WHICH SIDE ARE YOU ON, FOLKS? TRADE GROUP BACKS CORPORATIONS IN PROXY REVAMP, LEAVING ACTIVIST MEMBERS OUTSIDE

A pending vote by federal regulators on proposals to tighten rules affecting shareholder proposals has pitted the Investment Company Institute, the mutual fund industry trade association, against some of its own constituents.

By supporting the proposed revisions, which would make it more difficult for shareholders to get resolutions on proxy ballots, the ICI has aligned itself with big U.S. corporations that want to minimize management challenges from pesky shareholders. But many foes of the measures, such as socially conscious mutual funds that rely heavily on shareholder proposals to pressure companies to address their concerns, are ICI members.

Also opposed are activist investors in closed-end funds, who have turned to resolutions to push advisers to address poor performance and other issues. That’s a conundrum for ICI, considering the trade group has long positioned itself as a champion of fund shareholders.

The Securities and Exchange Commission is expected to vote by the end of this month on amendments to the rules governing shareholder proposals. When the proposed changes were unveiled last September, the agency received more than 300 comment letters, many of them critical.

Some critics of the revisions argue that they would cripple what’s described as the shareholder rights movement by making it nearly impossible to get resolutions on proxy ballots. The changes certainly would make it harder for investors to reintroduce proposals — and easier for companies to exclude them.

“It would completely dismantle the entire shareholder rights arena,” says Amy Domini, president of the $420 million Domini Social Equity Fund in Boston. “You have standards that are not implementable.”

But to other players — including big corporations and Washington-based ICI — the revisions don’t go far enough.

The ICI did not return calls for comment, but a 12-page letter to the SEC concedes the association must walk a fine line.

“Because investment companies are investors as well as issuers, the Institute and the investment company industry have a keen interest in ensuring that any amendments . . . strike a balance between preserving the rights of shareholders and avoiding undue interference with management responsibilities (and the attendant costs and burdens).”

Activists and corporations aren’t divided on all the SEC proposals. Many applaud its plan to reverse the so-called “Cracker Barrel” policy, which stems from a 1992 SEC ruling that barred proposals involving employment matters (such as alleged use of sweatshop labor) by considering them matters of “ordinary business.”

In its letter to the SEC, the ICI supports the “Cracker Barrel” reversal. But it also urges the commission to “correct” some rulings that effectively prohibit closed-end fund companies from excluding certain types of proposals from their proxy materials — such as resolutions that call on boards to consider replacing advisers or buying back shares of funds trading at a deep discount to their net asset value.

ICI also backs an SEC proposal to raise thresholds for shareholders who want to resubmit unsuccessful resolutions, but calls for even tougher standards.

Currently, a company that wants to omit a shareholder proposal from a proxy ballot takes its case to the SEC, which then decides whether the resolution meets any of 13 grounds for exclusion. But the SEC’s rulings as well as the proposals themselves are not legally binding.

” ‘Shut up and just pay the fees!’ That’s what the ICI is saying to stockholders,” gripes Phillip Goldstein, a Pleasantville, N.Y.-based closed-end fund shareholder who manages about $48 million in hedge fund assets.

majority vote ignored

Last summer, Mr. Goldstein got a majority of shareholders to approve his proposal calling on the board of the Clemente Global Growth fund — which had suffered from years of sluggish returns and net-asset-value discounts — to put its management contract up for competitive bid. But the board decided instead to hire a subadviser, Del.-based Wilmington Trust Co., to manage the domestic portion of the portfolio.

This year, Mr. Goldstein is raising the stakes by submitting a proposal to terminate the advisory contract with New York-based Clemente Capital Inc., which declined comment. He’s filed similar proposals with four other closed-end funds.

Amid the controversy, the SEC appears likely to adopt a more moderate revision than the one it proposed. Chairman Arthur Levitt tapped two legal experts — Harvey J. Goldschmid, a professor at Columbia University School of Law, and Ira M. Millstein, senior partner at New York-based Weil Gotshal & Manges LLP — to hammer out a compromise late last year.

“(The opinion) is almost universal that [Cracker Barrel] should be reversed,” says Mr. Goldschmid.

But in a nod to corporations and trade groups like the ICI — whose members may not like the prospect of their own shareholder revolts — the draft nixes an SEC proposal that would have allowed shareholders who own at least 3% of a company’s stock to override management’s decision to omit a proposal.

The draft does bow to shareholder groups — and rejects the ICI line — by scrapping an SEC proposal to increase the thresholds for resubmitting unsuccessful resolutions.

The draft compromise offers another victory to activists. Current rules allow companies to exclude shareholder proposals related to operations that account for less than 5% of their total assets, net earnings and gross sales at the end of the most recent fiscal year and are “not otherwise significantly related” to their businesses. The SEC earlier had proposed dropping the ‘significance’ test, which socially responsible funds consider an essential crowbar.

how much is too much?

“How do you quantify something like child labor?” asks Tim Smith, executive director of the New York-based Interfaith Center on Corporate Responsibility. “A lot of companies would argue that it didn’t meet the standard.”

Still, some say the ICI has clearly come down on the side of fund companies. “The ICI asked . . . to make it more difficult — in some cases, nearly impossible — for closed-end investors to get those ‘annoying shareholder proposals’ on funds’ proxy ballots,” argues Gregg Wolper, a closed-end fund analyst at Morningstar Inc.

“It’s easy to understand why,” he adds. “An (adviser) who runs a fund forever keeps collecting fees forever. And it’s much easier to hold that job forever if no one asks bothersome questions about risk or performance.