Fund Industry Pans Proxy Vote Disclosure Proposal

By

Washington

A proposed regulation requiring mutual funds to disclose their proxy voting policies and procedures is drawing a generally unfavorable response from the mutual fund industry.

“We take the position that a rule requiring a funds proxy voting record to be disclosed would not benefit the majority of shareholders,” says John Collins, a representative of the Investment Company Institute, Washington.

“The case hasnt been made that mandatory disclosure would benefit shareholders,” he adds.

But according to Bill Patterson, director of the Office of Investment for the AFL-CIO, Washington, disclosure is vital.

Mutual funds, he says, are now under no obligation to disclose to their investors the principles they use when voting on such matters as mergers, the election of corporate directors and executive compensation arrangements.

This, Patterson says, makes it impossible for a mutual fund investor to select a fund whose philosophy of ownership fits with the investors.

The AFL-CIO says some 29% of union households own mutual funds.

The AFL-CIO filed a petition for rulemaking with the SEC asking for the mandatory disclosure.

Another petition was filed by Domini Social Investments, New York, which says it was the first mutual fund manager in the United States to publish its annual proxy votes.

In its filing, Domini Social Investments Founder and Managing Principal Amy Domini, says the manner in which mutual funds exercise their proxy voting responsibilities should be considered a fundamental indicator of responsible mutual fund governance.

“We believe that the current approach taken by most mutual fund companies in not disclosing their policies or votes should be considered an abdication of the fiduciary responsibility,” Domini says.

“To argue that ordinary investors are not demanding this information is surely beside the point, and this has never been the sole basis or even a primary reason for disclosure,” she adds.

In a great many cases, Domini says, ordinary investors are probably unaware of what they are missing, and thus, not in a position to demand it.

Domini says proxy voting is the most direct means by which individual investors can play an active role in influencing corporate behavior.

The SECs proposal, which was released on Sept. 19, would require a mutual fund to disclose in its registration statement the policies and procedures it uses to determine how to vote proxies relating its portfolio securities.

This disclosure, the proposal says, would include the procedures the fund uses when a vote presents a conflict of interest between the interests of the funds shareholders and those of the funds investment advisor other affiliated parties.

In addition, the proposal would require a fund to file its complete proxy voting record with the SEC.

This filing would have to include such information as the subject matter of the vote, whether the matter was proposed by the issue or a security holder, how the fund cast its vote and whether the vote was for or against management.

Also under the proposal, a fund would have to disclose in its shareholder reports any proxy votes that are inconsistent with the funds policies and procedures and the reasons for the inconsistent votes.

Finally, the proposal would require a fund to disclose where shareholders can acquire information about its voting record and procedures free of charge.

Chris Wloszczyna, also a representative of ICI, says the Institute is still studying the specifics of the proposal.

However, he says, ICIs concerns remain. Mutual funds, Wloszczyna says, already have a legal duty to vote in the best financial interest of the fund and its policyholders.

Disclosure, he says, could politicize this process. Funds, Wloszczyna says, may come under pressure from outside interest groups that have a particular point of view that may not benefit the shareholders at large.

In addition, he asks, if it is determined that disclosure is beneficial, should it not also apply to all other pooled investments, such as public and private pension funds?

Carl Wilkerson, chief counsel for securities with the American Council of Life Insurers, Washington, says ACLI is examining the proposal and will likely participate actively in the rulemaking process.

The interests of the insurance industry, Wilkerson says, probably will not deviate substantially from that of the mutual fund industry.

In a statement, SEC Chairman Harvey L. Pitt says the proposal, if adopted, would give investors fundamental information about the practices of those who vote proxies on their behalf.

In addition, he says, it would discourage or expose conflicts of interest. “The securities belong to fund investors, who are entitled to know how their property is being voted,” Pitt says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.