 
procedures is available upon request. If a client requests a copy of 
the policies and procedures, the adviser must supply it.
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    \29\ Rule 206(4)-6(c).
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B. Rule 204-2, Recordkeeping

    Investment advisers expressed significant concerns with the 
compliance burdens of the proposed recordkeeping requirements and 
suggested several improvements. We are adopting the amendments to rule 
204-2 with modifications that should substantially reduce those 
compliance burdens. Under rule 204-2, as amended, advisers must retain 
(i) their proxy voting policies and procedures; (ii) proxy statements 
received regarding client securities; (iii) records of votes they cast 
on behalf of clients; (iv) records of client requests for proxy voting 
information,\30\ and (v) any documents prepared by the adviser that 
were material to making a decision how to vote, or that memorialized 
the basis for the decision.\31\ In response to suggestions from 
commenters, the amendments permit an adviser to rely on proxy 
statements filed on our EDGAR system instead of keeping its own copies, 
and to rely on proxy statements and records of proxy votes cast by the 
adviser that are maintained with a third party such as a proxy voting 
service, provided that the adviser has obtained an undertaking from the 
third party to provide a copy of the documents promptly upon request.
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    \30\ As adopted, the amendments only require an adviser to keep 
all written requests from clients and any written response from the 
adviser (to either a written or an oral request).
    \31\ Rule 204-2(c)(2). These records (other than proxy 
statements on file with our EDGAR system or maintained by a third 
party and proxy votes maintained by a third party) must be 
maintained in an easily accessible place for five years, the first 
two in an appropriate office of the investment adviser. Rule 204-
2(e)(1). These are the same retention requirements that apply to 
most other books and records under rule 204-2.
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III. Effective Date

    New rule 206(4)-6 and the amendments to rule 204-2 are effective on 
March 10, 2003. Advisers must comply with the new rule and amendments 
by August 6, 2003. By this date, advisers subject to the new rule must 
have adopted and implemented the required proxy voting policies and 
procedures. Also by this date, advisers must have provided clients with 
a description of their policies and procedures, and disclosure of how 
the clients may obtain information from the adviser on how it voted 
with respect to their securities.
    Advisers may choose any means to make this disclosure, provided 
that it is clear, not ``buried'' in a longer document, and received by 
clients by August 6, 2003. For example, an adviser could send clients 
the disclosure together with a periodic account statement, deliver it 
in a separate mailing, or include it in its brochure (or Part II of 
Form ADV). Advisers that use their brochure or Part II to make the 
disclosure must deliver (not merely offer) the revised brochure to 
existing clients by August 6, 2003, and should accompany the delivery 
with a letter identifying the new disclosure.

IV. Cost-Benefit Analysis

A. Background

    The Commission is sensitive to the costs and benefits resulting 
from its rules. While investment advisers typically exercise proxy 
voting authority

[[Page 6589]]

