A Missed Opportunity for Equal Treatment in Fund Proxy Voting
Last year, the SEC staff granted ExxonMobil relief that gave the company’s retail shareholders a new way to participate in the company’s governance. Shareholders can provide standing voting instructions while retaining the ability to revoke those instructions or vote differently on any individual matter. For investors who might otherwise not vote, the program provides a simpler way to participate without giving up control over their vote. Earlier this week, the staff granted similar relief to Goldman Sachs and Tesla for their shareholders. But when the Division of Investment Management staff extended relief to funds on September 29, it imposed restrictions that leave fund shareholders with fewer choices than shareholders in operating companies. It is unclear why this should be the case.
ICI has advocated for comparable SEC staff relief for fund investors. As with the operating company relief, participation would be voluntary, shareholders would continue to receive proxy materials, and they could subsequently opt out or override their standing instructions whenever they chose. The intent was to make it easier for retail fund investors to participate in the voting process while preserving their ability to make their own voting decisions. The SEC’s Investor Advisory Committee also recommended this relief for funds.
The potential benefit to fund shareholders is clear. Fund proxy campaigns cost between $675 million and $1.14 billion from 2020 through 2025. Some individual campaigns have cost tens of millions of dollars, with those costs ultimately borne directly or indirectly by fund shareholders. The current system forces shareholders to bear these costs, without meaningfully enhancing investor protection.
While relief announced for funds on September 29 takes a small step in the right direction, it falls short of the relief the SEC staff has provided to shareholders of operating companies. As a result, fund investors will not have the same range of choices, and the limitations reduce the practical value of the relief for funds and their investors.
Fund Investors Deserve the Same Choice
The relief provided by the SEC staff for funds categorically excludes contested director elections and changes to a fund’s investment advisory agreement with its primary adviser that require a shareholder vote. Those limitations create a significant difference between the choices available to fund shareholders and those available to shareholders of operating companies.
It is difficult to see the policy basis for these funds-only limitations. The proxy rules do not differentiate between funds and operating companies in this respect—for example, both funds and operating companies have contested elections for directors—and the investor protections built into the two approaches are substantially similar. In both cases, shareholders choose whether to participate, or stop participating, and retain the ability to vote differently on any matter when they wish. Fund investors should therefore have access to the same flexibility available to shareholders of operating companies.
That is particularly important because the challenges that standing voting instructions are intended to address are even more significant in the fund context. Retail investors own the overwhelming majority of mutual fund assets, yet their proxy voting participation has historically been far below that of institutional investors. Standing voting instructions could make it easier for shareholders who want to follow a fund board’s recommendations to participate, without limiting the rights of any shareholder to receive proxy materials and vote on individual matters.
The Limits Imposed by the Investment Management Staff Weaken the Relief
There is also a practical concern. Standing voting instruction programs require firms to make upfront and ongoing investments in technology, communications, servicing arrangements, and administration. Firms are more likely to make that investment if the program can be used broadly across all proposal types to provide meaningful long-term benefits.
Excluding important categories of fund votes changes firms’ cost-benefit calculations by reducing potential benefits. If a program cannot be used for contested director elections or changes to advisory contracts, some otherwise interested firms could decide that the cost of establishing and maintaining such a program outweighs the benefit, reducing the potential impact of the relief and leaving many of the problems with the current proxy process unchanged. Further, even for funds that opt in, the extensive limitations on the types of votes covered may make it more challenging to explain to retail investors how the standing voting instruction program will operate in practice, and the value of opting in.
A Significant Opportunity Remains
As we stated in our March paper, there is no single fix to the fund proxy system, and we continue to believe that the SEC and staff must take an all-the-above approach to reform. This would be so even if the staff had issued funds relief comparable to that given to operating companies. We appreciate the SEC staff’s engagement and its willingness to consider changes to the fund proxy process, but we are disappointed it did not do as much as they could. Fund shareholders should have access to the same flexibility the SEC staff has made available to shareholders of operating companies. The system is too broken for half measures to suffice. ICI will continue working with the SEC and staff toward broader reforms that reduce unnecessary proxy costs, improve shareholder participation, and preserve investor choice.