SEC Says Yes To Fund Proxy Disclosure

Approved by a 4-1 margin, the SEC banged the gavel on funds to make publicly available their proxy voting records, policies and procedures. The commission also unanimously approved a requirement for mutual fund advisers to disclose information on proxy policies and procedures, according to a Reuters report.

At issue is how a mutual fund, which owns shares in companies on behalf of fund investors, casts ballots on behalf of those investors when the public commpanies put issues such as executive pay or stock options to a shareholder vote. Most funds traditionally have not disclosed how they cast these votes.

Under current rules, fund companies have no obligation to reveal their vote.   But the curtain will be pulled back starting in July, when the SEC will begin requiring fund companies to make available to shareholders the fund’s proxy voting record.

Additionally, mutual funds will be required to disclose in their annual and semi-annual reports to shareholders and in their registration statement the methods by which shareholders can get  information on any proxy votes that are inconsistent with their proxy voting policies and procedures, according to the SEC.

Two Headed Issue

The issue has been landmined with challenges since it first took the road to approval on September 20, 2002 (See  SEC OKs Additional Mutual Fund Disclosures ).   On one side of the road are the mutual fund companies who are against such action due to the burden it would place on them.   SEC Commissioner Paul Atkins, the lone dissenting vote, agreed with the fund companies, telling the Associated Press (AP) that the new disclosure rule “will impose costs upon funds that will decrease shareholder returns.”

The mutual fund industry, responsible for approximately $6.6 trillion in assets, says a fund’s proxy votes can number in the thousands, as some funds have hundreds or thousands of holdings. In a demonstration of the enormity of this task, the Investment Company Institute (ICI), a fund lobbying group, sent heavy, phone book-size documents to the SEC, said to represent hypothetical examples of what companies would have to send to investors wanting to know how they cast proxy votes, according to the AP report.

Weighing in at 10 pounds, the heaviest of the volumes was for the Fidelity Spartan Total Market Index. The ICI estimates that fund would need as many as 932 pages to disclose how it cast proxy votes for its 3,882 holdings.  

Additionally, the ICI projected more than 200 mutual funds, representing 14.5 million shareholders, would have to produce disclosure spreadsheets totaling 99 pages or more each, on average. Such disclosure would carry a large price tag, in the end not offering much help, the group says. ICI spokeswoman Elizabeth Powell estimated the cost at $900 million over 20 years.

Commissioner Cynthia Glassman, who supported the rule with reservations, said in an AP statement that she had seen no compelling evidence that investors are interested in how their mutual fund companies vote.

“Ayes” Have It

On the other side are supporters of the proposed rule, including outgoing SEC chairman Harvey Pitt and Vanguard Group founder Jack Bogle, though not his successor John Brennan or the company Brennan now runs, which say fund investors deserve to know how their shares are voted.

Added Mercer Bullard, founder of the Oxford, Mississippi-based shareholder advocacy firm Fund Democracy in a statement to the AP, “Proxy votes have a significant impact on the value of America’s investments, and we don’t know — without disclosure — if mutual funds are voting the proxies in mutual fund shareholders’ best interest.”

Asked about the ballooning cost disclosure could possibly place on the funds, proponents such as Bullard take issue with the ICI’s argument on costs, saying disclosures could be made via the Internet.

ICI Response

Following the ruling, ICI President Matthew Fink said in a news media release, that while ICI supports many of the SEC’s proxy voting proposals, “a critical part of the rule overreaches, and is more likely to harm than help fund shareholders.”

Specifically, Fink pointed to, “the Commission’s vote with respect to requiring funds to report hundreds of thousands, and perhaps millions, of individual proxy votes. Making mutual funds the only investment entities required to report all of their individual proxy votes will undoubtedly embolden outside special interests.”  

ICI is concerned that such a move overall does not benefit fund shareholders, in addition to denying, “mutual funds the right to confidential voting that until today was seen as essential to independent voting, and which will continue to be enjoyed by all other institutional investors.”