Fund Democracy Initiatives: Proxy Voting Disclosure

Statement of Mercer Bullard, Founder and President, Fund Democracy, at Pax World News Conference on October 22, 2002:

Thank you Mr. Stapf, and my thanks to Pax World for sponsoring this important event and inviting Fund Democracy to participate.

I would first like to note that Fund Democracy submitted a comment letter this morning on the SEC's proposal. The letter is available at Fund Democracy's web site and will shortly be available on the SEC's web site as well.

The reason this rule is needed is very simple: Investors have a right to know how their funds vote proxies, because without this information they cannot make fully informed investment decisions. The Investment Company Institute says that investors are not interested in how funds vote proxies. So investors presumably don't care, for example, whether Fidelity voted to keep a former Enron director on the board of Lockheed?

I believe that investors do care, in varying degrees, about how funds vote proxies. Look at social investment funds, which have grown to over $2 trillion, at 1.5 times the rate of other funds, and in a down market. The investors in those funds have made the qualities of their funds as corporate citizens a primary factor in their investment decisions. It stands to reason that many more investors consider this at least a significant factor in their investment decisions.

Some funds manipulate existing rules by selectively disclosing the votes that they believe will be widely popular, while keeping secret votes that their investors might oppose. Such selective disclosure constitutes fraud in other contexts, and it should be treated no differently here.

Although the SEC's proposal goes a long way toward enforcing investors' right to know how their funds vote proxies, it falls short in two major respects.

First, the proposed rule makes proxy voting information publicly available, but not easily useable, to investors. Many in this audience of financial reporters know better than anyone the difficulties of using information on the SEC's electronic filing system, known as Edgar. Information is extremely difficult to find and even more difficult to collect for use in making comparisons among different funds. Proxy voting information will be buried in this system, where it will be almost impossible to use effectively. The proxy voting policies will be in one document and the voting records will be in a separate document, and there will not be an easy way to find either. This is why Fund Democracy has proposed that the SEC establish a pilot program for the disclosure of proxy voting information that would allow the instantaneous comparison of how different funds voted on particular proxy issues.

The second problem with the SEC's proposal is that it does not require fund managers to disclose their economic interest in voting with company management rather than in the best interests of fund shareholders. For example, Fidelity reportedly earned half of its $9.8 billion in revenues from fees paid by companies in which its funds are invested. It therefore has an incentive to vote with company management in order to keep this fee business, yet disclosure rules permit it to keep its conflict of interest secret. This conflict is structurally the same as for analysts who make false recommendations to bring in investment banking business. The SEC and other regulators believe that these analysts should have to disclose their conflicts, but the SEC has not proposed consistent treatment for fund managers. Investors should be allowed to evaluate for themselves whether fund managers are voting in their best interests.

The industry has its own objections to the SEC's proposal, which do not withstand scrutiny.

The most remarkable assertion is that outside parties will force fund managers to vote against shareholders' interests. This absurd claim seems to assume that fund managers will ignore their own duty to vote in the best interests of shareholders under pressure from outsiders, although the funds have absolutely no economic incentive to do so. As I noted earlier, if any outside influence is likely to distort fund managers' motives, it is their personal economic interest in voting with management in order to win more fee-based business.

A second industry claim is that there has been no public outcry for proxy voting disclosure. But neither was there a public outcry when the SEC adopted the mutual fund fee table or required that fund ads show standardized performance figures, yet these regulatory developments unarguably have benefited shareholders and have enhanced competition in the fund industry. If mass demonstrations in the streets were a predicate for regulatory reform, we would not even have a prospectus.

Finally, the industry claims that the new rules will be too expensive. The SEC estimates that the total cost will be about $14 million, or about 9 cents for each of America's 165 million mutual fund accounts. This is less than fund shareholders pay each year to support the Investment Company Institute, which uses shareholders' money to oppose pro-shareholder initiatives. Proxy voting information is already provided by half-a-dozen small funds almost all of which have below average expense ratios. It is disingenuous for large funds, which have no trouble paying to publicize their more popular votes, to argue that providing full disclosure will be too costly for them.

These arguments, like the industry's arguments against more frequent portfolio disclosure, are not serious objections, but merely tactical roadblocks thrown in the way of making America's capital markets more accurately and efficiently reflect the values of investors.

I again encourage you to review Fund Democracy's comment letter on its web site, and look forward to answering your questions.