as part of their discretionary management of client securities, the 
federal securities laws do not specifically address how advisers must 
exercise this power. New rule 206(4)-6 is designed to ensure that 
advisers that have proxy voting authority vote clients' securities in 
the clients' best interest and provide clients with information on how 
their securities are voted. In addition, these advisers must keep 
records that permit the Commission to confirm their compliance with 
rule 206(4)-6.
    Investment advisers registered with us have discretionary authority 
to manage $19 trillion on behalf of their clients, including large 
holdings in equity securities. In most cases, clients give these 
advisers authority to vote proxies relating to equity securities. This 
enormous voting power gives advisers significant ability collectively, 
and in many cases individually, to affect the outcome of shareholder 
votes and influence the governance of corporations. Advisers are thus 
in a position to significantly affect the future of corporations and, 
as a result, the future value of corporate securities held by their 
clients.
    Under the Advisers Act, an adviser is a fiduciary that owes each of 
its clients duties of care and loyalty with respect to all services 
undertaken on the client's behalf, including proxy voting. The duty of 
care requires an adviser that has authority to vote its client's 
proxies to monitor corporate events and to vote the proxies. To satisfy 
its duty of loyalty, the adviser must cast the proxy votes in a manner 
consistent with the best interest of its client and must not subrogate 
client interests to its own.
    An adviser may have conflicts that can affect how it votes proxies. 
For example, the adviser (or its affiliate) may manage a pension plan, 
administer employee benefit plans, or provide brokerage, underwriting, 
insurance, or banking services to a company whose management is 
soliciting proxies. Failure to vote in favor of management may harm the 
adviser's relationship with the company. The adviser may also have 
business or personal relationships with other proponents of proxy 
proposals, participants in proxy contests, corporate directors or 
candidates for directorships. For example, the adviser may manage money 
for an employee group, or an executive of the adviser may have a spouse 
or other close relative who serves as a director or executive of a 
company. Our concern with these conflicts and how they affect clients 
of advisers led us to propose, on September 20, 2002, new rule 206(4)-6 
and amendments to rule 204-2.\32\
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    \32\ See supra note 6.
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    New rule 206(4)-6 is designed to prevent material conflicts of 
interest from affecting the manner in which advisers vote clients' 
proxies. The rule requires SEC-registered investment advisers that have 
authority to vote clients' proxies to adopt written policies and 
procedures reasonably designed to ensure that the adviser votes proxies 
in the best interest of its clients, including procedures to address 
any material conflict that may arise between the interest of the 
adviser and the clients. The adviser must describe these policies and 
procedures to clients, provide copies of the policies and procedures to 
clients upon their request, and disclose to clients how they may obtain 
information from the adviser about how the adviser has voted their 
proxies.
    The amendments to rule 204-2 under the Advisers Act require SEC-
registered investment advisers that vote client proxies to maintain 
specified records with respect to those clients. These records will 
permit our examiners to ascertain the advisers' compliance with new 
rule 206(4)-6.
    Based on advisers' filings with us, we estimate that the majority 
of investment advisers registered with us will be subject to the new 
rule. SEC-registered advisers are not currently required to submit 
information to us describing their proxy voting practices. However, 
according to our records as of September 9, 2002, 6,203 of the 7,687 
advisers registered with us manage client assets on a discretionary 
basis.\33\ Because in most instances, advisers with discretionary 
investment authority are given authority to vote proxies relating to 
equity securities under management, it is likely that significant 
numbers of these 6,203 advisers vote proxies on behalf of one or more 
clients in connection with providing their discretionary asset 
management services.\34\
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    \33\ This estimate is based on information submitted by SEC-
registered advisers on Form ADV [17 CFR 279.1]. 6,203 SEC-registered 
investment advisers reported on Part 1A of their Form ADV that they 
provide continuous and regular supervisory or management services 
for client securities portfolios on a discretionary basis.
    \34\ Part 1A of Form ADV does not require advisers to describe 
the types of securities for which they hold discretionary investment 
authority. Some advisers that report having discretionary assets 
under management may manage only securities for which proxy voting 
issues do not arise, such as government or other debt obligations.
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    The Commission has given consideration to the costs of new rule 
206(4)-6 and amendments to rule 204-2, as well as the benefits. In the 
Proposing Release we requested comment and specific data regarding 
these costs and benefits. The comments we received were mostly general 
in nature and are discussed below. We received one comment that 
included data and estimated the cost of our proposal to be slightly 
higher than our figure. In light of the changes we are making to the 
rules as adopted, we believe our original figures accurately estimate 
the costs of the rule and rule amendments.

