Support Urged for Mutual Fund Rule

Mutual fund investors are being urged to get involved in a seemingly arcane regulatory battle to safeguard their investments from hidden conflicts of interest.

At issue is a proposed Securities and Exchange Commission rule that would require mutual fund companies to disclose how they voted on proposals presented to shareholders of companies in which the funds hold stock. These proposals range from mundane -- such as the reelection of auditors -- to meaningful, such as issues involving executive compensation and shareholder rights.

“Mutual fund companies are going to do whatever they can behind the scenes to kill this proposal or water it down,� said Tim Grant, president of Pax World Funds in Washington and one of several activists trying to drum up support for the SEC proposal. “This is not going to happen unless individual investors get involved.�

It’s an important debate because fund companies control 21% of the equity holdings in the U.S. on behalf of 90 million individual shareholders -- who buy the funds on their own or through 401(k) and other company-sponsored retirement plans.

Too often, fund companies vote with management in an apparent effort to safeguard lucrative 401(k) administration contracts with those same companies, said Mercer Bullard, president of a Mississippi-based investor rights group called Fund Democracy.

For example, Fidelity Investments administers the 401(k) plan at Lockheed Martin Corp., a Bethesda, Md.-based defense contractor. The AFL-CIO, one of the groups backing the SEC’s disclosure rule, alleges that Fidelity voted with Lockheed management in April to reelect a former Enron Corp. director to Lockheed’s board.

In addition, the AFL-CIO suspects that Fidelity voted in favor of management proposals at Tyco International Ltd., Nabors Industries Ltd. and Ingersoll-Rand Co. to reincorporate in Bermuda -- moves that diminished shareholder rights at all three companies, said Michael I. Garland, corporate transactions coordinator for the AFL-CIO Office of Investment.

The labor organization also says Fidelity voted against a recent proposal at Halliburton Co., which is under SEC investigation over allegedly improper recording of revenue, that would have stopped the company from contracting out lucrative consulting work to its auditing firm.

The allegations can’t be proved because Fidelity selectively discloses how it votes on shareholder issues -- disclosing votes that it believes will be popular and keeping secret other votes, Bullard said.

“Such selective disclosure constitutes fraud in other contexts,� said Bullard, a former SEC attorney. “It should be treated no differently here.�

Fidelity spokesman Vin Loporchio said the fund company considers its proxy votes to be proprietary information and doesn’t disclose specific votes as a matter of policy.

“When we vote proxies, we only consider our mutual fund shareholders’ interests,� Loporchio said. While acknowledging that policy precludes individual shareholders from determining for themselves whether the fund company’s votes benefited them, Loporchio added, “We feel our policy is in the best interest of our mutual fund shareholders.�

Bullard counters that Fidelity reportedly earned half of its $9.8 billion in revenue from fees paid by companies in which its funds are invested.

“It, therefore, has an incentive to vote with company management in order to keep this fee business,� Bullard said. “Yet disclosure rules permit it to keep its conflict of interest secret.�

The SEC requires that Wall Street analysts disclose potential conflicts. Bullard believes the pending mutual fund rule would do no more than put investment companies on the same playing field.

“This conflict is structurally the same as for analysts who make false recommendations to bring in investment banking business,� he said.

Fund companies argue that disclosing proxy votes politicizes the process. Besides, few investors seem to care.

“What we hear from our members is that shareholders express little interest in how proxies are voted,� said Chris Wloszczyna, spokesman for the Investment Company Institute, a Washington trade group representing the mutual fund industry.

Bullard counters that there wasn’t a public outcry demanding standard disclosure of fund fees or returns, either. But that standard disclosure has enhanced competition and made it easier for investors to pick among funds.

“If mass demonstration in the streets were a predicate for regulatory reform, we wouldn’t even have a prospectus,� Bullard said.

Nonetheless, if this battle is to be won, the voices of individual investors must be heard above the din of protest from fund companies that have everything to gain by preserving the status quo, said Grant, of Pax World. Grant, who runs a socially conscious mutual fund -- many of which are in favor of the disclosure proposals -- says the disclosure is simple to do. Both Pax and Domini Investments, another social fund company, prominently disclose their proxy votes on their Web sites.

Pax has launched a Web site to make it easy for individual investors to e-mail comments to the SEC about the disclosure issue. The site, www.mutualfundproxyvotes.com, has a sample letter and a prompt that allows investors to send a note directly to the agency’s public comment division. The comment period ends Dec. 6.

*

Times staff writer Kathy M. Kristof, author of “Investing 101� (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes .com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.