Commissioner Peirce Says Advisers Should Vote Proxies to Benefit Funds
Commentary by Steven Lofchie
SEC Commissioner Hester M. Peirce argued that advisers to funds must vote in accordance with the fund's investment objectives and the best interests of that particular fund, even if doing so conflicts with the best interests of individual shareholders or the asset manager.
In remarks at FINRA's Certified Regulatory and Compliance Professional Dinner, Ms. Peirce said that an adviser's fiduciary obligation flows to the specific fund it manages, but expressed concern that, in practice, advisers do not always vote in the best interests of each individual fund. She said that advisers must still vote in line with each fund's stated objectives, even if the adviser oversees multiple funds within a complex. She criticized the SEC's recent rulemaking that would require voting determinations to reflect the interests of the fund and its shareholders in light of the fact that these interests may differ, and it is the interests and objectives of the fund that should be determinative.
Ms. Peirce asserted that a fund publicly disclosing its votes can help determine whether the fund's votes match its objectives, but she said that a fund should only be required to do so if its investors request it, as it would impose a cost burden investors may not want the fund to bear. With respect to index funds, she recommended consideration of a requirement that such funds either vote in line with management, or refrain from voting. For other funds, she warned that a public voting disclosure requirement might empower other parties who are interested in commandeering the votes for their own purposes.
Commentary
On many issues, it is not worthwhile for advisers to educate themselves on how to vote, and it is not a worthwhile expense for investors to bear. It is also questionable whether most investors are interested in how advisers vote, although interest groups certainly are. Thus, it makes sense to allow investment companies to adopt a policy whereby they may choose to make their votes public or not. Then, investors can decide by investing or redeeming whether they favor that particular policy.
The Commissioner's suggestion that index funds should not use their votes "actively" seems consistent with the general policy of such funds; i.e., that they are along for the ride, and are not making active investment decisions. Besides voting along with management or not voting, there is a third alternative that seems also sensible: voting pro rata with other investors. Given the size of index funds, if they simply vote along with managers every time, there would be a sizable bloc of votes always on the side of management.