Ignore pressure funds put on shareholders to gain proxy votes

The Baltimore Sun

Don't be pressured to vote fund proxies.

Over the past few weeks, several readers dropped me lines to say that they had been surprised by ugly calls from Fidelity Investments about their mutual fund accounts.

They wanted to know how to respond.

Fidelity wasn't really checking up on shareholders and trying to make sure everything is all right - which is how some of the investors first took the call - but rather was calling to drum up proxy votes.

Specifically, Fidelity needs shareholders in many of its mutual funds to vote on a shareholder proposal that would make the firm's investments "genocide-free," avoiding companies known for extreme abuses of human rights.

The proposal in question was filed with more than two dozen Fidelity funds, and with many more issues from T. Rowe Price, Vanguard, Franklin Templeton and others. Specifically, the proposal requests that fund boards "institute oversight procedures to screen out investments in companies that, in the judgment of the Board, substantially contribute to genocide, patterns of extraordinary and egregious violations of human rights, or crimes against humanity."

It is a noble cause, but Fidelity had asked the Securities and Exchange Commission in the fall to exclude the shareholder-driven proposal from its proxies. The basis for Fidelity's argument - and many industry watchers say it has merit - is that investors are allowed to manage their investments, but not to micromanage the process; the SEC does not let shareholders dictate a company's "ordinary business operations," but it also does not let fund firms exclude proposals that raise social issues.

And, so, Fidelity had no choice but to issue proxies in preparation for a March 19 shareholder meeting and then for funds with subsequent meetings tomorrow and May 14.

As much as the firm did not want the vote, it really does not want the issue to linger. As a rule, funds know they can generate enough votes their way to defeat almost any proxy vote, provided they get enough people to make a decision. Getting a quorum, however, is hard to do when most investors do not read proxies, which is why firms solicit votes - a fairly common industry practice - and make those surprising calls to shareholders.

The investors with whom I spoke - including MarketWatch colleague David Weidner, who wrote about his experience - all said they were given little information, no chance to have a new proxy sent to them and almost no information on precisely what they were being asked to decide.

They were asked to make a decision by phone, on the spot.

All felt a bit wronged. A few said they voted against Fidelity, just to spite the company for not giving them much to go on (though they acknowledged having not read the proxy they were sent).

Had they truly wanted to show their displeasure with the vote-solicitation process, however, they should have hung up the phone without voting.

While many proxy issues are about much more mundane - and less emotional - issues than genocide, all proxy votes for mutual funds are supposed to be related to significant issues, usually related to the structure, management firm or operation of the fund.

Typically, a fund needs to get votes representing half of its outstanding shares; two-thirds of that pool is needed to approve a change. More often than not, funds use a solicitor - a cost paid by the shareholders - when it needs to reach quorum.

As such, solicitors want votes - preferably going the company's way - but mostly anything that moves the firm to the level of shares needed to make the election valid. Big investors may get pampered, but many solicitors will not send new proxies to small investors, noting that the fund met its obligation when it sent the original and does not want the expense of another.

If that spurs you to vote against the fund, so be it; the votes help to generate a quorum.

That is precisely why an investor who gets a proxy solicitation and feels a bit mistreated by a fund should withhold the vote. Do not abstain (that counts, too). Just refuse to vote your shares. Then dig out the proxy or go online to see what the issue is and decide - on your own time and with full information - whether and how you would like to vote. The only way to make your vote matter is to make an educated decision about the issues.

In the end, if your mutual fund company is telling you that your vote is important - but is treating you a bit as if you are not deserving of information - put the fund on your watch list, check out the issues that required the vote and make sure the fund is not going to somehow be changed for the worse in the future.

And remember: Fund companies typically do not believe that your votes matter.

All they really care about is that your votes count.


Chuck Jaffe is senior columnist for MarketWatch. His postal address is Box 70, Cohasset, Mass. 02025-0070.

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