Disclosure of the Irrelevant? - Impact of the Sec's Final Proxy Voting Disclosure Rules

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INTRODUCTION

On several recent occasions, Harvey Pitt, then acting Chairman of the Securities and Exchange Commission ("SEC"), discussed the importance of proxy voting disclosure by investment advisers and mutual funds to ensure that such fiduciary obligations are performed in the best interests of their clients/shareholders.1 On September 20, 2002, the SEC acted on Chairman Pitt's concerns by introducing two proposals.2 One proposal required open-end and closed-end investment companies to disclose their proxy voting policies and procedures as well as actual votes cast relating to portfolio securities they hold.3 The other proposal required registered investment advisers (excluding smaller advisers4) that exercise voting authority over client proxies to adopt and implement proxy voting policies that meet certain fiduciary standards and to make certain disclosures to clients concerning the advisers' proxy voting record.5 On January 23, 2003, after reviewing the most comment letters in recent SEC rule-making history, the SEC approved the two proposals, with minor modifications.6 Unfortunately, while providing no practical benefit to investors in their investment decision-making process, these new rules effectively impose onerous and costly obligations on funds and their advisers.

In addition, as pointed out by one investment management company in a letter to the SEC,

[T]hese proposals are inconsistent with the concept of a mutual fund whereby individual investors pool their investments into a common vehicle and delegate investment management and administration to the fund's investment manager and corporate oversight to the fund's Board of Directors. The mutual fund vehicle was not intended to be a substitute for, or operate as, a separately managed account for each investor. In the latter case, the investor receives individual advice on a portfolio of securities and has beneficial ownership in each of those securities. As a result, the investor also has the right to direct the voting of the proxies of each company held in that portfolio.7

I. BACKGROUND

Federal securities laws and regulations do not currently regulate how investment advisers vote proxies on behalf of clients. The sec has previously considered the issue of proxy voting disclosure on two separate occasions (in 1971 and 1978), but ultimately withdrew the proposed rules.8 However, as former Chairman Pitt noted,

[A]n investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with the general antifraud provisions of the Investment Advisers Act of 1940, as well as its fiduciary duties under federal and state law to act in the best interests of its clients.9

Despite these fiduciary standards, former Chairman Pitt, together with certain labor and socially responsible investing organizations, pressed for explicit regulation of mutual fund and investment adviser proxy voting activities.10 In the Investment Company Proxy Release, the sec determined that the required disclosure of a fund's proxy voting policies and actual votes is intended to enable "shareholders to monitor their funds' involvement in the governance activities of portfolio companies" which, in turn, will encourage funds to become more engaged in portfolio company governance activities.11 The sec's expectation is that increased shareholder activity with respect to mutual funds can have a potential "dramatic impact on shareholder value" and the value of capital market investors at large.12 However, except for citing statistics which demonstrate the growth and widespread popularity of mutual funds13, the sec failed to set forth specific facts supporting these assertions. Strikingly, the sec did not proffer any evidence that funds and investment advisers vote in a manner that undermines the value of a portfolio company. On the contrary, fund advisers have every reason to vote in a manner that will enhance the value of portfolio companies. …