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The best-laid plans . . .
An SEC plan to improve the disclosures from money management firms has shaped up as a long-term project. Some critics think investors are losing out in the interim.
If nothing else, the waves of corporate, accounting and Wall Street scandals have drummed into investors the need for accurate and timely disclosure from all public companies. So it's surprising that a key part of the Securities and Exchange Commission initiative to provide more information about the operations of money managers has made so little headway; indeed, some critics argue that there is less information available now than before the scandals emerged.
Hoping to use the power of the Internet, thenSEC chairman Arthur Levitt Jr. in 1997 launched a project to put the annual disclosure forms filed by money managers online. It took a while, but in 2001 Part I of Form ADV for most money managers appeared on the SEC's Web site. Part I, however, is the least informative portion of the form, offering mostly a check-the-box listing of basic information about an adviser's education, business and any disciplinary problems.
Part II, which requires narrative explanations and includes information about services, fees and strategies, is considerably more valuable to investors reviewing a money manager. But Part II won't be posted on the Internet anytime soon; indeed, the information is no longer stored on microfiche at the SEC, where until 2001 it could be copied. The SEC says the archiving was dropped because there was virtually no demand for the records.
Some skeptics say investors are being shortchanged. "Investors are getting less information today than before," says Edward Siedle, founder and president of Benchmark Financial Services, a Lighthouse Point, Floridabased investigator of pension consultants. "Most of the public information is incomplete."
The information about fees and strategies that belongs in Part II is still being compiled. Money management firms with more than $25 million in assets must complete Part II and provide copies to prospective clients and to existing customers on an annual basis. Most firms whose asset totals don't meet the $25 million threshold are subject to state disclosure regulations. With the exception of Alaska and Wyoming, all states require these smaller managers to file Part II. Many states, including California and New York, will provide copies to anyone who asks.
But investors may not receive exactly what they expect. A reporter's request to the California Department of Corporations for the most recent Part II filing from San Francisco pension consulting firm Callan Associates produced a June 1999 report. "They don't have to file every year unless there are changes, and we're assuming there are no changes," explains a department employee.
Those charged with getting Part II of the disclosures online -- officials at the SEC and the North American Securities Administrators Association, which represents regulators at state governments -- say the delay isn't because of bureaucratic foot-dragging. "If I understood for a moment that this delay was because somebody didn't want us to do this, you can believe the SEC would be all over this," says Robert Plaze, associate director of the commission's division of investment management.
Getting Part II online, say regulators, requires time and money. Funding, which is being generated from fees paid by investment advisers to list their Part I disclosures online, wasn't sufficient to move ahead until 2002. Since that time the agencies have been working with technologists at the National Association of Securities Dealers, which was hired to develop and operate the Web site, to figure out the most cost-efficient approach to a complex system akin to the SEC's Edgar database for financial information.
"There are no nefarious agendas in the way," says Mark Davis, associate general counsel at NASAA.
The SEC, though, accepts blame for not having yet adopted significant changes to Part II that were proposed back in 2000. Before the NASD can complete its development work, the SEC must adopt the rule changes, which include requirements to update filings more frequently and to reveal more information about potential conflicts of interest and disciplinary actions.
"We're certainly open to criticism for not having done that," says Plaze. "But there's been a huge mutual fund scandal going on. There have been tremendous resource requirements."
Public comments on the SEC revisions were largely supportive. TIAA-CREF wrote that "the proposed rules would improve the registration process and strengthen investor protections." New York law firm Davis Polk & Wardwell, though, said that the commission needs to "strike a more reasonable balance" between the expense and the potential benefits of more frequent filings.
Funding for development of the online project was made dependent on achieving an operational surplus from the annual fees some 17,000 money managers pay to file Part I forms. A surplus did emerge in 2002 and now totals about $5 million, allowing the online project to start moving forward again.
Plaze says he is hopeful the SEC will adopt its rule changes in the second half of 2004, eliminating another obstacle. Improved disclosure is an important element in SEC chief William Donaldson's plan to revamp the agency and clean up the money management business, so many insiders expect the project to gain new momentum. In late January the NASD was expected to brief the SEC and NASAA on the costs and time needed to get Part II online.
When might Part II become available on the Internet? NASAA's Davis reckons it will be "another couple of years before it's fully operational." Plaze's best guess: "Someday."
Unilever executives anticipated a routine annual meeting last May: The agenda included no contentious issues, and there was no sign of shareholder unrest. But executives at the Anglo-Dutch consumer products company, maker of Dove soap, Hellmann's mayonnaise and Lipton tea, noticed that the shareholder vote total was suspiciously low. So they called major institutional investors and discovered that seven of them had simply not bothered to take part, and that votes from another three had never been delivered to Unilever because of a coding error by Institutional Shareholder Services, which is based in Rockville, Maryland.
While the lost votes had no impact on the meeting's outcome, says a Unilever spokesman, the nondelivery of tens of millions of shareholders' votes points to little-known problems in proxy-gathering systems. The extent of the deficiencies is hard to gauge, but they could have led to erroneous results in some close-fought proxy battles, according to an October report by the Brandes Institute, a research division of money manager Brandes Investment Partners in San Diego.
"Although we lack specific numbers, we believe that there's the real possibility of making a mistake when the vote is close," says Barry Gillman, director of the Brandes Institute.
The problem is that there's no way for shareholders to know whether their proxy votes have been counted. Analysts say the system works well until the final stage, when such companies as Roseland, New Jersey's Automatic Data Processing, the dominant proxy-vote service provider, electronically deliver shareholder votes to large transfer agents, such as Bank of New York.
Independent tabulators, who include transfer agents, and, less frequently, ADP itself, routinely reject a small number of votes. For example, they are declared invalid if they don't match up with records kept by the New York City-based Depository Trust Co., the only clearing house in the U.S. But tabulators aren't required to confirm how many, or which, votes were tallied, although in close or contentious votes, many elect to do so.
ADP, meantime, says its responsibility ends once its voting instructions are delivered. "We know when an agent has picked up a file in its entirety," says Robert Schifellite, who runs ADP's worldwide shareholder communications and voting operations. "After that point, when we are not acting as an agent, our role ends." This disconnect stands in stark contrast to the end-to-end confirmation process that is routine in stock and currency transfers. Such a confirmation process creates an audit trail at every step of the transaction.
Cost, time constraints and competing priorities have blocked efforts to create an audit trail. Tabulators keep track of which shareholders' instructions were rejected. But it would be a laborious and expensive process for anyone to go back to clients to find out whether their votes were legitimately rejected. What's more, with ADP delivering voting instructions to tabulators just 15 days before annual meetings, there is little time to correct any errors. "About 99 percent of the time, there's absolutely no problem, because the vote is not close, so why spend a lot of time and money?" says Charles Roberts, co-owner and manager of Corporate Election Services, which is based in Moon Township, Pennsylvania.
About six years ago, ADP began talks with the American Society of Corporate Secretaries about making the final stage of the process more transparent. But the discussions bogged down over who would pay for the extra confirmation.
There are signs, however, that changes may be coming. In the wake of the Securities and Exchange Commission's decision last year to require mutual funds to disclose their proxy votes to fund investors, ADP has begun talks with a handful of major corporations to improve proxy confirmation procedures. Says ADP's Schifellite: "Accuracy in proxy votes has become even more critical than it has been in the past. Having a more transparent process is probably the right thing to do." -- S.B.