February 3, 2003
Let's not have another chad fiasco like the one that happened in the last presidential election.
Fund companies must begin tabulating their proxy votes July 1 to comply with the new Securities and Exchange Commission rules requiring them to begin disclosing these decisions for the full year ended July 31, 2004 on or before Aug. 31, 2004.
"Data collection will have to start immediately," explained Patrick McGurn, vice president and special counsel at Institutional Shareholder Services (ISS) of Rockville, Md., which has provided such services for socially responsible investing (SRI) firms that have already embraced proxy voting disclosure. Other fund executives are grappling with these "near-term concerns," McGurn said.
For large complexes, McGurn expects, the new rule "will not entail a great deal of additional work. For others, it is a wake-up call."
As fund compliance and operations executives come to terms with the new rules, which the SEC passed late last month (see MFMN 1/27/03), even fund giants Fidelity and Vanguard are sorting through the details, and declined comment. But shareholder service providers and industry experts predict that most fund companies will take advantage of the option the SEC has given them to post this information on their Web sites, rather than make it available in hard-copy form via a toll-free number. Electronically, they say, disclosure of these large documents, which can run into the hundreds of pages for even a single fund's proxies, will be far less costly, in the tens of thousands of dollars. McGurn called such costs "manageable," noting that they will be far less than the estimates the industry initially put forth to the SEC in an attempt to have the commission quash the rule.
One industry estimate for the cost of proxy voting disclosure was $900 million over the next 20 years.
"Suffice it to say, for a company with quite large holdings, having to deliver their proxy votes in paper form could be expensive," McGurn said. "Most will opt for the Web-based version."
Other leading shareholder service providers, meanwhile, are busy developing new lines of products to help fund firms comply with the new SEC rule.
Roy Weitz, publisher of fundalarm.com, argued that fund companies, in all likelihood, already keep a record of their proxy votes.
"What I don't understand, and what nobody has ever addressed, is when funds vote these proxies, they keep a record, logged in somewhere, just for their own internal records," Weitz said. "The idea that fund companies will all of a sudden have to start tracking proxy votes is just shocking." All most fund companies are going to have to do from this point forward, Weitz said, is figure out a way of electronically publishing these votes.
Diane Tod South, director of social research for Citizens Funds of Portsmouth, N.H., posts its proxies on its Web site at an annual cost of about $10,000 a year, a task she says, most "tech-savvy teenagers" could accomplish. "The screaming about costs was a smokescreen," she said.
As to whether or not investors are going to pay attention to these votes once they become part of the public domain the summer after next, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), which lobbied for the new rule, has said it will begin rating mutual fund proxies along with those of the 167 institutional investors it has already tracked for the past five years.
In particular, the AFL-CIO will be giving special care to such matters as executive compensation, independent directors, auditors, offshore headquarters, as well as whether fund companies put their own business relationships at companies where they also do retirement-service or other business "ahead of individual investors' interests," said Richard L. Trumka, secretary-treasurer of the AFL-CIO.
Pointing Fingers . . . at Fidelity
"Investors have good reason to suspect that mutual funds hide voting records that show a lockstep allegiance to management," Trumka said. "We believe that Fidelity used its shares to oppose a majority of independent directors at Tyco International, to re-elect an Enron director to the board of Lockheed Martin, and to approve a proposal by Stanley Works to move its headquarters to Bermuda."
The Investment Company Institute (ICI) has argued all along the way, ever since this issue came to the fore late last year, that mutual funds and their investment advisers have always taken their responsibility to vote their proxies very seriously.
Regardless of whether or not investors or large interest groups such as the AFL-CIO will use, or as the ICI has argued, abuse this information, "it is hard to argue with transparency" in this day and age, said Jay Baris, a partner with Kramer, Levin, Naftalis & Frankel of New York.
"The SEC has said, Get used to it,'" Baris said, adding that in response, his mutual fund clients are "just shrugging their shoulders" and hoping that the costs, even just for electronic maintenance, do not end up being too high.
One irony of this whole issue, Baris noted, is the fact that the SEC was pushing for less paperwork four years ago.
Perhaps, once all is said and done about proxy votes in the summer of 2004, the pendulum for more disclosure will have swung the other way.