Eyeing new investment fund rules: new SEC-driven rules react to market-timing and late trading practices, aiming to correct governance policies and address deficiencies.

• Author: Rothberg, Burton
• Position: Regulation - Securities and Exchange Commission

Financial executives are again finding themselves readjusting to new Securities and Exchange Commission (SEC) rules--this time related to major changes in the way institutional investors govern both themselves and the companies in which they invest. Though some of these changes have been in response to the scandals in the mutual fund and annuities industries, others have attempted to address suspected longer-term deficiencies in the financial system.

Financial Executives Research Foundation (FERF) reviews the changes with an eye towards the implications for finance professionals, and SEC Commissioner Cynthia Glassman comments on some of the new rules.

In January 2003, the SEC ruled that all investment companies and investment advisors must formulate and disclose a set of policies and procedures they will use in deciding how to vote on proxy votes for the equities they own. Beginning in August 2004, these companies were required to publish their actual votes for the past 12 months.

In "Analysis and Implications of the New Proxy Voting Rules for Mutual Funds, "FERF examined the new proxy policy statements for the 10 largest mutual funds families and found they all had a large degree of similarity. Key points common to most of them include:

* The proxy voting decision is normally made by a proxy voting group at the fund management company, rather than by the fund itself.

* Likewise, the fund families will vote the proxies in all their funds as a block. Vanguard, for example, decides on a Vanguard-wide position on a proxy issue and has all its funds vote that way.

* All fund families are opposed to anti-takeover measures, such as poison pills, dual-class stock, supermajority voting and staggered boards. They are strongly in favor of boards with a majority of independent directors, with special emphasis on the audit, compensation and nominating committees.

* The fund families are not in favor of limits on executive compensation. They are, however, against certain types of compensation they consider unfair, such as awarding stock options with below-market strike prices, re-pricing underwater options and any option plan that dilutes existing equity by more than about 2 percent per year.

* The funds are willing to give management wide leeway on all operational issues. This includes important financial decisions such as new loans or equity.

* The funds made it clear they will not be voting with activists on certain social/ethical issues.

* Almost all funds use an independent proxy voting service such as Institutional Shareholders Services (ISS). Some...