Comment Letter to the SEC: Proposed New Disclosures for Investment Advisers to Mutual Funds

Abstract

This submission is in response to Chairman Clayton’s July 30 press release announcing a staff roundtable on the proxy process and calling for submissions from interested parties. It refers in particular to two of the topics under consideration, Voting Process and Shareholder Proposals.

According to the Release establishing the Proxy Voting Rule (“Release”), an investment adviser “is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client’s behalf, including proxy voting.” This was the rationale behind the Proxy Voting Rule requiring investment advisers, including mutual fund advisers, to create and disclose their proxy voting policies and procedures. However, the SEC and its staff have yet to clarify what these fiduciary duties mean for the largest mutual fund advisers now that they control an extraordinary amount of shareholder voting power at many of our largest public companies.

This concentration of voting power creates significant value for an adviser if it can be traded for something that the adviser wants in return. For example, an adviser may use its voting power to support the activism of current and potential institutional clients in exchange for the ability to acquire more assets under management. Or, an adviser may use its voting power to support the activism of its own shareholders at the advisor’s portfolio companies in exchange for those shareholders agreeing not to target the adviser itself for such activism. The result is that an adviser has not cast its delegated voting authority “in a manner consistent with the best interest of its client” and has subrogated the “client interests to its own,” a breach in its fiduciary duties to its mutual fund clients and its shareholders.

The Commission should provide clarification that mutual fund advisers must disclose, consistent with their fiduciary duties to act in the best interests of their mutual fund clients and their shareholders, how they will deal with these new conflicts in their voting policies. In addition, shareholder proposals are a prime area where this opportunistic use of an adviser’s voting power may be in play. Therefore, the adviser’s voting policy must also explain how voting on these proposals are linked to maximizing shareholder value.

Specifically, this submission requests the Securities and Exchange Commission (“SEC” or “Commission”), in whatever form it deems appropriate, to clarify that investment advisers to mutual funds must disclose, under the Proxy Vote Rule, their policies and procedures: to avoid using their voting power at public companies opportunistically to obtain new business from activists such as public pension funds and investment funds associated with labor unions; and to eliminate pressures to support the activism of its own shareholders at its portfolio companies; and to identify an actual link between support for a shareholder proposal under Rule 14a-8 and the enhancement of shareholder value before voting in favor of any such proposal.

Keywords: proxy voting rule, proxy voting, mutual funds, investment advisers, activism, shareholder empowerment, public pension funds, fiduciary duties

JEL Classification: K2, K22