B. Benefits

    Rule 206(4)-6 will, we believe, provide several important benefits 
to advisory clients. Requiring advisers to have written proxy voting 
policies and procedures that address material conflicts of interest 
will benefit clients by ensuring that their advisers do resolve 
conflicts in the clients' best interests. Requiring advisers to 
describe their proxy voting policies and procedures to clients and to 
furnish copies to clients upon request will benefit clients by allowing 
them to understand how their advisers vote proxies. Clients will also 
be in a better position to evaluate whether their advisers' policies 
and procedures meet their own objectives and expectations. Many 
individual commented that they do want their advisers' policies and 
procedures to be available to them. Clients who do not approve of how 
their adviser votes their proxies may decide to reclaim the 
responsibility to vote proxies, provide the adviser with instructions 
on how to vote their proxies, or seek a different adviser whose voting 
policies they approve. Finally, requiring advisers to disclose to their 
clients how the clients can obtain information on how the advisers 
voted their proxies will benefit clients by allowing them to be fully 
informed about how their shares were voted and to confirm that their 
advisers are following their voting policies and procedures.
    The benefit of codifying these practices through a rule is 
difficult to quantify, for two reasons. First, commenters confirmed 
that some advisory clients are already receiving these benefits as a 
matter of practice. Many advisers commented that they already have 
proxy voting policies and procedures in place, and that they already 
provide much of this information to clients. Second, the adviser is an 
agent and fiduciary of its clients; it already owes them a fiduciary 
duty to vote proxies in the clients' best interest, and must provide 
them with information on how their proxies were voted.

[[Page 6590]]

C. Costs

    The Commission anticipates that rule 206(4)-6 and the amendments to 
rule 204-2 will impose certain costs on advisers that have voting 
authority over client securities.\35\ Advisers that do not yet have 
proxy voting policies and procedures in place will incur costs in 
connection with establishing them. Because the rule does not require 
specific policies and procedures, but permits the adviser flexibility 
to craft policies and procedures suitable to its business and 
conflicts, we believe that the costs will very significantly from 
adviser to adviser based on factors such as size, investment 
philosophy, and clientele. Moreover, a number of very large advisers--
likely the firms that would require the most detailed and complex 
policies and procedures--commented that they already had proxy voting 
policies and procedures in operation. Advisers that have established 
policies and procedures may incur only limited costs in revising them 
to meet the rule's requirements.
---------------------------------------------------------------------------

    \35\ In connection with estimating the annual aggregate burden 
of the proposed rule and amendments for purposes of the Paperwork 
Reduction Act, the Commission staff has estimated that advisory 
firms subject to the rule will incur staff salary and benefit costs 
aggregating approximately $5,775,000 to prepare and maintain the 
documents and records required under the proposal. This is an 
aggregate estimate, and each firm's individual costs in this regard 
will vary depending on the nature of the firm's advisory business 
and clients. See Proposing Release at n. 45.
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    Advisers will also incur costs in preparing descriptions of their 
voting policies and procedures, furnishing the descriptions to clients 
(and furnishing copies of the policies and procedures upon request), 
responding to client requests for actual proxy votes, and keeping 
records as required by the rule amendments.
    Although a number of advisers indicated that their cost to comply 
with the proposed recordkeeping requirements would be significant, they 
did not provide specific data. Advisers with relatively few staff 
indicated that they believed that complying with the recordkeeping 
requirements would require them to hire an additional employee, while 
large advisers chiefly commented on the requirement to maintain records 
that were material to the voting decision. We have narrowed the 
recordkeeping requirements from the proposal to incorporate several 
recommendations from commenters. Under the rule amendments as adopted, 
advisers may retrieve proxy statements from the Commission's EDGAR 
system rather than maintaining copies, and may rely on a third party to 
make and keep copies of proxy statements and records of votes. Further, 
the final rule substantially narrows the requirements for keeping 
documents material to the adviser's voting decision. We believe that 
these changes significantly reduce the costs involved.

