SEC acts to require fund proxy vote disclosure

Published: Friday, January 24, 2003 at 6:01 a.m.
Last Modified: Thursday, January 23, 2003 at 10:36 p.m.
WASHINGTON - Over industry objections, the Securities and Exchange Commission acted Thursday to require mutual funds to disclose to investors how they voted on decisions at the companies whose shares they hold.
One SEC commissioner dissented in the move by the watchdog agency, which will bring a significant change in the way mutual fund companies operate. He warned that the new rule will hurt investors' returns by imposing heavy costs on mutual fund companies that are likely to pass them on.
In a 4-1 vote, the SEC adopted a rule that for months has drawn objections from the mutual fund industry, including heavyweights Vanguard and Fidelity, as being unnecessarily burdensome and costly. Some investor advocates have sided with the big funds on the same grounds.
The SEC action was a victory for the AFL-CIO, whose pension fund is a major investor. The labor organization had organized protests last month outside Fidelity offices nationwide.
U.S. stock funds managed $3.4 trillion in assets in 2001, or nearly a third of all shares, for 93 million Americans.
Under current rules, fund companies are not obligated to tell anyone how they cast their ballots on corporate moves - not even investors on whose behalf the votes were collectively cast.
Starting in July, fund companies will be required to tell shareholders who request such information how they cast their proxy votes.
"There are conflicts of interest in the way votes are exercised," or at least potential conflicts, SEC chairman Harvey Pitt said before the vote.
But commissioner Paul Atkins, who voted against adopting the rule, declared that it "will impose costs upon funds that will decrease shareholder returns."
Matthew Fink, president of the Investment Company Institute, the fund industry's lobbying group, issued a statement saying the new rule "is more likely to harm than help fund shareholders."
It will bring no new benefits while making the investment process for mutual funds more political, said Fink.
SEC commissioner Cynthia Glassman, who supported the rule with reservations, said she had seen no compelling evidence that investors are interested in how their mutual fund companies vote.
The industry says a fund's proxy votes can number in the thousands, as many funds have hundreds or thousands of company holdings.
To make it less costly for the industry, the SEC modified its earlier proposal so that fund companies will be required only to make the voting information available on the Internet, not to mail the material to shareholders.
The ICI has said it is unclear whether electronic disclosure would be feasible and less burdensome than mass mailings.
The SEC also voted Thursday to adopt a rule that outside corporate lawyers must go to company officials if they suspect fraud.
That was a weakened move from an earlier proposal that also would have required lawyers to inform the SEC if they couldn't get company officials to stop the fraud.
Companies themselves will be required to notify the SEC if attorneys have resigned in protest, as they must do when an accounting firm resigns from auditing a company's books.
The SEC put out for an additional 60 days of public review the requirement for attorneys to inform the agency.
Groups representing attorneys, such as the American Bar Association, had objected to the SEC proposal, saying it improperly exceeded Congress' mandate in the corporate fraud law.
Critics say it could hurt attorney-client confidentiality and inhibit companies in their communications with outside lawyers.

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