Mutual funds feel the heat from Enron

Labor unions and socially conscious investing funds are using the Enron fiasco to push traditional fund companies to disclose their proxy votes.

And they have gotten some encouraging words from top Securities and Exchange Commission officials.

Those in the fund industry oppose the idea, saying that they believe it is in the best interest of their shareholders to keep the proxy votes confidential.

“We are in the process of putting something together to deal with the issues you’ve raised,” SEC Chairman Harvey Pitt said in response to the 13 million-member AFL-CIO’s renewed call for requiring mutual funds to disclose proxy votes.

strong voice

“I think these are very significant issues, and we’ve actually heard from a lot of mutual fund investors who support the proposals that you have raised,” Mr. Pitt said at a recent investor summit in Washington, where the AFL-CIO repeated its call for the disclosures.

“We’re taking a very hard look at it,” Mr. Pitt added.

Paul Roye, director of the SEC’s division of investment management, said at the summit that a pending proposal would require disclosure of proxy-voting practices and whether proxy votes would be made available to clients by mutual fund managers and other investment advisers on the ADV registration form.

“We are moving to put more disclosure out there … in this area,” said Mr. Roye.

Damon Silvers, the AFL-CIO’s associate general counsel, raised the issue at the SEC’s summit. He accused Fidelity Management and Research Co. in Boston of possibly casting its proxy votes to re-elect an Enron director, Frank Savage, to the board of Lockheed Martin Corp. in Bethesda, Md.

He acknowledged, however, that the 13 million-member labor group could not be sure, because Fidelity refused to say how it voted.

“They refused to tell their customers, their clients, whether or not they did this,” Mr. Silvers said at the summit. “We do not believe that most Americans would like to see their money used to re-elect an Enron director to watch over more of their money.”

The AFL-CIO has taken the stand that Enron directors should not be re-elected to other boards. Mr. Savage, who has served on the board of Lockheed Martin since 1990 and is a former chairman of Alliance Capital Management LP of New York, is the only Enron director so far to win re-election to another board. Three others have lost posts.

A Lockheed Martin spokesman, Jim Fetiq, says Mr. Savage “has a very long and distinguished affiliation with [Lockheed Martin]. He has been responsible for some of our disclosure policies. They are noted industrywide for their transparency and progressiveness, and we are pleased that he has been re-elected.”

Richard Metcalf of the Washington-based AFL-CIO’s office of investment, says a relatively high 28% of shareholders withheld their vote for Mr. Savage.

He says Boston-based Fidelity, the largest U.S. fund company, with $862 billion in assets, held 40.7 million shares, or 9.25%, of Lockheed Martin’s stock at the time of the April proxy vote re-electing Mr. Savage. That made Fidelity the third-largest holder of the company’ s stock.

“A lot of these funds will automatically vote in favor of management and the board,” says Mr. Metcalf. “This re-raised this whole question for mutual funds.” Pension funds are required under regulations to divulge their proxy votes, but mutual funds are not, he says.

The AFL-CIO and the Teamsters union have joined the Financial Planning Association and consumer groups in asking the SEC to require funds to give more disclosure about their holdings, and the two labor groups also asked for disclosure of proxy votes and voting policies.

Mercer Bullard, founder and chief executive of Fund Democracy LLC in Chevy Chase, Md., a mutual fund shareholder advocacy group, started the drive for more fund disclosure.

“The re-election of Savage … exposes the risk that the reason Fidelity and other fund firms would [vote for Mr. Savage] is to win business from Lockheed,” such as management of 401(k) plans, Mr, Bullard says.

fidelity’s view

A Fidelity spokesman, Scott Beyerl, says Fidelity doesn’t discuss its client relationships. But he says the suggestion of a possible conflict between 401(k) management and proxy votes is “absurd.”

“Our proxy-voting guidelines make no distinction between companies with whom we have a relationship and those with whom we do not provide other services,” he says.

Mr. Beyerl says the company keeps its proxy votes confidential because it “allows us to continue to have candid conversations with companies on important issues regarding company management.”

That is the position taken by most other mainstream mutual fund companies. Socially conscious investment companies, however, are moving toward disclosing their proxy votes, with an eye toward pushing companies and investors toward their style of investing.