V. Paperwork Reduction Act

    As set forth in the Proposing Release, new rule 206(4)-6 and the 
amendments to rule 204-2 contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\36\ The titles for the collections of information are 
``Proxy Voting by Investment Advisers'' and ``Books and Records to be 
Maintained by Investment Advisers.'' The Commission submitted the new 
collection of information, Proxy Voting by Investment Advisers, 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 collection for information for 
rule 206(4)-6 has been approved by OMB; and OMB control number is 3235-
0571 (expires November 30, 2005). The collection of information for 
rule 204-2 was previously approved under OMB control number 3235-0278 
(expires November 30, 2005). 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 control number.
---------------------------------------------------------------------------

    \36\ 44 U.S.C. 3501 to 3520.
---------------------------------------------------------------------------

A. Rule 206(4)-6

    Under rule 206(4)-6, an investment adviser that exercises voting 
authority over clients' securities must adopt written proxy voting 
policies and procedures, describe the procedures to clients, make them 
available to clients upon request, and inform clients how they can 
obtain information about how their securities were voted. We requested 
comment on the recordkeeping burden of rule 206(4)-6, but received no 
responses.
    In the Proposing Release, we estimated that, on average, an adviser 
would spend 10 hours annually documenting its proxy voting policies and 
procedures.\37\ For purposes of estimating the number of advisers that 
would be affected by the new rule, we assumed that all advisers with 
discretion to manage clients' assets also had discretion to vote 
clients' securities and would thus be subject to the rule.\38\ We 
received no comments on this assumption. According to our records, 
6,203 of the 7,687 total advisers registered with the Commission manage 
client assets on a discretionary basis.\39\ We therefore estimated 
advisers' total burden for establishing proxy voting policies and 
procedures to be 62,030 hours.\40\
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    \37\ In preparing this estimate, we have taken into account the 
fact that many advisers subject to ERISA (because they manage plan 
assets) already have proxy voting procedures in place that can serve 
as the basis of the adviser's procedures under the new rule.
    \38\ This estimate potentially overstates the number of advisers 
that would be subject to the rule. Part 1A of ADV does not require 
investment advisers to describe whether they vote proxies on behalf 
of clients. Nor does Part 1A require advisers to describe whether 
the securities they manage are voting securities as opposed to, for 
example, government or other debt obligations for which proxy voting 
issues do not arise.
    \39\ Based on our records of information submitted to us by 
investment advisers on Part 1A of Form ADV, 6,203 SEC-registered 
investment advisers report that they provide continuous and regular 
supervisory or management services for client securities portfolios 
on a discretionary basis.
    \40\ 6,203 x 10 = 62,030.
---------------------------------------------------------------------------

    The rule also requires these advisers to describe their proxy 
voting policies and procedures to clients. The attendant paperwork 
burden is already incorporated in a collection of information titled 
``Form ADV,'' which is currently approved by OMB under control number 
3235-0049.\41\ In addition, the rule also requires these investment 
advisers to provide copies of their proxy voting policies and 
procedures to clients upon request. According to our records, SEC-
registered advisers have, on average, 670 clients each; we had 
estimated that, on average, at least 90 percent of each of these 
adviser's clients would find the adviser's description of its proxy 
voting policies sufficiently informative, and ten percent at most (or 
67 clients of each adviser on average), would request copies of the 
full policies and procedures.\42\ We had also estimated that it would 
take an adviser 0.1 hours per client to deliver copies of the policies 
and procedures, for a total burden of 41,560 hours.\43\ Advisers

[[Page 6591]]

commented that very few clients currently request copies of proxy 
voting policies and procedures. We are not changing our original 
estimates at this time, because advisers may experience an increase in 
client requests as a result of the disclosure required under the rule.
---------------------------------------------------------------------------

