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June 15, 2004
Rule Proposal Requires Canadian Mutual Funds To Disclose Proxy Votes and Guidelines
    by William Baue

New Canadian Securities Administrators rule closely resembles the US Securities and Exchange rule.

Late last month, the Canadian Securities Administrators (CSA) released a set of proposed rules requiring mutual funds to establish proxy voting guidelines and to disclose them, as well as their actual voting records, upon investor request. This proposal brings the CSA up to speed with its southern counterpart, the US Securities and Exchange Commission (SEC), which implemented similar rules in January 2003.

"The proposed rules will lift the veil of secrecy that has prevented anyone from knowing how mutual funds cast their proxy votes," said Don Rolfe, CEO of Ethical Funds. In 2000, the Vancouver-based socially responsible investment (SRI) mutual fund firm became the first in Canada to disclose its proxy voting guidelines, and the first to disclose its actual proxy voting record the next year.

Ethical Funds filed a comment letter in support of mandatory proxy voting and guideline disclosure when the CSA first proposed the rule in September 2002, concurrent with the SEC's rulemaking proposal. While the SEC received more than 8,000 comments on the rule proposal, the CSA received only 56.

"The original CSA rule in 2002 was woefully inadequate because it didn't require mutual funds to disclose their policies, nor how they voted on individual votes," said Eugene Ellman, executive director of the Social Investment Organization (SIO), who also filed a comment letter in 2002. The SIO represents the SRI industry in Canada. "The original proposal simply required mutual funds to file an overview statement of their proxy policies and voting as part of a much larger disclosure document involving detailed financial disclosures."

The revised rule proposal, entitled Investment Fund Continuous Disclosure and contained in National Instrument 81-106 and companion policies, eliminated these shortcomings. The rules are now aligned much closer with the current SEC rule, with one significant exception.

"The major difference is that the Canadian rule does not specifically give mutual funds the choice to disclose through their websites or the SEC website--or in Canada's case, the national securities website known as SEDAR," Mr. Ellman told "We feel this is an important issue, which we are intending to take up with CSA--in fact, I have already raised this with legal counsel who helped to draft the new rules."

Disclosure via the web carries several advantages: first, votes can be posted immediately after they are cast, and second, the constant availability of the guidelines and voting records removes the onus from investors to request the information. Furthermore, the web represents a more cost-effective medium than hard copy, which is expensive to print and mail.

A similarity between the SEC and CSA rules is that neither addresses the question of proxy disclosure by other institutional investors, particularly pension funds.

"SIO is currently working on a brief to national pension regulators in Canada who are working on a 'model pension law,' which would be used to guide the federal and provincial governments in future pension reform in Canada," said Mr. Ellman. "We will be recommending in that brief that pension regulators match the mutual fund requirements and require pension funds to disclose their proxy policies and their votes."

A few progressive Canadian pension funds, such as the Ontario Teachers Pension Plan and the Ontario Municipal Employees Pension Plan, currently disclose their votes, but few others do.

"Over the long term SIO would like to see proxy policy and voting disclosure by all major institutional investors," Mr. Ellman said.

Until then, the Canadian SRI community is applauding the proposed rules.

"These new rules are crucial in restoring confidence in the mutual fund industry and the financial markets," said Deb Abbey, CEO and Portfolio Manager of Real Assets, a Vancouver-based SRI mutual fund firm.

"This is good news not just for the SRI community--which obviously wants greater transparency on social and environmental issues--but the investment community as a whole, which can hold mutual funds to a higher standard of disclosure than in the past," Mr. Ellman added.

The consultation on the proposed rules runs through July 27, during which time the public can send comment letters. The proposed rules are scheduled for implementation on December 31, 2004.


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