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January 24, 2003
SEC Tells Mutual Funds To Disclose Their Proxy Votes
by William Baue
The Securities and Exchange Commission voted in favor of rule changes that require mutual fund
companies to disclose their proxy voting policies and their actual proxy votes.
Yesterday, the U.S. Securities and Exchange
Commission (SEC) voted to adopt rule amendments and a new rule that require mutual fund
companies to disclose their proxy voting policies, procedures, and actual proxy votes. The rule
changes represent a major victory for the socially responsible investment (SRI) community. The SRI
community helped initiate the rule change process, promoted the necessity of greater transparency,
and demonstrated the practical viability of proxy vote disclosure. The SRI community's depth of
experience concerning proxy-voting disclosure uniquely positions it to project the likely course of
future development on this issue.
"For years now, Social Investment Forum members have
called for disclosure of proxy votes and voting guidelines," said Social Investment Forum (SIF) President Tim Smith, who is
also senior vice president and director of socially responsible investing at Walden Asset Management. "Forum members were the first
firms in the nation to voluntarily make such disclosures. In fact, all of the U.S. mutual fund
companies that currently disclose both their guidelines and voting decisions publicly are members
of the Forum."
The history of this landmark decision is inextricably linked to the social
investment community. In 1999, Domini Social
Investments became the first mutual fund company to publicly disclose its proxy votes. In
November 2001, Domini filed a rulemaking petition that helped instigate yesterday's decision (the
AFL-CIO and the International Brotherhood of Teamsters also filed rulemaking
In September 2002, when the SEC opened a 60-day comment period on the
proposed rule amendments that would require mutual funds to disclose their proxy votes, Domini
submitted its own comment letter and lobbied for others to do the same. In conjunction with Working Assets, the telephone and credit
card company, and Ralph Nader's corporate reform organization Citizen Works, Domini helped generate 2,500 letters to the
SEC in support of the rule.
Fellow SIF member Pax World Funds helped generate more than
1,000 letters in support of the rule changes through its MutualFundProxyVotes.com website launched
last October. Pax World Funds has made its proxy voting record available since Pax's inception in
1971. In all, the SEC received almost 8,000 letters, a record number commenting on proposed rule
changes. Over 7,000 of the letters supported the changes.
Four of the five SEC
Commissioners voted in favor of the rule changes, which will take effect in July. The sole
dissenting voice belonged to Commissioner Paul Atkins, who echoed the mutual fund industry's
concern that the measure would impose an undue cost burden on fund companies.
points out that the SEC addressed this concern. "The rule did take into account the complaints of
the industry that it would be expensive to prepare big written reports, and allows the funds to put
their information online--even on the SEC's website is an adequate response to the rule," Mr. Smith
Now that the rule changes have passed, Mr. Smith and others in the
SRI community are considering the ramifications for investors, mutual fund companies, and
"I think investors are going to get smarter as they get more educated about
the funds they hold," Citizens Funds Director
of Social Research Diane Tod South told SocialFunds.com. "Once the votes are disclosed,
[investors] will start to ask more questions."
Mr. Smith extrapolated how this increased
attention may affect mutual fund companies.
"The hope is that public disclosure will
create a more conscientious voting process by major mutual funds, because their vote is part of the
public record," said Mr. Smith. "We believe the rule will result in a number of resolutions
getting more votes than they would have before this rule, because the resolutions are in the best
interest of shareholders."
Domini's Director of Shareholder Advocacy and General Counsel
Adam Kanzer agreed.
"These rules will make mutual fund companies more accountable to their
investors," said Mr. Kanzer. "As a result, we believe they will be less likely to rubberstamp
corporate management's proposals and more likely to take an independent view of what is in the best
interest of shareholders."
Tim Smith believes investors may also see financial benefits
from the rule changes.
"There is mounting evidence that attention to shareholder rights,
including social and corporate governance issues, is linked to long-term corporate performance,"
said Mr. Smith. "When all mutual funds reveal how they use proxy votes, enabling shareholders to
know what is being done in their name, we expect to see a contribution to long-term shareholder
Mr. Smith added that the social investment community's role in achieving
disclosure of mutual fund proxy voting may drive investors to socially responsible investing.
"We hope that the leadership by social funds, many of whom have disclosed their proxy voting
records for a number of years, will be an additional attraction to investors," said Mr. Smith.
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