    \41\ In April of 2000, we proposed amendments to Part 2 of Form 
ADV that would require investment advisers that vote client proxies 
to describe their proxy voting policies and procedures in their 
brochure. Electronic Filing by Investment Advisers; Proposed 
Amendments to Form ADV, Investment Advisers Act Release No. 1862 
(April 5, 2000) [65 FR 20524 (April 17, 2000)]. An adviser could 
satisfy the disclosure requirements under new rule 206(4)-6(b) and 
(c) by describing its policies and procedures in its brochure. See 
supra note 26. In connection with our April 2000 proposal, when we 
obtained OMB approval for our amendments to the Form ADV collection 
that would result from the proposed changes to Part 2, we included 
the paperwork burden of describing any proxy voting policies and 
procedures in a firm's brochure.
    \42\ 670 x 10% = 67.
    \43\ 0.1 x 67 x 6,203 = 41,560. In connection with submitting 
this collection of information to OMB, the Commission has also 
prepared an estimate of the aggregate annual cost to affected firms 
of this annual aggregate hour burden. We anticipate that investment 
advisers would likely use compliance professionals to document their 
firms' proxy voting policies and procedures. We estimate the hourly 
wage for compliance professionals to be $60, including benefits. We 
anticipate that investment advisers would likely use clerical staff 
to deliver copies of proxy voting policies in response to clients' 
requests. We estimate the hourly wage for clerical staff to be $10, 
including benefits. Accordingly, we estimate the annual aggregate 
cost of collection to be $4,137,400 ((62,030 hours x $60 per hour) + 
(41,560 hours x $10 per hour) = $4,137,400).
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    We are adopting rule 206(4)-6 as proposed. Accordingly, the 
estimated annual aggregate burden of collection for rule 206(4)-6 
remains 103,590 hours.\44\ This collection of information is mandatory, 
and responses to the disclosure requirements are not kept confidential.
---------------------------------------------------------------------------

    \44\ 62,030 x 41,560 = 103,590.
---------------------------------------------------------------------------

B. Rule 204-2

    Rule 204-2 sets forth the requirements for maintaining and 
preserving specified books and records by investment advisers. The 
collection of information under rule 204-2 is necessary for the 
Commission staff to use in its examination and oversight program. This 
collection of information is mandatory. Responses provided to the 
Commission in the context of its examination and oversight program are 
generally kept confidential.\45\ The records that an adviser must keep 
in accordance with rule 204-2 must generally be retained for not less 
than five years.\46\
---------------------------------------------------------------------------

    \45\ See section 210(b) of the Advisers Act [15 U.S.C. 80b-
10(b)].
    \46\ See rule 204-2(e).
---------------------------------------------------------------------------

    As amended, rule 204-2 requires registered investment advisers that 
vote client proxies to maintain specified records with respect to those 
clients. The records must be maintained in the manner, and for the 
period of time, as other books and records under rule 204-2(c). 
Advisers subject to rule 206(4)-6, Proxy Voting by Investment Advisers, 
must maintain copies of their proxy voting policies and procedures, as 
well as copies or records of each proxy statement received with respect 
to the securities of clients for whom the adviser exercises voting 
authority. These advisers must also maintain a record of each vote 
cast, as well as certain records pertaining to the adviser's decision 
on the vote. In addition, the adviser must maintain a record of each 
written client request for proxy voting information, and all written 
responses by the investment adviser to written or oral client requests 
for proxy voting information.
    We received numerous comments on how to minimize the burden of this 
collection of information. In response to these comments, we have 
substantially modified the rule amendments. Under the adopted 
amendments to rule 204-2, advisers may use a third party service 
provider to maintain proxy statements and proxy votes if the service 
provider undertakes to provide copies of those records promptly on 
request. Many advisers, particularly advisers that vote proxies on 
hundreds or thousands of companies, already retain a proxy voting 
service that they may be able to rely on under the amendments as 
adopted. In addition, advisers may rely on the Commission's EDGAR 
system to meet the requirement that they maintain proxy statements. We 
have also amended the requirement that advisers maintain client 
requests for proxy voting information, and the advisers' responses, by 
requiring only the retention of written client requests and of 
advisers' written responses to any client request, whether oral or in 
writing.\47\ Finally, we narrowed the requirement that an adviser 
maintain records of documents material to the adviser's decision on how 
to vote. The revised rule requires advisers to maintain only documents 
that they created that were material to making the voting decision.\48\
---------------------------------------------------------------------------

