When the Securities and Exchange Commission voted 4-to-1 last January to force mutual funds to tell their shareholders exactly how they cast their ballots in corporate proxy contests, the fund industry looked like it had lost its long-running battle against the regulation. Not quite. Fund companies have instead redirected their efforts and are now vigorously pushing to delay or amend the rule. Even the measure’s supporters concede that the matter isn’t completely resolved.
On one front, the Investment Company Institute, the main industry trade association, is lobbying the Office of Management and Budget to declare the rule, which applies to all proxies filed on or after July 1, 2003, too onerous to the industry. On March 13 the ICI sent a letter to the OMB and the SEC arguing that the rule posed undue burdens on the industry. Although the OMB does not have the power to review an SEC regulation, it can declare that it imposes excess “paperwork burdens.” The commission then has to decide whether to modify the rule or let it stand.
The industry has already won one minor victory: The SEC regulation does not require fund companies to mail out proxy voting information to shareholders, as an earlier draft of the rule had required. Instead, funds can post the requisite information online. Still, the ICI estimates that the new disclosure requirements would cost the $6 trillion industry $40 million a year on top of a onetime charge of $22 million to make the transition.
That’s money well spent, say proponents of the rule, whose ranks include shareholder and consumer advocates, labor unions and corporate governance experts. They argue that disclosure will ensure greater transparency and give fund companies an incentive to vote their proxies in their shareholders’ interests instead of, for example, trying to curry favor with companies to win lucrative pension management business from them. “If they have convictions about their proxy votes, they should welcome disclosure,” says William Patterson, director of investment at the AFL-CIO.
But the fund industry is concerned that if the anonymity of proxy votes is eliminated for mutual funds but not for others, funds would be more -- not less -- vulnerable to management pressure. The new rule would also hurt company share prices, they say. For instance, other investors, seeing a split between a company and a mutual fund, might overreact by selling the stock, thus hurting both the company and the fund’s shareholders.
The industry also argues that the rule would force fund managers to dilute their focus on their shareholders’ bottom line as proxy votes become politicized by interest groups like socially responsible investors. “Most funds’ objective is driven solely by maximizing shareholder returns in compliance with their policies,” says ICI general counsel Craig Tyle. “What the SEC has done will lead to additional conflicts.” As an example, says Russel Kinnel, director of fund analysis at Morningstar, labor unions may pressure funds to vote for resolutions that tie executive pay to worker benefits.
“We are not arbiters of social conscience,” says David Weinstein, Fidelity Investments’ executive vice president for public policy.
The SEC itself agrees the industry’s worries about political pressure are worthy of additional monitoring and will review the rule by year-end 2005 to see if it has had any adverse consequences.
Fund industry executives are hoping that sooner or later, the SEC will come around. Some even predict that should the commission vote again on the rule, it may be defeated if new SEC chairman William Donaldson, who has publicly stated that he supports the rule in principle, can be persuaded to vote nay.
In the interim the funds must fight the perception they have something to hide. “To oppose disclosure at this moment in capital markets is pretty stunning,” says the AFL-CIO’s Patterson.
