This story was updated from Thursday 9:46 p.m.
The battle for disclosure knows no boundaries.
Securities and Exchange Commission
voted yesterday for a proposal that tackles yet another area of mutual fund disclosure -- proxy votes. In short, the proposal would force mutual fund companies to disclose to investors how they vote in company proxy contests. The proposal is somewhat toothier, though, than previously expected.
Simply through the vast number of shares their funds own, many fund managers have considerable weight in proxy votes. And given the recent spate of corporate governance misfires, more and more mutual fund managers have announced that they're going to use their influence as shareholders to affect corporate behavior. Perhaps most notably, Vanguard Group founder John Bogle has assembled an ad-hoc group that includes Chris Davis of Davis Funds and Bill Miller of Legg Mason to encourage institutional investors to throw their weight around on a slew of issues.
The industry on the whole, however, doesn't quite seem ready to share their efforts to that end with investors.
While the finer points are still being worked out, the SEC proposal has essentially four parts. First, funds will be required to disclose the policies and procedures used to determine how votes will be decided and cast. Specifically, funds would have to lay out the procedures it would use when a vote presents a conflict between the interests of fund shareholders and those of the fund's investment adviser or principal underwriter.
Second, funds will have to make their proxy voting records available. Those records would have to 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 would also have to be disclosed, along with the reasons for the inconsistency.
Lastly, the proposal requires that a fund state in its registration statement and reports to shareholders that information about the fund's proxy voting is available without charge, upon request, and provide the requisite toll-free numbers and Web sites.
The proposal also lays out similar rules for investment advisers.
Too Much Information
The fund industry has made the predictable objections -- primarily that they already have a fiduciary duty to vote in the interest of shareholders and that disclosing information on individual proxy votes would be overwhelming and irrelevant to fund investors.
"The purpose of disclosure is to provide meaningful information that investors can use to make sound investing decisions," says Chris Wloszczyna, a spokesperson for the Investment Company Institute, which lobbies on behalf of the mutual fund industry. "That includes information on fees, risk, investment strategy. But you have to draw the line somewhere, and proxy votes just aren't meaningful."
Indeed, Wloszczyna (pronounced "wazena") says that not only would disclosing proxy votes not help individuals make better investing decisions, it could very well obscure more relevant information.
For large fund companies -- such as Vanguard, which offers some 50 equity funds -- the new disclosure rules would quickly become an onerous task.
Fidelity, the industry's biggest company, votes in more than 5,000 proxy contests every year, according to spokesperson Vin Loporchio.
Fidelity posts its guidelines for proxy voting on its site (
www.fidelity.com), noting its policy against repricing stock options without shareholder approval as well as other issues of executive compensation. Beyond that, though, the company doesn't think greater disclosure will help -- and could very likely hurt -- shareholders. "We've long believed in quiet diplomacy
with companies, and think that's worked well for our shareholders," Loporchio says. "If that information, released publicly, were to have a negative impact on the stock, then that would have a negative effect for our shareholders."
Many funds worry that if forced to disclose that they've voted against management, for instance, that the action will cause selling or shorting of the stock, sending its share price into a downward spiral.
Essentially, funds argue that proxy votes are proprietary information, and should be considered similarly to the information that managers use in their buying and selling decisions. "We don't disclose our economic analyses of companies, even though a lot of people would like to know what we're about to buy or sell," Loporchio says.
The industry's most vocal supporters of the proposal come from funds that historically have placed more importance on shareholder activism -- notably, socially responsible funds.
Citizens Funds, long an advocate of using proxy votes to influence corporate governance, announced on Thursday that it will begin publishing its voting record on its Web site
www.citizensfunds.com. Citizens Funds votes in more than 2,000 proxy contests a year.
"We're thrilled to see the SEC take action along these lines," says Citizens director of social research Diane South. "We read the comments other fund companies make and wonder what planet they're on."
Investors are clearly interested in taking a more active role in corporate governance, South says, and that means funds should reveal what they're doing along those lines. "Maybe investors don't always understand the importance of proxy voting," she says, "but disclosure will educate them -- and that's good."
The SEC has set a 60-day public comment period on the rule proposal. Then the commission will likely spend a few more months reviewing the comments and modifying the proposal before putting it to a final vote. The full text of the proposal will be posted on the SEC's Web site (