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SEC Poised to Decide Thorny Proxy Voting Issue


WASHINGTON - Securities and Exchange Commission officials intend to finalize a controversial proposal to force mutual funds to disclose how they vote in proxy decisions this week.

During a speech at a mutual fund directors' conference here, SEC Chairman Harvey Pitt laid out the timetable, his comments echoed by other SEC staff members.

The rule is seen as a response to investors' widespread lack of confidence in the equity markets following the corporate scandals that have rocked Wall Street during the past year. It would amend the Investment Advisers Act of 1940 to require funds to tell investors how they vote proxies, the decisions operating companies make through shareholder referendum.

The SEC is pursuing the rule because it is concerned about conflicts of interest between fund managers and clients. Many complexes have business arrangements with the companies in which they invest, which could cause problems for fund shareholders, according to the SEC.

For example, the commission 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 initiative has won the support of many investors, interest groups and shareholder advocates, such as Vanguard Group founder John Bogle.

But the Investment Company Institute opposes the primary tenant of the measure, saying that it would serve political and lobby groups, not shareholders Some interest groups, the ICI said, could pressure funds to vote shares in a way that furthers their causes. Indeed, the AFL-CIO, one of the nation's largest trade unions, has endorsed the proposal (see MFMN 8/28/02). Last month, it staged protests outside the offices of Fidelity Investments (see MFMN 12/02/02).

Fund companies see other problems with the proposal, as well. The ICI said that the rule would be a burden, requiring funds to "detail hundreds of thousands of individual proxy votes, in some cases accompanied by lengthy explanations." Others have said that there is little reason to strip funds of their ability to anonymously vote proxies, a right shared by every other stockholder.

The commission, meanwhile, is seen as moving unusually quickly on the proposal. The comment period for the rule, which lasted 60 days, closed only last month and was regarded as unusually short. During that period, a record number of investors and executives, roughly 8,000, wrote to the commission about the proposal, officials said.

But the ICI said that there has not been enough time to fully discuss the issue. "Because it had a relatively short comment period, there has been little opportunity to discuss" the impact on corporate governance, said John Collins, an ICI spokesman. "There are SEC-regulated institutions whose proxy voting information would be confidential, but that confidential protection would be ripped away from voting mutual fund proxies. It's good for that to be aired."

Rose DiMartino, a partner with the law firm Willkie Farr & Gallagher of New York, which counts many mutual funds among its clients, said that the industry is getting railroaded by an overzealous Congress and a timid SEC. "The SEC is cowering in front of Congress and is not willing to come in and say this is the wrong thing for the industry," she said. "This creates an uneven playing field. Why isn't it a good idea for banks and brokers? What about everybody else?"

Many companies had hoped that the SEC would try to stall the proposal and "something else would grab Congress' attention," DiMartino said. But, to her outrage, the initiative "keeps moving along."

Ferocious Competitors'

Indeed, there are indications that the fund industry is feeling pressured. Vanguard Group Chairman John Brennan and Fidelity Investments CEO Edward Johnson condemned the proposal in an op-ed last week in The Wall Street Journal. The pair wrote that the issue was so important that the two largest fund complexes in the U.S., which "compete ferociously," had joined to fight the SEC's initiative.

The proposal, they said, "is neither practical nor useful" for investors, who would have to sift through thousands of pages to find any meaningful information about how funds voted their shares in proxy decisions. In addition, the two executives said that the rule would distract advisers from their primary purpose, which is making shareholders money.

"A fund manager's focus belongs on investment management, not on becoming an arbiter of political and social disputes," they said.

As an alternative, Brennan and Johnson suggested that the SEC beef up the proxy oversight rule of mutual fund boards, which could ensure that funds stick to specific proxy voting guidelines.

Despite the flap, there is some question whether the commission will be able to vote on the proxy rule as quickly as Pitt would like. By Jan. 26, the SEC must decide on eight rule proposals under the anti-fraud legislation, known as the Sarbanes-Oxley Act, which President Bush signed last summer.

The commission's agenda is currently packed. Nonetheless, by this weekend, the SEC must decide on eight rule proposals under new anti-fraud legislation, known as the Sarbanes-Oxley Act. Per that legislation, the commission approved rules last week governing the sale of company stock during blackout periods, the inclusion of financial experts on audit committees and a ban on misleading pro-forma financial information.

This week, the SEC is expected to address additional provisions, including rules regarding auditor independence, prohibited non-audit services, attorney conduct, off-balance-sheet transactions and the retention of records.

But with the SEC bound by the Jan. 26 deadline, some hope the proxy initiatives will be sidelined.