Week In Review
February 1, 2010
Bill Would Require Funds to Reveal Proxies
House Financial Services Committee Chairman Barney Frank (D-Mass.) is considering a bill that would require mutual funds, pension plans and other large institutional investors to publicly reveal how they vote their proxies, in order to impose proper corporate governance on otherwise passive investors who, he believes, don't vote in the fiduciary interest of their end investors.
"If you are the owner of shares, you have a privacy right," Frank said at a hearing on financial services compensation. "But if you own shares on behalf of a fiduciary, you will need to disclose how you vote."
Although many pension plans disclose their voting guidelines, they are not legally required to disclose how they vote their proxies. In late 2003, the Securities and Exchange Commission passed a measure requiring mutual fund companies to file an annual SEC listing of their proxy votes every August.
Vanguard founder and former Chief Executive Officer John Bogle called on the mutual fund industry in a recent Wall Street Journal editorial to stand up for shareholders' long-term benefit by holding companies up to higher standards.
Corporate Library Research Associate Beth Young said a uniform law would hold mutual funds and other large investors up to a higher, more uniform standard: "At a minimum, it pushes investment managers to look at their proxy-voting process and what they need to do to insulate themselves from corporate or labor conflicts of interests. By requiring public disclosure of votes, investment managers will think more about whether they have the information and staff to act as a fiduciary for the people they are voting on behalf."
Schwab E-Mail Could Bolster Case Against YieldPlus, Judge Says
U.S. District Judge William Alsup said that a 2007 e-mail that a Charles Schwab managing director wrote could prove to be a "mea culpa smoking gun" since the executive called on Schwab to tell investors it misrepresented risks in the short-term bond fund Schwab YieldPlus.
The plaintiff's attorney, Reed Kathrein, quoted the e-mail, in which Janice Diamond urged a superior to "admit our mistakes and make changes to prevent this from happening again." Judge Alsup commented, "The jury could certainly construe that to mean, 'We have not been honest with our investors.'"
However, Schwab spokesman David Weiskopf countered that the e-mail should not be singled out since, first of all, its author was a junior-level credit analyst and, second, the plaintiffs have filed "millions" of e-mails in the case.
"That e-mail isn't any smoking gun. The date of that e-mail was after the credit crisis and supports our view that what [Diamond] was commenting on was not that there was anything done wrong, but that we felt badly about the consequence of what this unforeseeable event has caused," Weiskopf said.
However, the plaintiffs' attorney also cited a September 2006 e-mail from Schwab Chief Investment Officer Liz Ann Sonders in which the CIO wrote, in a "worst-case scenario," there could be a "seizing up" of mortgage-backed securities, in which buyers and sellers would be "nowhere to be found, regulators having placed them in handcuffs."
Weiskopf shot back at that e-mail, as well, saying it was only one of "five or six perspectives" that the CIO provided.
The trial is scheduled to begin July 5 in the U.S. District Court for the Northern District of California.
Affluent View Vanguard As Top Mutual Fund Brand
The leading mutual fund brand in the nation is Vanguard and the leading distributor is Charles Schwab, 4,000 affluent and high-net-worth investors told Cogent Research in a recent survey. In both categories, Fidelity, which had previously held first place since Cogent started the research in 2006, was knocked to second.
The change reflects changing investor perceptions, loyalty and household penetration, Cogent said. Market dynamics appear to be contributing to Fidelity's challenges, particularly a decline in the number of wealthy investors using 401(k) plans, Cogent said. In fact, for the first time ever, affluent investors have more dollars allocated to IRAs than to employer-sponsored retirement plans.
"It would appear," said Meredith Lloyd Rice, an author of the report, "that Fidelity is caught in a perfect storm of an aging population, higher unemployment and lower across-the-board plan participation."
Vanguard has improved its relationship with investors over the past year as a mutual fund provider, Cogent said, with investors citing Vanguard's financial stability, range of products and fund performance. "It's worth noting, however, that Fidelity remains a powerhouse and is probably better positioned than most other firms to make any necessary course corrections in the coming months," Rice said.