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March 29, 2002
SEC Chair Calls Proxy Voting a Fiduciary Duty
    by William Baue

In a February letter, the SEC Chair acknowledged that proxy voting is a fiduciary responsibility for all fund managers

On February 12, Securities and Exchange Commission Chair Harvey Pitt responded to a query regarding proxy voting policies originally sent to the SEC fourteen years earlier. In 1988, the Department of Labor issued a set of guidelines, now known as the "Avon Letter," directing Employee Retirement Income Security Act (ERISA) fund managers to vote proxies with the same diligence as making other fiduciary decisions. John Higgins, president of Portland, Maine-based Ram Trust Services, recently reiterated the call to the SEC to issue similar guidelines for all fund managers. Ram Trust Services was the firm that sent the original letter to the SEC.

"I am not sure why it took the SEC so long to respond," said Nell Minow, co-founder of the Corporate Library, a Ram-affiliated corporate governance watchdog. Ms. Minow personally delivered Mr. Higgins' letter to Mr. Pitt in December 2001. "They now say that everyone already knew that proxy voting was a fiduciary act, but if that was so, why not put it in writing?"

Mr. Pitt's letter clarified in writing the SEC's stance that proxy voting is in fact an investment adviser's fiduciary responsibility, generally governed by state law.

"We believe, however, that an investment adviser must exercise its responsibility to vote the shares of its clients in a manner that is consistent with . . . its fiduciary duties under federal and state law to act in the best interest of its clients," wrote Mr. Pitt in the letter.

Mr. Higgins' suggestion that the time is right to address the fiduciary status of proxy voting could be considered a coy understatement in the wake of Enron, which demonstrated the dangers corporate governance system failure. Before Enron, many fund managers automatically voted proxies in accordance with management's recommendation. After Enron, such blind faith in the trustworthiness of management would be considered na´ve at best, if not simply irresponsible.

Mr. Pitt's iteration of proxy voting as a primary fiduciary responsibility sent a strong message to the investment community. The Wall Street Journal predicted that the letter could enhance shareholder activism. Social Investment Forum Chair Timothy Smith echoed that prediction, and made the Enron connection explicit.

"The long shadow that Enron is casting over the 2002 shareholder resolution season is very evident in the SEC chairman's recent call for mutual funds to exercise more diligence in voting their proxies," said Mr. Smith.

The impact of the correspondence between Ram and the SEC may reach much deeper. Mr. Higgins called for the SEC to consider mandating disclosure of proxy voting policies and even actual voting records, especially in contested matters. Mr. Pitt replied that such rule amendments were proposed in 2000, and that a decision on whether to adopt them would be made soon.

"I can't predict what the SEC will do," said Ms. Minow. "I very much hope that they will require money managers to at least make their proxy policies public (and any vote not in accordance with the policies), if not every single vote. Domini posts all of its votes on its website, so I do not think it creates much of a burden to disclose them."

In fact, Domini Founder and Managing Principal Amy Domini sent a letter to Mr. Pitt in late November 2001 that similarly asked the SEC chairman to mandate disclosure of proxy voting policies as well as actual voting records for all fund managers.

"Disclosure [of proxy voting policies and records] should be considered a fundamental fiduciary obligation that mutual funds owe to their shareholders, and should be required as a matter of law," Ms. Domini wrote. "Certainly, disclosure would promote accountability and transparency, which are not only guiding principles of our financial regulatory system but have been special concerns of the Commission in recent years."


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