September 20, 2002

SEC Proposal Would Require Mutual Fund Companies to Disclose Proxy Voting
    by William Baue

The Securities and Exchange Commission proposed rules requiring all mutual fund companies and investment advisers to disclose proxy voting guidelines and votes.

Yesterday, the five-member board of the Securities and Exchange Commission (SEC) voted unanimously in support of proposals that require all mutual fund companies and investment advisers to disclose their proxy votes and voting policies. The Commission will consider public comments submitted over the next 60 days before making its final decision.

"If adopted, these proposals would give investors fundamental information about the practices of those who vote proxies on their behalf," said SEC Chairman Harvey L. Pitt. "They also would discourage or expose proxy voting conflicts of interest. The securities belong to fund investors, who are entitled to know how their property is being voted."

Corporate governance advocates and the socially responsible investment (SRI) community have long been calling for such regulation. For example, Amy Domini of Domini Social Investments submitted a letter to Chairman Pitt this past November in support of a rulemaking petition that asked the SEC to require mutual fund managers to disclose proxy votes and policies.

"Pitt's statement echoes almost exactly something Amy Domini said in our letter to the SEC," said Domini Director of Shareholder Activism Adam Kanzer. "The vote belongs to the investor, and this is exactly what Pitt is saying."

The proposals would require mutual funds companies to disclose their proxy voting policies in their registration statements with the SEC. The SEC publishes the statements on its EDGAR website.

"Another one of the [proposed] requirements is that if a shareholder requests information on a vote, the fund company has to respond in three working days, which I think is great," said Mr. Kanzer.

The SEC's proposed rules also include a requirement that mutual fund companies must post their proxy voting policies and voting records on their websites, according to SEC spokesperson John Heine. However, Commissioner Cynthia Glassman had voiced concern over the costs this requirement might create, especially for small fund companies that cannot afford to host websites.

"If you don't have a website, [this requirement] is not applicable," Mr. Heine told SocialFunds.com.

"To a certain extent, though, this discussion of cost is beside the point," said Mr. Kanzer. "If proxy voting is a fiduciary duty, then you have to develop guidelines, you have to track votes, and you have to disclose it to the SEC. The incremental cost of also disclosing it to shareholders is fairly small. In fact, posting the information on websites is one of the cheaper methods."

Domini was the first mutual fund company to start publishing its proxy voting guidelines, in 1996, and its proxy voting record, in 1999. Many other SRI firms have since followed suit, including Pax World Funds in May 2000, MMA Praxis in October 2000, the Calvert Group in April 2001, and most recently, Citizens Funds.

The proposed rules would also require mutual fund firms to disclose to their shareholders proxy votes that are inconsistent with the firm's policies, along with an explanation for the inconsistency.

"This particular point about reporting on votes that are inconsistent with the policies and procedures, that's one benchmark an investor could use," Mr. Kanzer told SocialFunds.com. "Investors might not plow through every vote or all the guidelines, but they might look at a short report that identifies where proxy votes vary from the guidelines. The Commission wants to insure that conflicts of interest are clear and disclosed. If firms do vote against their own guidelines, they need to have a good reason why."

The SEC will post detailed information about all of the proposed rules on its website within the next few days. The Commission will consider public feedback submitted during a 60-day comment period and then vote its final decision. The rules could therefore take effect before the next proxy voting season.

"It will be very interesting to see whether or not this affects the way firms vote, whether it affects their guidelines, whether they see people 'voting with their feet,' shifting to firms that have guidelines that are more consistent with their values," said Mr. Kanzer. "It's a great opportunity for SRI."