SEC Proposes Proxy Vote Disclosure Rule
Regulators on Thursday proposed forcing mutual funds to reveal how they cast their votes on behalf of investors in corporate contests over executive pay, board makeup and other issues.
The Securities and Exchange Commission voted unanimously to seek two months of public comment on the plan, which could draw fierce opposition from the fund industry. Fund companies, which hold about 21% of the U.S. stock market on behalf of 93 million investors, have opposed mandatory disclosure of so-called proxy votes, citing lack of public demand.
Activist investors such as the AFL-CIO cheered the SEC action as an important step in efforts to reform corporate governance. As scandals such as Enron Corp. and WorldCom Inc. have rocked investor confidence, Congress and the SEC have adopted rules calling for quicker or more complete disclosure in several areas, including executive stock trading and compensation.
Although corporate proxy votes often deal with mundane issues, they also can be a forum for such matters as the size of an executive’s retirement package or the membership of a company’s board.
“This is an issue whose time has come,” Steve Schueth, director of the Washington-based Social Investment Forum, said of the proposed proxy rules. “WorldCom, Enron and the other fiascos have called into question the whole issue of investor trust.”
Under the proposal, fund companies would be required to file their proxy voting records twice a year with the SEC, which would post them on its Web site at www.sec.gov. The funds also would be required to send written copies to investors upon request.
Fund companies also would be required to make their voting guidelines public, as Vanguard Group and Fidelity Investments already have. However, only “socially conscious” fund firms such as Domini Social Investments post their votes, industry analysts say. Though the mainstream fund industry says investors have shown little interest in proxy voting, activists don’t agree.
“If regulatory improvement depended on hearing from shareholders, we wouldn’t have prospectuses. We wouldn’t have fee tables,” said Mercer Bullard, founder of Fund Democracy, an Oxford, Miss.-based shareholder advocacy group.
Funds face conflicts of interest because they sometimes “serve two masters,” Bullard said. They may avoid taking a stand against company management for fear of losing pension plan business, he said. The fund industry disputes that contention.
“That argument is absurd. When we vote our proxies, we only consider our shareholders’ interests,” Fidelity spokesman Vin Loporchio said.
Loporchio also said proxy disclosure could have unintended consequences. If, for example, it became known that Fidelity had voted against management, it might adversely affect the stock price and, in turn, fund shareholders, he said.
Still, investor Adrian Nenu of St. Petersburg, Fla., said he, for one, wants to see proxy votes revealed.
“If a fund firm votes for an outrageous executive compensation package, I would think that most people would want to know,” Nenu said. “If they’re acting in a fiduciary duty, like they say they are, then there’s nothing to hide. If anything, they should be proud to post the information.”
After the 60-day comment period passes, the SEC will vote on whether to formally adopt the disclosure rule.
In a separate disclosure battle still looming, the SEC may respond to investor petitions seeking to force funds to reveal their portfolio holdings more than twice a year.
