Get Ready to File Those Disclosures
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Thursday, January 23, 2003

Get Ready to File Those Disclosures

Harvey Pitt may be a lame duck chairman of the SEC, but he has not lost his sense of humor. Nor is he taking the fund industry's side on the issue of proxy vote disclosures. Like it or not, fund firms are going to have to disclose how they vote their proxies. The commissioners passed the rules on a 4-1 vote. They also passed the disclosure rules for investment advisors unanimously.

"This is a significant act that we are going to enact to protect investors," said Pitt at this morning's meeting. The dissenting voice came from Commissioner Paul Atkins, who expressed concerns about whether fund shareholders truly want the information and whether the cost of compliance may be too high. Commissioner Cynthia Glassman also voiced reservations about the rules, but ultimately cast her vote in favor of them.

The rules will take effect in July of this year meaning that the first proxy vote season covered by them will by 2004's.

Pitt kicked off this morning's meeting by showing the mock up of a proxy disclosure form created by the ICI and mailed to reporters this week. "We are calling this the ICI's Truth in Advertising submission," jibed Pitt, adding that he was unsure whether the reporters or the SEC staff received the mock up first. He then put on a bit of theater for the audience.

"While I understand that the industry wants us to focus on the mutual fund holding the largest number of stocks, I thought it would be useful for the SEC staff to look at how the typical fund's report would look. I also asked the staff to put together its version of how the disclosure would look," he said while holding up much slimmer mockups created by the SEC.

"As we used to say where I grew up in Brooklyn, this effort is close but no cigar," he quipped in reference to the ICI's mockup.

More seriously, Pitt said that requiring funds to disclose their complete proxy-voting recording would benefit shareholders through improved disclosure and oversight, and ultimately improve corporate performance and returns to investors.

"We are not persuaded by the arguments of the industry," said Pitt. "My decision is based on the merits of the rule, not on who supports it, or who opposes it or how many commented on it," he added in explaining his own vote. "My preference, and it is a strong one, is for disclosure, not for structural change."

He also shot down each of the six essential objections to the rules raised by the industry:

Shareholders have no interest in the disclosures. Pitt pointed to the 7,200 comments of the 8,000 submitted during the disclosure period as evidence that they do care. He also dismissed remarks from Atkins and Glassman that the comments were a small proportion of all 95 million fund shareholders and that a large number of them were form letters. "When we modify or create rules we do not take a plebiscite, we look at the issues they raised," he explained. "Knowing how difficult it is to get people to comment on anything, that number is significant."

The requirement would be politicizing. Pitt said the voting process is already to some extent political. "The disclosure will place these votes in the sunlight so shareholders can see if the votes were influenced," he elaborated. Finally, he noted that activists already can determine the holders of large blocks of stock and seek to influence them.

It would disrupt "behind-the-scenes diplomacy" efforts by funds. "it is not clear how this would interfere with those efforts," said Pitt.

It would interfere with the fund directors' oversight of the process. Pitt also said this argument was a red herring. "Proxy voting should promote understanding of fund directors of their obligations to vote the proxies in the interests of shareholders," he argued.

It would unduly increase costs. Pitt noted that the SEC staff modified the rules in response to this concern and said that as the rules now stand, the costs would be "minimal." "We have intended to keep the costs low," he said.

SEC staffer Christian Broadbent explained the broad outline of the rules. Fund firms will be required to submit the record of their proxy votes to the SEC on form NPX that was created in response to the enactment of Sarbanes-Oxley. That form will record:

  • Each matter on the proxy
  • Who proposed the matter, management or shareholders
  • Whether the fund cast a vote
  • Whether the vote was for or against management

    The disclosure would cover a twelve month period ending June 30, not the fund's fiscal year. Deadlines for the filings would be on August 31.

    The staff also modified the rules to drop the requirement that firms mail a disclosure to each shareholder. Instead, the will have the choice of making the document available either in paper format for those who request it by calling a toll-free number or for download through the firm's Web site. Shareholders will also be able to download the document from the SEC Web site.

    "We are not requiring that funds disclose votes that are inconsistent with the fund's policies," explained Broadbent. He explained that the staff did not want to create rules that would encourage the funds to write overly broad policies.

    Even with the modifications, there was some dissent. "I see more perceived than real interest," Glassman said. "For most shareholders, financial performance is their real interest." She also gave weight to the industry's concerns that activists will seize on the information to pursue their own agendas.

    Her dissent may even have opened the door, at least a little, for the industry to get the rules revoked at some point in the future.

    Glassman said the SEC will conduct an impact on the study at some point of time down the road. "I would have wanted surveys and focus groups to gauge shareholder demand for this and more information on the costs to the funds," she said. The rule should be revisited if the study finds that either shareholders have no interest in the voting records or if the costs to disseminate them are too high.

    But that study is not yet scheduled. For now, Chairman Pitt wins.

    How They Voted
    Harvey Pitt (chair)Yes
    Cynthia GlassmanYes
    Harvey GoldschmidYes
    Paul AtkinsNo
    Roel CamposYes
    Source: SEC Webcast

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