PAM letter to SEC on proxy voting disclosure
December 5th, 2002
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Re: File Numbers S7-36-02 and S7-38-02
Dear Secretary Katz:
On behalf of Progressive Asset Management, I am writing in support of the Security and Exchange Commission's recently proposed rules regarding proxy voting guidelines and vote disclosure by mutual funds and investment advisers, File Numbers S7-36-02 and S7-38-02. I commend the agency for instituting meaningful disclosure that will surely bolster confidence in the equity markets, and I strongly support the recommendations set forth in these proposed rules.
The rules are a major step forward in providing greater transparency to investors whose proxy assets are held in mutual funds or entrusted to investment advisers. It is my belief that such disclosures are the fiduciary duty of mutual fund managers and investment advisers, similar to the fiduciary standard already applied to private pension plans under the 1974 Employee Retirement Income Security Act (ERISA).
Greater disclosure of proxy voting policies and practices would pressure fund managers and advisers to refrain from unilateral rubber-stamping of management's decisions, and would provide investors additional tools to distinguish among funds in the market. Indeed, the proposed rules would not only help investors identify those funds and advisers that carefully examine proxy proposals before voting on them, but also those who emphasize strong corporate governance or high standards of corporate social responsibility. The amendments would also allow for fund owners to be alerted when fund managers vote counter to established voting guidelines, and in essence, would pressure mutual funds and investment advisers to take seriously their voting duties.
Engaged proxy voting helps bring increased managerial accountability to many companies, and there is mounting academic evidence that progress on social, environmental, and corporate governance issues is linked to positive, long-term corporate performance. When all mutual funds and investment advisers reveal how they cast proxy votes, enabling shareholders to know what is being done in their name, we can expect corporate governance and accountability to greatly improve.
Should the Commission NOT institute the proposed rules, I believe it will have squandered a timely opportunity to restore investor confidence in the U.S. equity markets. Further, I fear that such inaction will be viewed as a condonation of the potential conflict of interest that currently exists with regard to proxy voting amongst mutual funds and investment advisers. Specifically, as the presumed "watchdog" over the securities industry, I am sure the Commission is aware that the proxy votes of mutual funds and investment advisers are overwhelmingly aligned with the recommendations of corporate management. When such positions are ill-advised (for example, to continue to endorse a firm such as Arthur Andersen as the company's independent auditor, even in the wake of its demise amid scandal) and in the absence of a requirement to disclose proxy votes, there is no way for mutual fund holders to hold their own management accountable on its voting record. Some parties in the industry insist that the continued confidentiality of the voting record is needed to insure credibility. I suspect that such parties may have an interest in "kowtowing" to corporate management recommendations, in part by a desire to win profitable 401(k) and other business from companies where proxies are being cast. While this may simply be a suspicion, I believe it to be widespread in scope. It is beyond the point in time when the Commission ought to take action to eliminate this potential conflict of interest.
Finally, allow me to address one of the objections to the proposed rules; namely, that these rules will prove excessively burdensome to administer and will result in increased fees to administer the funds/portfolios, which ultimately will be passed on to investors. Adherents to this argument proffer that firms will lose business and/or a competitive advantage if the proposed rules are adopted. The Commission need only look at public pension funds (again, where the fiduciary standard to disclose proxy voting is mandated by the 1974 Employee Retirement Income Security Act (ERISA)) to refute this type of argument. Furthermore, should the rules be adopted universally, as proposed, the fears relating to competitive (dis)advantage are likewise debunked.
Thank you for the opportunity to comment on the proposed rules.
Sincerely,
Neil Stallings
Director of Social Research & Shareholder Advocacy
Progressive Asset Management, Inc.
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