Mutual fund shareholders now will know how their funds’ directors vote on such key issues as executive compensation and the independence of board members as a result of a Jan. 23 U.S. Securities and Exchange Commission (SEC) vote. By 4-1, the SEC adopted a new rule compelling mutual funds to disclose their proxy votes—an action the AFL-CIO has sought since petitioning the SEC in December 2000. Funds failing to make the information available to shareholders or the SEC will be liable for potential fraud.
Once a year, publicly traded companies hold meetings in which their shareholders vote on proposals that shape corporate governance. Shareholders—including mutual funds, which now own some 20 percent of publicly traded securities and manage approximately $3 trillion of Americans’ investment dollars—vote on these proposals using ballots known as proxies. Now, mutual funds must tell their investors how they voted.
The SEC proposed the rule in September 2002 and received 8,000 letters on the issue—more than any on any previous rule change. The vast majority of comments, including many from workers and union-sponsored pension funds, supported the rule change.
New Rules Shines Light on Conflicts of Interest
The effect of the rule will be to allow mutual fund investors, including workers with individual 401(k) retirement plans, to determine whether mutual funds are casting proxy votes in their best financial interests, as required by law, or to curry favor with corporate executives who can give them lucrative contracts. “Now a mutual fund’s own shareholders will know what corporate CEOs already typically know—how that mutual fund casts its proxy votes,” says AFL-CIO Secretary-Treasurer Richard Trumka.
The AFL-CIO reiterated its call for the rule—petitioning the SEC again in August 2002—as part of the union movement’s 2002 “No More Business As Usual” campaign, launched after unprecedented executive fraud at Enron Corp., WorldCom Inc. and other corporations.
Last year, hundreds of union and community activists rallied at the offices of Fidelity Investments, the nation’s largest mutual fund, to demand it disclose proxy votes on corporate proposals, including the appointment of an Enron director to the board of aerospace giant Lockheed Martin Corp. and the re-incorporation of Connecticut-based toolmaker Stanley Works in the tax haven of Bermuda. They also demanded Fidelity cease opposing the proposed new SEC rule.
UNITE President Bruce Raynor, who took part in a Boston rally, calls the new rule a real victory for corporate reform. “No longer will mutual funds like Fidelity be able to hide in secrecy. If they vote their proxies to further corporate greed at the expense of working people’s investments, we’re going to know about it and hold them accountable.”
Fidelity and Tyco: Conflict of Interest Harmed Stockholders
Supporters of the rule say it is needed to illuminate potential conflicts of interest that can lead mutual funds to cast proxy votes damaging to shareholder value. John Bogle, founder and former CEO of the Vanguard Group, the nation’s second largest mutual fund, says his industry faces “extraordinary conflict” when voting proxies.
For example, Fidelity voted against a 1998 Electrical Workers pension fund-sponsored proposal calling for a majority of independent directors, free from personal or financial ties to executives, to become part of Tyco International Ltd.’s board. Fidelity was Tyco’s largest shareholder with the most proxy votes, just as it was at Enron and WorldCom. Fidelity—which in 1999 made $2 million running Tyco employee benefit plans—voted against the union’s proposal, which lost.
In 2002, two former top Tyco executives were charged in a massive $600 million fraud scheme. Investors fled and approximately $80 billion in shareholder value evaporated as Tyco’s stock plummeted. While nine Tyco board members belatedly voted not to nominate themselves for re-election, they could not restore workers’ savings.
Learn More
Read the statement by AFL-CIO Secretary-Treasurer Richard Trumka on the SEC vote.
Check out the Securities and Exchange Commission ruling.
Investors urge Fidelity to come clean.
Read AFL-CIO President John Sweeney's remarks on mutual fund disclosure at the National Press Club.
AFL-CIO and allies step up pressure to force Fidelity to disclose proxy votes.
AFL-CIO Secretary-Treasurer Richard Trumka, UNITE President Bruce Raynor, 300 workers tell Fidelity: 'Stop the secrecy!'
Activists tell Fidelity to disclose shareholder votes.
