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SEC Wants Funds to Disclose Proxy Votes


The backlash against corporate secrecy spilled over into the usually clean mutual fund industry as the Securities and Exchange Commission took a first step last week in requiring mutual funds to disclose their proxy voting policies and votes.

The proposal, which would affect both mutual funds and registered investment advisers, is supposed to enable shareholders to monitor their funds' involvement in the governance activities of companies.

Investors as Clients'

The SEC also proposed requiring investment advisors to employ written policies governing the way they exercise voting authority over clients' securities and disclose how those clients can get information about the proxy votes cast.

"If adopted, these proposals would give investors fundamental information about the practices of those who vote proxies on their behalf," SEC Chairman Harvey L. Pitt said in a statement. "They also would discourage or expose proxy voting conflicts of interest. The securities belong to fund investors, who are entitled to know how their property is being voted."

The SEC is accepting opinions on the possible requirements for 60 days following the proposal last week.

Vote With Their Feet'

"Basically, the industry has felt that it's part of the investment process that fund managers can either vote with their feet or contact company management if they see something they don't like," said Chris Wloszczyna, a spokesman for the Investment Company Institute. "It's never been a proposal before," he said of the pending proxy ideas.

As for an official stance, the ICI hasn't taken one yet, according to Wloszczyna. "We're still looking at it. We're still reviewing it," he said, noting the comment deadline is still a ways off. "We have a couple of reservations, not necessarily about the proposal, but the issue. There's sort of a subtle distinction there, or maybe not so subtle."

Political Football?

As well, the Institute has some concerns about the effects of making the mutual fund voting records public. "When funds vote their proxies, they have a legal duty to vote solely in the best interests of all their shareholders, and part of a fund's goal is to maximize return for the shareholders," Wloszczyna said.

"They have to vote for all the shareholders, not with the agenda of any particular interest in mind, which may or may not coincide with the best interests of all the shareholders or the shareholders at large," he continued. "So, instead of serving all shareholders, disclosing proxy votes could politicize investing. Special interest groups who have no particular interest in helping funds achieve their investment objectives or helping fund shareholders reach their long-term goals would be able to exert pressure on the fund managers."

Mutual fund assets represent a quarter, or $2.5 trillion, of the $10 trillion U.S. equity markets, according to some estimates.

There are also other issues, according to Wloszczyna, namely whether, if this rule is imposed on mutual funds, it should extend to all other types of pooled investments.

The Gist

The proposals affecting registered management investment companies consist of four main areas: 1) Investment company proxy voting policies and procedures, 2) Investment company proxy voting records, 3) Disclosure of proxy votes that are inconsistent with a fund's policies and procedures, and 4) The availability of proxy voting information to fund shareholders.

First, a fund would be required to disclose the policies and procedures it uses to determine how to vote proxies relating to securities in its portfolio. One of the main concepts of this proposal is to disclose the procedures the fund uses when there is a conflict of interest between shareholders and the fund's investment advisor.

Second, a fund would be required to file its complete proxy voting record with the SEC. For each matter that was voted, the fund would have to reveal the outcome and whether it was proposed by the issuer or by a security holder.

Third, funds would have to provide evidence of proxy votes inconsistent with the funds' policies and the reason behind the inconsistency.

Lastly, a fund would be required to state in its registration statement and reports to shareholders that information about the fund's proxy voting is available without charge, upon request, by calling a specified telephone number. The information would also be posted on the fund's Web site and on the SEC's Web site.

As far as investment advisors are concerned, the proposals for them are nearly the same. They would have to adopt written policies and procedures governing their exercise of voting authority, to ensure they are voting in the best interests of investors.

They would have to describe their proxy policies and procedures to investors and provide a copy upon request. They would also be mandated to inform clients how they can obtain information about how the adviser voted on proxies.