The Securities and Exchange Commission voted today to increase transparency among mutual fund proxy voting.
The proposal, first floated in September, included some surprisingly stringent requirements that were left unchanged in the final rules. (For more details, see
SEC Proposes to Force Funds to Disclose Proxy Votes.)
Under the new rules, funds will be required to share the decision-making process with investors. Specifically, funds will have to lay out the procedures it will use when a vote presents a conflict between the interests of fund shareholders and those of the fund's investment adviser or principal underwriter -- for instance, a CEO compensation issue regarding the chief executive of the fund's underwriter.
In addition, funds will have to make available their proxy voting records. Those records must identify the matter voted on, whether the matter was proposed by the issuer or by a security holder, whether and how the fund cast its vote, and whether the fund cast its vote for or against management.
Any votes that are inconsistent with the fund's proxy voting procedures must be disclosed, along with the reasons for the inconsistency.
While an impressive coterie of fund luminaries -- such as Vanguard founder John Bogle, Davis Investments' Christopher Davis and a host of socially responsible fund families -- backed the plan from the start, most in the industry weren't as enthusiastic.
"This is a great day for mutual fund investors," says Tim Grant, president of the socially responsible Pax World fund family. "And just because these rules were dreaded by mutual fund managers is not a reason to temper our enthusiasm."
The Investment Company Institute, the lobbying arm of the mutual fund industry, was the most vocal in its concerns that the proposal over-reached. "We support and have supported most of the proxy voting proposal," says Chris Wloszczyna (pronounced Wazena), a spokesperson for ICI. Indeed, ICI endorsed the bulk of the plan, including the disclosure of voting policy and procedures, eliminating conflicts of interest and the retention of records. Its primary concern was that disclosing all this information in a mailing to investors would be a financial, administrative and strategic burden on the fund companies, as well as information overload for the investor.
Fidelity, for example, votes in more than 5,000 proxy contests every year, according to spokesperson Vin Loporchio.
"We are disappointed with the Commission¿s vote with respect to requiring funds to report hundreds of thousands, and perhaps millions, of individual proxy votes," an ICI statement says. "
This will undoubtedly embolden outside special interests. This will not serve the interests of mutual fund shareholders to whom the industry owes its sole allegiance. This part of the rule also denies mutual funds the right to confidential voting that until today was seen as essential to independent voting."
Shareholder advocacy groups largely "pish-posh" the ICI's complaints. "Every claim the ICI has made about this proposal has turned out to be wrong or misleading," says Mercer Bullard, securities law professor at the University of Mississippi and founder of Fund Democracy, a mutual fund shareholder advocacy group. "The fund industry has a self-inflicted black eye over this."