Primer on proxy statements: They're dense, rare, but crucial

I MADE A few wrong keystrokes on the Internet last week. Instead of finding the proxy statement of a small fund company, I wound up on a Web site dedicated to one of the world's leading educators on quantum physics.

It's all relative, however, because a typical proxy statement is as understandable as quantum physics to an average investor.


Proxy season for 2001 already is among the busiest in years, with many more fund companies likely to join the fray, thanks to a key Securities and Exchange Commission rule change and a general desire to try to make funds lawsuit-proof.

If you get a proxy, it's crucial that you know what to do next.


A fund's annual report and prospectus must now be written in "plain English," but proxies don't fall under that standard. As a result, they might as well be written in runes, the ancient Nordic alphabet, as far as the average investor is concerned.

What's more, investors don't understand proxies because they just don't get them very often. In fact, investors whose shares are held in a brokerage account or fund supermarket may never get the paperwork because their brokers may be empowered to vote on routine business matters.

Funds undertake the expense of a proxy mailing only when they have something important to take care of, which is why the paperwork is worth watching for. A fund may have years in which it wants to make minor adjustments, but will let those things build up until something major requires attention.

That means the proxies many fund firms will send out this year have a dozen or more shareholder votes to be taken care of. Many are housekeeping, but some are likely to involve the fundamental investment policy of the fund, something that can only be changed with shareholder approval.

When the SEC recently increased a requirement so that a fund must now keep 80 percent of its money in the assets for which it is named - meaning a North American government bond fund couldn't be flush with bonds from Brazil - it set many fund firms into motion. Some are changing names; others, investment policies, so that the fund manager has maximum leeway.

But much of that activity gets buried in a proxy that can cover many funds. Fidelity Investments has had several recent proxies where one document served anywhere from six to 14 funds.

In all cases, what the fund company needs the most is a quorum, usually votes representing half of all outstanding shares. Two-thirds of that pool is needed to OK a change.

Because many investors don't respond to proxies, funds often hire proxy solicitors to send e-mail notices or place phone calls to get out the vote.


Here is where the proxy process gets particularly tricky.

E-mails soliciting your vote often give you nothing but a ballot, without details on what the vote is for. Likewise, phone solicitors often won't send you a fresh copy of the paperwork - a move they can get away with because the fund met its legal obligations when it sent a first notice that you ignored.

In all cases, the solicitors want quick votes, and the way you vote may be unimportant.

So if you ignore a proxy when it first comes and are solicited to vote on it later, learn what is going on, call to complain if you can't get extra paperwork, but don't vote on any issue - even the seemingly innocuous approval of a board - without a full understanding. (At many funds, voting on one issue but not others is treated as if you abstained on certain votes; your proxy still counts toward building a quorum.)

"When funds have a reason to send a proxy, they throw the kitchen sink in there, so you wind up with a lot of confusing proposals at once," says Geoff Bobroff of Bobroff Consulting, an East Greenwich, R.I., firm that counsels fund management. "Not every vote is routine. If you don't understand what they are asking you to vote on, call and ask what's going on. It might be no big deal, but it could change the character of your fund."

Among the votes that might change your fund are those asking you to authorize a 12b-1 sales and marketing fee, any vote to alter the fund's expenses and/or management fee, votes to let the fund concentrate its investment portfolio or to invest in securities that the existing prospectus prohibits.


Changes also could be mostly semantic. Fidelity, for example, wants shareholders to change the investment objective on its Overseas Fund from "Overseas Fund seeks long-term growth of capital primarily through investments in foreign securities" to read simply "Overseas Fund seeks long-term growth of capital." The SEC's 80 percent rule makes this change moot, as it forces the fund to keep the bulk of its holdings in foreign securities.

Management doesn't ask for your input on how to run the fund every day. When they do, it's worth sorting through the proposals and learning fund physics to figure out what's happening and how it might affect your funds.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.