    \47\ ``Written'' policies and procedures would, of course, 
include documents in electronic format. See Use of Electronic Media 
by Broker-Dealers, Transfer Agents, and Investment Advisers for 
Delivery Of Information, Investment Advisers Act Release No. 1562 
(May 9, 1996) [61 FR 24643 (May 15, 1996)].
    \48\ The proposed amendments would have required a record of all 
oral and a copy of all written communications received and memoranda 
or similar documents created by the adviser that were material to 
making a decision on voting client securities.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the proposed amendments 
would increase the average annual collection burden of an adviser 
subject to the amendments by 20 hours, to 215.34 hours.\49\ Based on 
the comments we received, we continue to estimate that the annual 
collection burden will increase 20 hours per adviser, on average. Many 
commenters indicated that the recordkeeping burdens as proposed were 
significant, which we interpreted to mean in excess of our original 
estimate of 20 hours. However, we believe 20 hours is an accurate 
estimate of the burden, in light of the changes we have made to the 
final version of the recordkeeping amendments. As discussed above in 
connection with proposed rule 206(4)-6, we estimate that 6,203 advisers 
exercise voting authority on behalf of clients and will thus be subject 
to this additional burden, for an annual aggregate burden increase of 
124,060.\50\ The average annual burden for SEC-registered investment 
advisers under rule 204-2 would accordingly increase from 195.34 hours 
to 211.48 hours.\51\
---------------------------------------------------------------------------

    \49\ 195.34 + 20 = 215.34.
    \50\ 20 x 6,203 = 124,060. In connection with submitting this 
collection of information to OMB, the Commission also prepared an 
estimate of the aggregate annual cost to affected firms of this 
annual aggregate hour burden. We anticipated that investment 
advisers would likely use compliance clerical staff to maintain the 
records required under the proposed amendments. We estimated the 
hourly wage for compliance clerical staff to be $13.20, including 
benefits. Accordingly, we estimated the annual aggregate cost of 
collection to be $1,637,592 (124,060 hours x $13.20 per hour = 
$1,637,592).
    \51\ (1,501,578.5 current hours + 124,060 additional hours = 
1,625,638.5 aggregate burden hours) / 7,687 SEC-registered 
investment advisers = 211.48.
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VI. Summary of Final Regulatory Flexibility Analysis

    An Initial Regulatory Flexibility Analysis (``IRFA'') was published 
in the Proposing Release. No comments were received on the IRFA. The 
Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA''), in accordance with 5 U.S.C. 604, regarding rule 206(4)-6 
and amendments to rule 204-2. The following summarizes the FRFA.
    The FRFA discusses the need for, and objectives of, the new rule 
and rule amendments that require certain advisers to adopt proxy voting 
policies and procedures and maintain certain proxy voting records. The 
rule is designed to ensure that advisers vote clients' securities in 
the clients' best interest, and that the adviser addresses how it 
resolves material conflicts of interest.
    The FRFA also discusses the effect of the rule and rule amendments 
on small entities. For purposes of the Advisers Act and the Regulatory 
Flexibility Act, an investment adviser generally is considered a small 
entity if it: (i) Has assets under management having a total value of 
less than $25 million; (ii) did not have total assets of $5 million or 
more on the last day of its most recent fiscal year; and (iii) does not 
control, is not controlled by, and is not under common control with 
another investment adviser that has assets under management of $25 
million or more, or any person (other than a natural person) that had 
$5 million or more on the last

[[Page 6592]]

day of its most recent fiscal year.\52\ Of the 6,203 advisers the 
Commission estimates will be affected by the new rule, the FRFA 
estimates that 138 are likely to be small entities.
---------------------------------------------------------------------------

    \52\ 17 CFR 275.0-7(a).
---------------------------------------------------------------------------

