Mutual funds braced for setback from SEC
By Julie Earle
01/22/2003 19:01
The US mutual fund industry is bracing itself for bad news tomorrow when the Securities and Exchange Commission plans to vote on a rule that would force mutual funds to disclose their proxy voting records.
The SEC, which is facing an investor backlash over corporate disasters such as Enron, will vote on a proposal that would require mutual fund managers to publicly disclose how they cast proxy votes on behalf of their investors, on controversial issues such as executive compensation. Industry watchers believe the rule is likely to be approved, with minor changes, in what would be a significant blow to the $6,600bn fund industry.
SEC commissioners agree that if the proposals are approved, mutual fund companies which failed to make information available to shareholders, or to report their votes to the SEC, would be liable for potential fraud.
An adoption of the rule would be a win for corporate governance advocates, who claim the changes are needed to prevent conflicts of interest that might cause fund managers to vote in their own interests.
Advocates of the SEC proposal, including big pension funds and labour unions, have claimed that if fund companies had been forced to reveal their voting records years ago, that may have prevented debacles such as WorldCom and Enron, where investors lost hundreds of millions of dollars.
The AFL-CIO, the largest US labour federation, has said that fund firms did not rein in packages of executives because they were pressed to vote a certain way.
Mercer Bullard, the chief executive of Fund Democracy, a mutual fund watchdog group, said that mutual fund managers also might vote with management to win or protect business, such as lucrative 401(k) pension accounts.
"Fund managers have the same conflicts as stock analysts," said Mr Bullard.
Since the SEC first launched the proposal in September, it has received more than 7,000 comment letters, with the majority in favour of the rule being adopted. The fund industry, barring a few funds, has been aggressively opposed to the proposal that would reveal how they marked ballots on behalf of their 95m investors.
The Investment Company Institute, a mutual fund industry group in Washington, has argued that disclosing proxy votes would harm shareholders, not help them. The SEC plan would also expose fund firms to constant attack from activist groups.
Last week, Ned Johnson, the chairman of Fidelity, the number one mutual fund group, and his arch-rival, John Brennan, at Vanguard, joined forces to fight the SEC plan and complained that any rule would require money managers to spend time explaining and defending their votes, distracting them from their real jobs of stock-picking.
Fidelity, in its letter to the SEC, "strenuously objects" to proxy votes being disclosed. It said that disclosure would be costly without advancing the real interests of fund shareholders.
Both companies complained that the rule would leave pension funds, foundation and bank trusts and insurance companies still able to vote in secret. |
