Debts To Wealth

The SEC must make it mandatory for the funds to inform the investors about the fees they get from companies in which they invest and disclose the votes they cast in the favor of these companies’ management. This will prevent the fund managers’ conflicts of interest.

The most powerful mutual fund companies in the country have joined hands and launched an aggressive public relations campaign. The goal of this alliance is to frustrate a Securities and Exchange Commission proposal to force mutual funds to inform their voting pattern on corporate proxy issues. The agency should see the funds’ campaign as an attempt to get the ruling in its favor and develop the increasing momentum for accountability reform.

The SEC’s common-sense approach will necessitate mutual funds to disclose their proxy-voting policies and their actual votes on resolutions sent to the companies’ shareholders whose stock is owned by the funds. As mutual funds have around 19% of the country’s equity, they can cast the final votes on executive pay packages, corporate environmental policies or labor practices and other important questions.

But the largest mutual fund companies are hesitant to accept the SEC’s proposal. They are adamant that the costs of adhering to the rule would be very high to substantiate. They are scared that proxy-voting transparency will allow special interest groups to push for the funds. But surprisingly, they assume that investors are not bothered about how funds vote.

But the fund industry’s arguments are totally baseless. According to the research conducted by the SEC, the total cost to follow the planned rule would cost roughly 9 cents annually for every mutual fund account. Also the industry’s contention that informing about proxy votes would allow special interest groups to control how funds vote, ignores the important reason for the proxy-vote rule. Shareholders who have some or the other concerns should be allowed to express their concerns.

According to the industry’s careless assumption that investors don’t want proxy-vote disclosure, public hue and cry is not mandatory for regulatory reform. Investor education will result in more intelligent decisions, better mutual fund governance and finally stronger financial markets.

As the disclosure of funds’ votes becomes mandatory, the fund managers will become stewards, dealing with proxies as fund assets that should be used for the benefits of shareholders. It will let fund managers to be more answerable to the shareholders who will not accept voting to be done without thinking, just to suit corporate management. Investors can also choose mutual funds as per their voting records.

Excepting few, most of the mutual fund managers are not interested in doing their fiduciary duties. Instead, they want to protect their interests and profits. This is the primary reason behind the industry’s opposition to the planned rule.

Mutual funds hold shares in companies with whom the funds’ management companies have excellent business relationships. This is because if fund managers don’t enjoy good relationships, they will see the companies developing better relations with other fund managers.

The new rule attempts to reduce the fund managers’ conflicts of interest by making it necessary to inform the procedures it adopts to handle conflicts and to find out about the votes that differ from the fund’s publicized proxy-voting procedures. Mutual funds should be accountable for their voting records and consider investors’ interests first. Hence the SEC’s proposed rule must be followed.

After it becomes a law, the SEC should handle the fund managers’ conflicts of interest by necessitating funds to inform about the fees they get from companies in whom they have invested and disclose the votes they cast to favor the management of those companies. This will let mutual fund investments play a stronger role in good corporate governance and more responsible corporate behavior.