    As discussed in the FRFA, the rule and rule amendments do not 
impose new reporting requirements, but do impose recordkeeping 
requirements on advisers, including small advisers, that exercise 
voting authority over client securities. The FRFA notes that advisers, 
generally vote client proxies only when they are managing client assets 
on a discretionary basis. Small advisers engage in discretionary asset 
management on a limited scale, and thus should not have to dedicate 
significant resources to meet the compliance and recordkeeping 
requirements in connection with their proxy votes.
    The FRFA discusses alternatives considered by the Commission in 
adopting the new rule and rule amendments that might minimize adverse 
effects on small advisers, including: (i) The establishment of 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (ii) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rule for such small entities; (iii) 
the use of performance rather than design standards; and (iv) an 
exemption from coverage of the rule, or any part thereof, for such 
small entities.
    We believe that the flexibility built into the rule provides for 
differing compliance requirements for small entities. We do not believe 
that further clarification, consolidation, or simplification of 
compliance and reporting requirements for small entities or an 
exemption from the coverage of the rule for small entities would be 
consistent with investor protection and the fiduciary duty an adviser 
owes to its clients. The new rule and rule amendments use performance, 
rather than design standards, in the sense that that they require 
policies and procedures to ensure votes are in the best interest of 
clients, rather than specifying specific elements of the policies and 
procedures.
    The FRFA is available for public inspection in File No. S7-38-02. A 
copy of the FRFA may be obtained by contacting Daniel S. Kahl, Senior 
Counsel, Securities and Exchange Commission, 450 Fifth Street NW., 
Washington DC 20549-0506.

VII. Consideration of Promotion of Efficiency, Competition, and Capital 
Formation

    Section 202(c) of the Advisers Act requires 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.\53\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 80b-2(c). Section 204 of the Advisers Act, which 
is part of our statutory authority for the proposed recordkeeping 
amendments for investment advisers under rule 204-2, permits us to 
prescribe recordkeeping rules that we determine are necessary or 
appropriate in the public interest or for the protection of 
investors. Also in this Release, we are adopting new rule 206(4)-6, 
under other statutory provisions that do not express the same public 
interest standard, and are not covered by section 202(c). In the 
interest of comprehensiveness, we nevertheless have included rule 
206(4)-6 in our section 202(c) analysis.
---------------------------------------------------------------------------

    As discussed above, the rule and rule amendments will require 
investment advisers that have authority to vote clients' securities to 
adopt and implement written policies and procedures designed to ensure 
that votes are cast in the clients' best interest.
    Although we recognize that compliance programs, including proxy 
voting programs, may require advisers to expend resources that they 
could otherwise use in their primary business, we expect that the rules 
and rule amendments may indirectly increase efficiency in a number of 
ways. Advisers would be required to carry out their proxy voting in an 
organized and systematic manner, which may be more efficient than their 
current approach. Requiring all advisers with voting authority to adopt 
proxy voting policies and procedures, and meet recordkeeping 
requirements, may enhance efficiency further by encouraging third 
parties to create new resources and guidance to which industry 
participants can refer in establishing, improving, and implementing 
their proxy voting procedures. In addition, proxy voting policies and 
procedures may focus advisers on their fiduciary duties in voting 
client securities, thus increasing efficiency by deterring securities 
law and common law fraud violations.
    Because the rule and rule amendments apply equally to all advisers 
that exercise voting authority over clients' securities, we do not 
anticipate that any competitive disadvantages would be created. To the 
contrary, the rule and rule amendments may encourage competition by 
raising clients' awareness about advisers' proxy voting and 
facilitating the differentiation of services offered by various 
advisers.
    We anticipate that the rule and rule amendments may have a limited 
indirect effect on capital formation. The rule and rule amendments will 
likely increase investor confidence in investment advisers by making 
proxy voting more transparent and encouraging increased emphasis on 
proxy voting by advisers. Because capital formation is influenced by 
investor confidence in the markets, we believe that the rule could have 
a positive effect on capital markets.

