May 16, 2024 Laura Bissell Featured in Fund Directions Article on Mutual Fund Voting

First appeared in Fund Directions, a publication of With Intelligence

ICI group wants to let funds decide when shareholders refuse to vote

Handing small decisions to fund boards can keep things moving despite growing difficulty getting
shareholders to vote on anything

Outdated regulations requiring shareholder input on management decisions are forcing
funds to spend time and money on proxy elections in which shareholders clearly don’t want
to participate, according to a leader of an Investment Company Institute (ICI) group working
on a series of regulatory proposals ICI members believe will modernize and improve fund
regulations.

Updating proxy rules are just one of the goals on the agenda of an ICI working group that
plans to present SEC officials with a list of suggestions on how to modernize rules that are
particularly vexing to fund advisers and fund boards.

Proxy rules requiring that shareholders approve certain routine fund decisions are
particularly troublesome, however, due to the growing difficulty of getting shareholders to
respond no matter how much effort funds put into the election, according to Bruce Leto, a
partner at Stradley Ronon who serves as co-head of the ICI working group.
The group previewed its efforts during a panel session titled Modernizing the 1940 Act
Regulatory Regime at the ICI’s Investment Management Conference in March.

“It’s become extremely expensive to get shareholder votes – and hard to get them –
because shareholders don’t necessarily care so much about some of these things,” Leto said.
The working group is made up primarily of lawyers from the law firms Ropes & Gray, Dechert
and Stradley Ronon. Group members also include members of the ICI and Independent
Directors Council (IDC), Leto told Fund Directions.

The group, which formed in early 2022, has been developing ideas for regulatory changes
that can help make funds more competitive and aims to propose a realistic framework for
“modernizing” parts of the Investment Company Act later this year, Leto said.
The rising difficulty of securing shareholder approvals through proxy elections has made it
one of the group’s primary targets, Leto said.

Falling voter participation rates have forced proxy solicitors to spend more time trying to
reach shareholders by phone and mail, which in turn has made it more expensive — and
sometimes impossible, as in the case of a failed Nuveen fund merger in June 2019 — for
funds to obtain the approvals required to conduct ordinary business.

An |Cl survey of fund proxy campaigns between 2012 and 2019 found that 22 campaigns
cost over $1m, while eight cost over $10m. The most expensive campaign captured by the
survey cost $108m.

Within the past year, the Invesco Funds estimated that a November 2023 proposal to elect
new board members would cost approximately $13m, and the T. Rowe Price Funds disclosed
in May 2023 that a similar proxy would cost an estimated $12.7m.

“Some of these big, massive fund groups at the top of the food chain … the dollars that were
spent by some of them on some these routine things like electing trustees, the numbers are
staggering,” Leto said.

At the ICI conference in March, members of the group discussed ideas that could make proxy
elections simpler and less frequent – such as allowing boards to make minor decisions on
their own without needing to seek shareholder approval, loosening the requirement that
two-thirds of a board must be elected by shareholders, allowing electronic delivery of proxy
materials, and raising the percentage of cast votes needed to win an election in exchange
for reducing the size of the quorum needed to hold one.

There are many situations in which getting rid of fund shareholder approval requirements
wouldn’t actually change the shareholder experience, because proxy votes are often
redundant with board oversight, Leto argued.

He pointed to the selection of independent fund auditors, which fund audit committees
currently have to recommend to shareholders for their approval.

“The audit committees actually have a lot of substantive power over auditors. They’ve got
to review the services and review the fees,” Leto said. “So having this extra approval by the
board and then the shareholders is — mean, how many approvals do you need?”
Another example is the process for changing a fund’s primary investment objective.

Currently, any change, no matter how minor, requires approval from shareholders. Members
of the working group argued, however, that the fund managers could pursue those goals
more effectively if some kinds of small changes to their objectives could be approved by the
board rather than by waiting for a major proxy effort with shareholders, Leto said.

He was quick to say that the group’s expected proposals would allow funds to skip
shareholder approvals only in limited situations that met very specific conditions.
“There would have to be notice to shareholders [of any change], and it would have to be
something that was not like a primary policy, or a primary strategy,” he said.

The working group’s overall theory, however, is that funds shouldn’t have to spend their
shareholder’ assets struggling to get input from shareholders who don’t want to be
bothered with most of the issues they’re asked to approve.

“The question is, do the shareholders really care? | mean, the board’s getting all the
information about this [anyway]. Do the shareholders really care?” Leto said.

Retrying the proxy problem with a fund-focused approach

This is not the first time ICI has tried to tackle proxy regulations. In 2019, the association put
together a broad-based working group that included public corporations, fund advisers,
broker-dealers, and proxy solicitors in an effort to propose regulatory solutions designed to
reverse plummeting rates of proxy participation.

Unfortunately, according to the group’s final report, the group represented so many constituencies with differing points of view that the group found it impossible to reach a consensus on how to approach the problem. The current working group, by contrast, is focused on a fund-specific point of view and operates under the assumption that declining proxy participation is a permanent change in the market.

“The view is that shareholders don’t care about it so much,” Leto said. “That’s an underpinning of some of the topics that we’ve been discussing.” The working group will likely vet its proposals with shareholder advocacy organizations before it publishes them later this year, Leto said.

Some industry participants may disagree with proposals aimed at reducing the frequency of proxy elections, however.

Fund shareholders have indeed come to view their investments more passively, but
shareholder education is more to blame than the frequency of proxy elections, argues Laura
Bissell, a senior managing director at proxy solicitor Okapi Partners, which took part in the
2021 ICI working group.

“There is a large disconnect happening in the industry whereby a financial advisor often has
discretion to move their clients’ assets into different investments however they see fit based
on market conditions, but then does not retain the voting rights for those investments – a
fact that most shareholders do not know,” Bissell told Fund Directions in an email.

“The retail shareholder expects their financial advisor to take care of their financial matters
so ignores attempts at prompting a response, or looks to their advisor for advice, which the
FA is often hampered from providing due to compliance concerns,” she wrote.