Introduction

Recently adopted SEC rules will now require mutual funds to disclose the policies and procedures they use to vote proxies relating to portfolio securities. The new rules will also require mutual funds to file with the SEC and make available to shareholders the specific proxy votes they cast. The new rules are intended to provide greater transparency for shareholders with respect to an important function performed by mutual funds given their significant presence in the equities markets. The investment management community generally supported the idea of disclosing proxy voting policies and procedures but does not believe that requiring disclosure of proxy voting records will offer much benefit to investors. A description of the new proxy voting disclosure rules follows.

Proxy Voting Policies and Procedures

Mutual funds will need to describe or include in their statements of additional information (or, for closed-end funds, Form N-CSR) their proxy voting policies and procedures. Mutual funds will also have to state in their annual and semi-annual reports to shareholders that a description of their proxy voting policies and procedures is available as follows:

• Without charge, upon request, by calling a specified toll-free number;

• On the fund's website, if applicable; and

• On the SEC's website at http://www.sec.gov.

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.

The SEC has not prescribed specific guidelines or requirements relating to the content of proxy voting policies and procedures. However, the SEC will require disclosure of the procedures used by a mutual fund when a vote presents a conflict of interest between the interests of fund shareholders, on the one hand, and those of the fund's investment adviser, principal underwriter or any affiliate of the fund, adviser or underwriter, on the other hand.

General and Specific Policies. The SEC has indicated that it expects funds' disclosure of their proxy voting policies and procedures to include general policies and procedures as well as policies with respect to voting on specific types of issues. In the adopting release, the SEC provides examples of general policies and procedures with respect to which disclosure would be appropriate:

• 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;

• Policies and procedures relating to matters that may affect substantially the rights or privileges of the holders of securities to be voted; and

• Policies regarding the extent to which the fund will support or give weight to the view of management of a portfolio company.

The SEC also offered examples of specific types of issues that could be covered by a fund's proxy voting policies and procedures:

• Corporate governance matters, including changes in the state of incorporation, mergers and other corporate relationships, and anti-takeover provisions such as staggered boards, poison pills and supermajority provisions;

• Changes to capital structure, including increases and decreases of capital and preferred stock issuance;

• Stock option plans and other management compensation issues; and

• Social and corporate responsibility issues.

Compliance Date. All registration statements on Form N-1A, and all post-effective amendments that are annual updates to effective registration statements on Form N-1A, filed by a fund on or after July 1, 2003, must describe (or include a copy of) the fund's proxy voting policies and procedures. Every annual or semi-annual report transmitted to shareholders after the effective date of such registration statements and post-effective amendments must include the required disclosure about the availability of a fund's proxy voting policies and procedures.

Proxy Voting Record

In addition to describing their proxy voting policies and procedures, mutual funds will be required to file annually with the SEC their proxy voting records and to make their proxy voting records available to their shareholders.

Under new Rule 30b1-4, a mutual fund will have to file an annual Form N-PX by August 31 of each year. Form N-PX will contain the fund's complete proxy voting record for the 12-month period ended June 30. The following information will need to be disclosed on Form N-PX for each matter on which the fund was entitled to vote:

• The name of the issuer of the portfolio security;

• The exchange ticker symbol and CUSIP number for the portfolio security;

• The shareholder meeting date;

• A brief identification of the matter voted on;

• Whether the matter was proposed by the issuer or by a security holder;

• Whether and how the fund cast its vote on the matter; and

• Whether the fund cast its vote for or against management.

A mutual fund must state in its annual and semi-annual reports to shareholders and in its SAI that information regarding how the fund voted proxies during the most recent 12-month period ended June 30 is available without charge, upon request, by calling a specified toll-free number, or on the fund's website, or both, and on the SEC's website. If a fund discloses that its proxy voting record is available by calling a toll-free number, the fund must send the information disclosed in its most recently filed 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. If a fund discloses that its proxy voting record is available on its website, the fund must make available free of charge the information disclosed in its Form N-PX as soon as reasonably practicable after the Form N-PX has been filed with the SEC (i.e., the same day as filing).

Compliance Date. Mutual funds must file their first report on Form N-PX by August 31, 2004 for the 12-month period beginning July 1, 2003 and ending June 30, 2004. All registration statements on Form N-1A (and post-effective amendments thereto) filed on or after August 31, 2004 must include the disclosures about the availability of the Fund's proxy voting record. Annual and semi-annual reports transmitted to shareholders on or after August 31, 2004 must include the required disclosure about the availability of a fund's proxy voting record.

Please contact Charles Weber (414/277-5107 or cmweber@quarles.com), Conrad Goodkind (414/277-5305 or cgg@quarles.com) or Fred Lautz (414/277-5309 or flautz@quarles.com) if you have any questions about the matters discussed in this Update or if you would like assistance in preparing proxy voting policies and procedures and new Form N-PX.