Thursday, June 13, 2019

ICI recommends improvements for fund proxy processes

By Amy Leisinger, J.D.

In a letter in response to the SEC’s roundtable on the proxy process, the Investment Company Institute stressed the importance of proxy voting to funds as both institutional investors and issuers. However, the organization’s letter focused on proxy issues arising in funds’ roles as issuers, particularly with regard to the fact that their shareholder bases are made up mostly of diverse retail investors. Shareholder approval can be difficult to obtain when funds attempt to track down the beneficial owners of fund shares, and ICI recommended that the SEC take steps to adjust the “majority vote” requirement and to permit funds to communicate directly with beneficial shareholders. The organization also suggested improvements to disclosure delivery and layering capabilities.

Proxy challenges. In its letter, ICI noted that investment companies face additional challenges in obtaining quorums and shareholder approval given the diffuse nature of their shareholder pools. Funds have large numbers of retail investors, according to ICI, and these types of shareholders are less likely to vote. In some cases, the organization explained, funds encounter difficulties in communicating with their shareholders, as many investors’ funds are held in omnibus accounts under the names of intermediaries, and it can be difficult to obtain accurate individual identifying information. In addition, ICI noted the sheer volume of proxy materials in connection with the combination of funds in a complex addressed in proxy materials and the attendant costs. These problems are often compounded by the need to resend proxy materials if a quorum is not established on the first try, ICI stated.

Shareholder approval and voting. “[T]he costs and difficulties associated with fund proxy campaigns are enormous and will not improve without regulatory intervention,” ICI opined. For example, the Investment Company Act requires a majority vote of outstanding voting securities to implement certain changes to fundamental policies and agreements, but there is no compelling reason that shareholders need to approve all policies designated as “fundamental,” especially when the change would not be material to fund strategies or risks, the organization explained. As such, ICI recommended that the SEC consider using a disclosure-and-notice approach with regard to certain fundamental policies and allow for board approval. Adequate notice, together with redemption rights, would protect shareholders while minimizing costs, according to ICI.

In addition, the organization suggested that the Commission use its exemptive authority to create a new means by which to satisfy the “majority vote” requirement. Specifically, ICI advanced a Commission rule change that would allow a fund with 75 percent or more of shares affirmatively voting at a meeting to satisfy the requirement so long as holders of more than one-third of total outstanding voting securities are represented at the meeting. In addition, ICI also put forward a requirement of unanimous board approval of the proposed action. This change would provide funds with a more practical means by which to obtain shareholder approval of actions that a large number of shareholders and the board itself approved, ICI stated, and shareholders would still have the ability to “vote with their feet” if they do not agree.

Proxy delivery. ICI also advocated a change that would allow funds to deliver proxy materials directly to shareholders as opposed to going through intermediaries. To facilitate this change, the Commission could require intermediaries to compile and provide shareholder information for funds for the purpose of distributing proxy materials, the organization stated. ICI explained that this would improve shareholder communications while simultaneously lowering proxy solicitation costs, which would save shareholders money.

The organization also put forward the suggestion that the SEC should permit funds to include the proxy card with the initial proxy notice. The current restriction on including the proxy card adds more steps to an already complicated process and may confuse shareholders (evidenced by some returning the notice with markings attempting to vote), according to ICI. Allowing issuer funds to include the proxy card in the same mailing would reduce cost while improving shareholder participation in voting, according to ICI.

Disclosure layering. Finally, ICI recommended that the SEC allow additional use of layering, linking, and incorporation by reference in proxy materials. Under this approach, funds could provide information beyond that currently provided in a notice in a more succinct manner than currently seen in proxy statements, ICI stated. In addition, proxy materials would be more “shareholder-friendly,” and investors would still have access to complete information in online materials, the organization explained.

“Proxy statements ought to be engaging. In practice, their sheer bulk conspires against shareholder participation in the proxy process and generates enormous cost,” ICI concluded.