The Securities and Exchange Commission voted to adopt a rule that would force mutual fund managers to publicly disclose how they cast proxy votes on behalf of their investors, handing a major defeat to the mutual fund industry, which lobbied hard against the requirement.
The SEC also voted to require lawyers to report suspected wrongdoing at a company to top executives or directors. But commissioners backed away from a proposal that would have forced lawyers to report such activity to federal regulators, instead asking for comments on an alternate plan that would require the company to promptly tell the SEC if a lawyer had withdrawn and why that happened.
The lawyer-conduct rule, which was approved unanimously, was the last in a series of regulations the SEC was required to adopt under the Sarbanes-Oxley Act, an investor-protection bill that Congress passed last summer in response to the troubles at Enron Corp., WorldCom Inc. and other companies.
The proxy-disclosure rule, approved 4 to 1, was not required by Congress but was pushed by outgoing SEC Chairman Harvey L. Pitt.
The commission was criticized by some investor groups after Wednesday's vote on new auditor-independence rules for failing to accept tough language that would have, among other things, prohibited accounting firms from designing tax shelters for their audit clients. Pitt rejected allegations that the agency had caved in to accounting industry demands.
"There has been some suggestion that by not adopting what we put out, the commission is cutting back on protections for investors," Pitt said. "I find that to be offensive and in any event completely wrong."
Investor groups generally praised the actions the SEC took yesterday. "I'm overjoyed," said Nell Minow, a longtime corporate governance activist and now editor of the Corporate Library, a governance resource site. "I think this is all terribly significant."
The SEC proposed last fall that mutual fund managers be required to publicly disclose how they cast proxy votes on behalf of their investors. Proxy votes, which investors can cast for each share they own, can involve critical issues, such as who will represent investors on a board of directors and how much top executives will be paid.
Mutual funds represent 95 million investors and, on their behalf, control an estimated 20 percent of proxy votes cast at shareholder meetings. The SEC received more than 7,000 comment letters on the proposal, a majority in favor of the rule, according to an agency spokesman.
Under the rule adopted yesterday, mutual funds will have to post votes electronically with the SEC and can put them on their Web sites if they wish. The funds will not be required to mail disclosures to shareholders, a change from the initial proposal that the SEC staff said will cut the cost of implementing the rule.
The rule applies to proxy votes made after July 1. They will have to be posted one year after the votes are cast, the SEC staff said.
Pitt pushed for the rule, saying mutual fund managers have potential conflicts because they may believe they need to vote the way a company's executives want in order to win a contract to manage that firm's pension.
But the Investment Company Institute, which represents the mutual fund managers, said in a statement: "We are disappointed with the Commission's vote with respect to requiring funds to report hundreds of thousands, and perhaps millions, of individual proxy votes. Making mutual funds the only investment entities required to report all of their individual proxy votes will undoubtedly embolden outside special interests. . . . [The rule] denies mutual funds the right to confidential voting that until today was seen as essential to independent voting, and which will continue to be enjoyed by all other institutional investors."
Among the groups that will not have to disclose their proxy votes to the general public are bank trust departments that vote proxies on behalf of shareholders whose stocks they oversee, pension funds and insurance companies.
Robert E. Plaze of the SEC's investment management division disputed the assertion that the new rule unfairly singles out mutual funds. He said, for instance, that insurance and pension funds -- not the beneficiaries -- bear the risk of investing in companies. By contrast, mutual funds are owned by shareholders who bear the risks and get the rewards when a fund's investments go down or up.
The disclosure rule does not apply to bank trust departments because the SEC does not regulate banks, he said.
Paul S. Atkins, the lone commissioner voting against the disclosure rule, said he agreed with many of the arguments presented by the mutual fund industry. He said he thought the new rule would add to the costs of running mutual funds without any evidence that shareholders wanted the information.
Atkins also said he was worried that the elimination of confidential voting would reduce the ability of mutual fund managers to work behind the scenes to improve the management of companies. And he agreed with the industry group that requiring mutual funds but not other large investors, such as pension funds, to make their votes public will create an unlevel playing field.
Pitt strongly defended the new disclosure rule. He said that because proxy votes won't be disclosed until a year after they are cast, they are in effect confidential when they occur. He also argued that investors are entitled to the proxy information whether they want it or use it.
Investor groups have contended that many votes aren't really confidential because 80 percent of publicly traded companies permit top management to know how shareholders vote; only mutual fund investors have been in the dark.
On the lawyer rule, the SEC voted to require lawyers to report evidence of wrongdoing to top corporate officials. But, in response to concerns of the American Bar Association and other lawyers that a provision in an earlier proposal would violate attorney-client confidentiality, the SEC decided to seek additional comments on that issue. The new plan contains the requirement that a company must tell the SEC when a securities lawyer has resigned or withdrawn from representing the company and why.
The SEC hopes that by requiring that the "noisy withdrawal" of an attorney be made public by the company, rather than by the lawyer, the rule would get around the concerns about attorney-client privilege.
ABA President Alfred Carlton Jr. said, "We are encouraged, but we want to wait to see the actual wording of the rule."