November 3, 2015 Okapi’s Laura Bissell Quoted in BoardIQ Article
If You Can’t Get Over the Quorum Bar, Set the Bar Lower
Article published on November 3, 2015
By Greg Saitz
Along with the rather routine business of electing fund directors at SEI, a pending proxy also asks shareholders to approve a less common proposal – reducing quorum requirements to hold a meeting from a majority of shares to one third. It’s a rarely seen request among open-end funds, experts say, but one that could save complexes lots of money.
SEI’s quest to lower the quorum bar comes at a time when fund groups find it harder to get enough shareholders to respond so they can meet the minimum requirements for holding a meeting. Shareholder indifference and a rise in the number of investors who don’t want to be called about such matters have driven up the cost of fund proxies, experts say, so having to wrangle fewer votes is money saved for funds or advisers.
SEI’s proxy asks shareholders in four of its trusts comprising 50 funds to reduce the quorum requirement by approving amendments to the trust declarations. The fund group has voting authority on about 34% of outstanding shares in the SEI Daily Income Trust but 6% or less for the other trusts.
“The present quorum requirement places considerable cost burdens on those funds due to the expenses related to proxy voting,” a filing says. “It is generally quite difficult to get shareholders to vote in connection with a shareholder meeting. Given the diverse and widely held shareholder base for the SEI funds, it is very costly and time consuming to get a quorum of shareholders.”
Quorum requirements in two other trusts, SEI Institutional Investments Trust and SEI Asset Allocation Trust, are spelled out in the trusts’ bylaws, allowing the fund board to change them without shareholder approval. The meeting is set for Jan. 15.
SEI estimates it will cost $3.1 million for printing and mailing the proxy, legal fees and proxy solicitation services of calling, e-mailing or otherwise contacting shareholders to get them to vote. The proxy also notes the funds will pay Broadridge about $500,000 plus expenses, although it is unclear whether that amount is part of the larger fee.
Proxy costs can vary widely by fund group depending on the shareholder base, how shares are distributed and quorum requirements, proxy solicitation experts say. But on average, it can cost between $1 and $1.50 per shareholder to print and mail proxies, and when combined with other expenses, shareholder meetings can top several million dollars, according to these experts and ’40 Act attorneys.
“It’s a very expensive process for [funds], so every penny they can squeeze out of it” means savings for funds, says Peggy Schooley, general manager and senior vice president of Broadridge’s mutual fund proxy division.
Many fund groups’ declaration of trusts already have the lower quorum threshold of one third, and newer funds hardly ever set a majority of shares outstanding as the quorum minimum, attorneys say. American Century and Dimensional Fund Advisors, both of which held shareholder meetings earlier this year, have minimum quorum requirements of one third, filings show.
Schwab funds, however, which is seeking shareholder approval next month to consolidate its fund boards, still requires a majority of shares to reach a quorum for electing directors. The related Laudus Trust requires the somewhat lower 40% of shares eligible to vote for a quorum.
Fidelity asked shareholders of some funds in 2009 to reduce the quorum requirement from a majority of shares to one third, a proposal the firm said was intended to bring those funds in line with other funds in the complex. At the time, Fidelity estimated costs to solicit investors holding the 170 billion outstanding shares at about $950,000.
Other fund complexes will likely make similar proposals, Laura Bissell, senior managing director and head of the mutual fund group at Okapi Partners, writes in an e-mail.
“For certain proposals, such as the election of trustees or directors, which frequently carry a plurality of votes cast requirement, lowering the quorum to hold meetings would allow a fund to more readily achieve the votes needed,” she writes.
The challenge to gathering enough votes when minimums are higher, Bissell says, is a combination of “overwhelming shareholder apathy” and an increase in the percentage of fund shares held by investors who designate themselves “objecting beneficial owners.” These so-called OBOs hold shares via omnibus accounts and essentially put themselves on a do-not-call list from vendors such as proxy solicitors, Schooley says. Conversely, it’s OK to contact non-objecting beneficial owners, or NOBOs.
The service providers can send a ballot to objecting beneficial owners, but that’s about it, says Paul Torre, who heads AST Fund Solutions’ mutual fund division. And mailings aren’t that effective, he notes. The initial contact via mail usually generates about a 12% response; a follow-up mailing gets between 3.5% and 5%; and a third mailing prompts just a 2% or 3% response, he says.
In the ’90s, the split between non-objecting and objecting beneficial owners was about 60/40, Torre says. Now on most campaigns it’s 50/50, and with some funds, objecting beneficial owners are 60% of the shareholder base. “It’s growing bigger than it’s ever been,” he says.
In SEI’s case, even if shareholders approve the quorum change, the proxy notes, it will apply only to certain proposals. The ’40 Act mandates that a valid meeting on some issues, such as advisory contracts or management fee increases and 12b-1 plans, can only be held once a majority of outstanding shares have voted.
And while proposals to reduce quorum requirements for funds are not considered controversial among proxy solicitors, advisory service ISS’s proxy voting guidelines that many mutual funds adopt recommend voting against such a proposal “unless there are compelling reasons to support” it.
An ISS spokesman declined to comment on SEI’s proposal specifically but says generally that if a fund is unable to get 50% of shares to vote and there are “no major holders in the fund’s stock, we will likely support the proposal.” An SEI spokeswoman did not return a call for comment.