VIII. Statutory Authority

    We are adopting new rule 206(4)-6 pursuant to our authority set 
forth in sections 206(4) and 211(a) of the Advisers Act [15 U.S.C. 80b-
6(4) and 80b-11(a)]. We are adopting amendments to rule 204-2 pursuant 
to the authority set forth in sections 204 and 206(4) of the Advisers 
Act [15 U.S.C. 80b-4 and 80b-6(4)].

Text of Rule and Rule Amendments

List of Subjects in 17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

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

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    1. The authority citation for Part 275 continues to read in part as 
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(F), 80b-2(a)(17), 80b-3, 80b-
4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *

    2. Section 275.204-2 is amended by:
    a. Redesignating paragraph (c) introductory text, paragraphs (c)(1) 
and (c)(2) as paragraph (c)(1) introductory text, paragraphs (c)(1)(i) 
and (c)(1)(ii) respectively;
    b. Adding new paragraph (c)(2); and
    c. Revising paragraph (e)(1).
    The additions and revisions read as follows:


Sec.  275.204-2  Books and records to be maintained by investment 
advisers.

* * * * *
    (c) * * *
    (2) Every investment adviser subject to paragraph (a) of this 
section that exercises voting authority with respect to client 
securities shall, with respect to those clients, make and retain the 
following:

[[Page 6593]]

    (i) Copies of all policies and procedures required by Sec.  
275.206(4)-6.
    (ii) A copy of each proxy statement that the investment adviser 
receives regarding client securities. An investment adviser may satisfy 
this requirement by relying on a third party to make and retain, on the 
investment adviser's behalf, a copy of a proxy statement (provided that 
the adviser has obtained an undertaking from the third party to provide 
a copy of the proxy statement promptly upon request) or may rely on 
obtaining a copy of a proxy statement from the Commission's Electronic 
Data Gathering, Analysis, and Retrieval (EDGAR) system.
    (iii) A record of each vote cast by the investment adviser on 
behalf of a client. An investment adviser may satisfy this requirement 
by relying on a third party to make and retain, on the investment 
adviser's behalf, a record of the vote cast (provided that the adviser 
has obtained an undertaking from the third party to provide a copy of 
the record promptly upon request).
    (iv) A copy of any document created by the adviser that was 
material to making a decision how to vote proxies on behalf of a client 
or that memorializes the basis for that decision.
    (v) A copy of each written client request for information on how 
the adviser voted proxies on behalf of the client, and a copy of any 
written response by the investment adviser to any (written or oral) 
client request for information on how the adviser voted proxies on 
behalf of the requesting client.
* * * * *
    (e)(1) All books and records required to be made under the 
provisions of paragraphs (a) to (c)(1)(i), inclusive, and (c)(2) of 
this section (except for books and records required to be made under 
the provisions of paragraphs (a)(11) and (a)(16) of this section), 
shall be maintained and preserved in an easily accessible place for a 
period of not less than five years from the end of the fiscal year 
during which the last entry was made on such record, the first two 
years in an appropriate office of the investment adviser.
* * * * *

    3. Section 275.206(4)-6 is added to read as follows:


Sec.  275.206(4)-6  Proxy voting.

    If you are an investment adviser registered or required to be 
registered under section 203 of the Act (15 U.S.C. 80b-3), it is a 
fraudulent, deceptive, or manipulative act, practice or course of 
business within the meaning of section 206(4) of the Act (15 U.S.C. 
80b-6(4)), for you to exercise voting authority with respect to client 
securities, unless you:
    (a) Adopt and implement written policies and procedures that are 
reasonably designed to ensure that you vote client securities in the 
best interest of clients, which procedures must include how you address 
material conflicts that may arise between your interests and those of 
your clients;
    (b) Disclose to clients how they may obtain information from you 
about how you voted with respect to their securities; and
    (c) Describe to clients your proxy voting policies and procedures 
and, upon request, furnish a copy of the policies and procedures to the 
requesting client.

    By the Commission.

    Dated: January 31, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2952 Filed 2-6-03; 8:45 am]
BILLING CODE 8010-01-P