Fund industry waits on proxy voting rules

(September 1, 2004) A new rule requiring U.S. mutual funds to fully disclose their proxy votes at shareholder meetings is now in force. Canadian regulators have introduced a similar proposal, but there are concerns that the Canadian version doesn’t provide the same level of disclosure, as well as worries about how long it will take before the new rules are in place.

Mutual funds and how they vote their proxies is an issue for many investors, who have been pushing for increased disclosure and transparency.

The U.S. Securities and Exchange Commission rule — which took effect yesterday — requires mutual funds, which hold about 20% of all American stock, to disclose their proxy voting records to shareholders online or in paper form, as requested. The SEC will also make the information available on its Web site.

A number of fund firms lobbied hard against the changes, on both sides of the border. However, earlier this year, the Canadian Securities Administrators introduced a similar rule contained in National Instrument 81-106, which requires investment funds to establish policies and procedures for voting proxies and to maintain a proxy voting record, available to unitholders on request.

Comments on the CSA’s rules were due this summer, with the regulator initially hoping to have 81-106 in place by the end of the year.

Eugene Ellmen, executive director of the Social Investment Organization, says his association and its members strongly support the principle of proxy voting disclosure.

“We believe that proxy voting represents a critical asset,” Ellmen said in his submission to the CSA. “It is important for investors to actively use their power as shareholders to vote on important corporate issues. As such, investment funds have an obligation to develop proxy voting policies and to implement procedures to vote their shares in accordance with these policies.”

However, Ellmen says he’s concerned that the CSA chose not to follow the SEC provision that proxy voting records be posted on fund company Web sites. “By specifically permitting investment funds to post their proxy voting policies and records on the Web, the CSA would provide the option to mutual funds to set up a low-cost disclosure system.”

Gary Hawton, CEO at Meritas Mutual Funds, one of a handful of Canadian socially responsible fund firms who already report their proxies online (Ethical Funds and Real Assets are the others), says he remains confident that regulators will mandate that mutual fund managers respect the fact that proxy votes are only in their hands because investors have entrusted their savings to them. “Thus, it only makes sense that investment managers and fund companies report how they voted these proxies back to their unitholders — the rightful owners,” he says.

Still, Hawton is concerned about the CSA’s timeline, noting that 81-106 contains a number of other disclosure-related amendments that will force fund firms to change the way they do business. “Companies will have to scramble to meet these new requirements and shortened deadlines,” he said.

That sentiment was echoed in several submissions the CSA received in response to the rule. “Its implementation will necessitate some significant systems, operational and procedural changes,” said the Guardian Group of Funds in its submission. “Our current experience is that any major programming change to our unitholder reporting system requires a 6 to 9 month lead time. It is unreasonable to have the instrument apply to reports for the financial year ending on December 31, 2004.”

PFSL Investments Canada recommends that the instrument be applicable no sooner than October 2005. “This will allow time for compliance with disclosure and unitholder notice provisions,” the firm said.

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As well as SRI fund firms, some of the major fund companies now appear to be onside with regards to proxy voting. RBC, one of the country’s largest fund complexes, says it supports requirements to have and to publish proxy voting policies, procedures and historical proxy voting records. “We are also in favour of the requirement to deliver these policies and procedures to unitholders upon request,” RBC added.

The next step for the CSA will be to study all the submissions, group together those of a similar nature, and come up with a response that’s agreeable to all securities commissions, says the Ontario Securities Commission’s Eric Pelletier. “So we have some work ahead of us. I can’t tell you how long that will take because we haven’t yet seen the extent of the comments.”

“If the comments lead us to make significant changes to the proposal, we would probably have to re-publish for another comment period,” Pelletier adds. “But it’s worth taking the time to get people’s feedback and build a proposal that meets expectations.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(09/01/04)

Doug Watt