WASHINGTON - The SEC's verdict on proxy voting disclosure is being met with mixed reviews: proponents say it lets in the sunshine, while opponents say it opens the door to politics.
The controversial and closely watched measure, which requires mutual fund companies to disclose their proxy voting guidelines and votes cast, was approved Jan. 23 by a 4-1 vote.
The measure is slightly different from one originally proposed, as it allows mutual fund companies to post proxy voting records and guidelines on their websites. This addresses a concern the Investment Company Institute raised about the costs of mailing shareholders phone-book-sized prospectuses that included all the voting information.
And outgoing SEC Chairman Harvey Pitt said the ruling fulfills the commission's commitment to "the bedrock principles of transparency and adherence to fiduciary duties." The measure guards against the practice of mutual fund companies casting votes that further their own interests rather than those for whom they vote, he said.
Despite the website provision, mutual fund companies are disappointed with the ruling. The Washington-based ICI, whose membership is made up of mutual fund companies, voiced its displeasure with the proxy voting disclosure aspect of the ruling, as did officials of fund family giants Vanguard Group, Valley Forge, Pa., and Fidelity Investments Inc., Boston.
More harm than good
"It's more harmful than helpful to shareholders," said Elizabeth Powell, ICI spokeswoman. The rule produces no additional benefits to shareholders, said Ms. Powell, and brings politics into the equation.
"The main concern we have is it would allow special interest groups to politicize the proxy voting process with little or no regard for the best interest of fund shareholders," said Vin Loporchio, Fidelity spokesman. While the firm will fully comply with the SEC ruling, Fidelity officials hope the commission will review its effectiveness in due time, Mr. Loporchio said.
The ruling will be an administrative burden tied to compiling and posting of proxy voting records, he said. It will also put undue pressure from special interest groups on portfolio managers whose job is it to focus on investment management and not be the arbiter of political and social disputes, he added.
However, the ruling will have no impact on the way Fidelity manages money, he said.
Vanguard brass is encouraging portfolio managers to focus on investment fundamentals and not proxy voting, said John Demming, Vanguard spokesman. "We will continue to focus on fulfilling our fiduciary responsibilities and maximizing shareholder value."
Vanguard, like Fidelity, supports the other components of the measure, including the requirement that mutual fund companies develop proxy voting guidelines. Vanguard and Fidelity already post proxy voting guidelines on their websites, but the practice is not widespread, said ICI spokesman John Collins.
Janus Capital Management, Denver, which did not publicly come out against the proposal, will fully comply with ruling, said Janus spokeswoman Shelley Peterson.
On the other hand, unions, advocacy groups, shareholders and socially responsible investment firms lobbied hard for the measure and applauded its passage.
`Long overdue victory'
AFL-CIO Secretary-Treasurer Richard Trumka called it a "long overdue victory" for mutual fund investors. "The new SEC rule means that mutual fund investors will have the information necessary to determine if the votes mutual fund companies cast on our behalf truly represent investors' best interests and do not represent an effort to curry favor with the CEOs of portfolio companies in order to win lucrative contracts managing employee benefit programs," Mr. Trumka said in a statement.
Socially responsible investment firms also cheered the ruling. Thomas Grant, president of Pax World Funds, Portsmouth, N.H., called it "a big win for investors and a major step forward for good corporate governance."
Mercer Bullard, CEO of Fund Democracy, an Oxford, Miss., shareholder advocacy group, said opposition by the mutual fund industry is "a self-inflicted black eye." The politicization argument doesn't hold water because portfolio managers are obligated to ignore special interest groups when voting proxies, he said. "By giving investors a reason not to trust mutual fund managers, it (the mutual fund industry) has tarnished a reform that will help restore confidence in America's markets."
Scott Cooley, senior mutual fund analyst with Morningstar Inc., Chicago, said the mutual fund industry misjudged the political environment surrounding corporate governance and disclosure, and the industry would have been better served by gearing up for the changes rather than battling them.
Vanguard and Fidelity have strong reputations on proxy voting and Mr. Cooley said he doesn't suspect they have anything to hide. "They just don't want anyone looking over their shoulders and don't want to deal with the pressure" that will come from shareholders and activists. But those concerns don't outweigh the shareholders' right to know, he added.
Scott Stewart, former portfolio manager at Fidelity and current faculty director at the Boston University School of Management, said proxy voting disclosure makes sense because any measure that makes investors more confident in the money management process is a positive. That said, he doesn't see a lot of abuses by mutual fund companies.
While the issue has generated much debate, some industry observers don't think 401(k) plan participants or individual investors will be affected by the ruling.