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ICI Opposes Proxy Disclosure Proposal


The Investment Company Institute has dismissed a Securities and Exchange Commission initiative that would require fund companies to disclose how they vote on proxies, insisting that the proposal would favor political groups and pose a risk to shareholders and fund complexes.

But the trade group endorsed certain proposals within the SEC initiative, such as requiring that funds adopt policies for voting in situations where there is a conflict of interest.

Although many fund complexes have said they oppose the measure, the ICI statement is significant in that it represents the industry's official stance on the issue - and that it allows certain concessions to the SEC.

The ICI maintains that the SEC's proposal, which many support as a way to ensure that fund managers vote proxies in the best interest of shareholders, would be an onerous burden. The SEC wants funds to file reports twice each year "detailing hundreds of thousands of individual proxy votes, in some cases accompanied by lengthy explanations," the ICI said.

Prize' Funds

The ICI said that the rule would "needlessly politicize mutual fund portfolio management," because proxy voting information "is being sought mostly by interest groups." Such groups "want proxy votes disclosed to further their social and political agendas, regardless of how much it hurts mutual fund shareholders," the ICI continued. "Special interest groups appear to view mutual funds as a prize to be captured as they single-mindedly pursue their narrow objectives."

ICI spokesman Chris Wloszczyna said the organization is concerned that disclosing proxy votes would allow political groups to unduly pressure fund managers. "A fund's primary goal is to maximize shareholder return," Wloszczyna said. "Special-interest groups aren't concerned about shareholder return; they're promoting their own interests."

The ICI also said that confidential proxy voting has long been a "fundamental shareholder right," and that doing away with such confidentiality would weaken corporate governance and accountability. "Confidential voting allows mutual funds to take a position on controversial issues without pressure or retaliation from corporate management," Wloszczyna said.

Still, the trade group endorsed several provisions within the proposal. It said that all fund companies should adopt proxy-voting policies, especially in cases where funds face a conflict of interest. The group also said that such policies should be disclosed both to the SEC and to shareholders. It said that funds should maintain records of votes that can be examined by SEC investigators.

The group also recommended that the SEC adopt the idea of assigning oversight of the proxy voting process to a fund's independent directors. Wloszczyna said handing proxy responsibilities to directors seems logical because they already handle questions of conflict of interest and other sticky issues.

The ICI's opinions were included in a letter it sent to the SEC commenting on the rule proposal. The SEC's deadline for comments was Dec. 6.

The proposal, which would amend the Investment Advisers Act of 1940, stems from the SEC's concern about conflicts of interest between fund managers and clients. The Act states that funds must vote proxies in the best interest of investors. But many fund managers have business arrangements with the companies in which they invest, which could cause problems for fund shareholders, the SEC said.

Whose Side?

For example, the SEC said that some fund companies oversee employee benefit plans or provide brokerage and banking services for corporations in which the funds own stock. The SEC worries that those arrangements will prompt fund companies to vote proxies in a way that favors corporations, not shareholders. Exposing how funds vote proxies will help prevent that, the SEC said.

The ICI's opposition to the rule echoes the sentiment of other complexes, including fund giant Fidelity Investments, of Boston, which worries that complying with the proposed regulation would be time consuming and expensive.

The Vanguard Group, of Valley Forge, Pa., said requiring funds to disclose their votes "would cause funds to [incur] considerable costs to provide investors with detailed information that they have not asked for and do not need."

Still, there is a groundswell of support for the proposal. In a letter to the SEC opposing the fund industry's stance, John Bogle, the outspoken shareholder advocate who founded Vanguard in 1974, said that he "strongly supports" the proposal. Vanguard investors "have the right to know how the shares of the corporations in his or her portfolio are voted," he said.

Bogle conceded that proxy disclosures may pose problems for funds, including slightly higher mailing costs as well as controversy over contentious votes. But he urged the commission to be "extremely skeptical" of the fund industry's arguments on these points.

Other support for the initiative is largely based among grassroots and political groups, although it's difficult to know how large that groundswell is [see MFMN 12/9/02].

As of early last week, SEC staffers were still counting responses to the proposal and had already tallied nearly 7,500 letters. "There is no way to characterize any of the responses at this point," said spokesman Herb Perone.

The AFL-CIO of Washington, meanwhile, staged a protest outside Fidelity headquarters Dec. 4, condemning the company's opposition to the proxy rule [see MFMN 12/2/02]. The labor union said that hundreds of protestors flocked to Fidelity's Boston headquarters, as well as retail outlets throughout the country, waving signs that read, "What is Fidelity hiding?"

The protests, the union said, were part of a campaign that seeks to "improve corporate accountability and provide retirement security in the wake of recent corporate scandals."

"The new [SEC] rule will enable investors to ensure their mutual funds use their enormous proxy voting power to promote corporate accountability rather than to protect their corporate clients," the AFL-CIO said in a statement.

The amount of stocks that the $6 trillion mutual fund industry holds in long-term, open-end funds is $3.6 trillion, according to Financial Research Corp. of Boston.