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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 petitions).

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 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.

Mr. Smith 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 told

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 corporations.

"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 "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 value."

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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