October 18, 2021
Subject: File No. S7-11-21
From: J. Alan Reid, Jr.
Affiliation: Former ICI Governor, President of Forward Funds, Founder, ProxyMatch, Inc.
I have been very happy to see the Commission focus on Proxy Voting. Commissioner Allison Lees talk earlier this year, and Chair Genslers Office Hours both suggest a serious intention to address what should be a strong pillar of US public markets- proxy voting.
While many things have changed since 1940, this area of the 1940 ACT seems to have been ignored by the industry, yet deserves actual adherence as stated:
Section 1.b (THE INVESTMENT COMPANY ACT OF 1940)
Upon the basis of facts disclosed by the record and reports of the Securities and Exchange Commission made pursuant to sec- tion 30 of the Public Utility Holding Company Act of 1935, and facts otherwise disclosed and ascertained, it is hereby declared that the national public interest and the interest of investors are adversely affected
(1) when investors purchase, pay for, exchange, receive dividends upon, vote, refrain from voting, sell, or surrender securities issued by investment companies without adequate, accurate, and explicit information, fairly presented, concerning the character of such securities and the circumstances, policies, and financial responsibility of such companies and their management
(2) when investment companies are organized, operated, managed, or their portfolio securities are selected, in the interest of directors, officers, investment advisers, depositors, or other affiliated persons thereof, in the interest of underwriters, brokers, or dealers, in the interest of special classes of their se- curity holders, or in the interest of other investment companies or persons engaged in other lines of business, rather than in the interest of all classes of such companies security holders
(3) when investment companies issue securities containing inequitable or discriminatory provisions, or fail to protect the preferences and privileges of the holders of their outstanding securities
I contend that few employees, registered representatives of the investment managers, board members of the management companies nor of the funds themselves can describe the circumstances, policies or financial responsibility under which they vote (or) refrain voting.
Proxy voting allows investors a voice and transparency into the companies that they invest in. This should be a hallmark of public equity, a feature not available in private markets.
With over 30 years in the investment industry, and over 14 years running a mutual fund group, I am convinced that fiduciaries vote to meet the standards that counsel advises them are in their own best interest (limiting liability) and not of their investors. While this sounds scandalise, it is the outcome of an aggressive plaintiffs bar, and lack of respect for responsibility to the country and to investors spelled out in article 1.a of the 40 Act.
For years, Wall Street ran on the buying and selling of securities, thus driving the focus of the industry, rather than the importance of the role a shareholder has to vote their proxies. As the writers correctly presumed in 1.a(3) such companies may dominate or control, much like you describe in sentence 1, on page 7 under Introduction and Background of your proposed rule (Release Nos. 34-93169 IC-34389 File No. S7-11-21). The investment management industry is not alone here, as study after study show most fiduciaries (often guided by ISS and/or Glass Lewis), regularly vote in a similar fashion.
According to the Federal Reserve, 77% of all US equities are owned by or for the benefit of individuals, I believe those peoples actual values should be represented. While returns are important, there is a duty to our overall economic welfare as described in Section 1.a that all fiduciaries should respect. Recent work regarding company purpose and even statements from The Business Roundtable agree that companies do better when they have considered a broader set of perspectives from both shareholders and stakeholders, a group I call Holders.
Both issuers of equities and the managers of 40 Act funds share responsibility for making this a priority. Today, many of them claim abilities to create driverless cars, robots, wireless communications, mass media, global entertainment and even alter DNA, yet fail to make any effort to allow their investors a voice or offer transparency. NASDAQ / FedReserve https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/#series:financial-assets
Regarding the issue at hand, all 40 Act companies should disclose on their websites their intended proxy votes for their investors review, at least two weeks prior to the vote. One would think funds would welcome such interaction with their actual investors. Investment companies should also disclose votes for other clients that may be different than those voted for the fund, and the reasons for this.
While I suspect this will not be well received by many, I will ask that any fund describing itself as ESG be mandated to such a regiment, as failure to do so would surely void qualification as an entity concerned about Governance. While not always the case, many would also fail under any viable Social moniker as well.
Regarding Securities Lending, I was a member of the ICI working Group at The Federal Reserve that met in 2009-2012, and one of the only Governors present. I will call on those discussions for my statements, having discussed these matters with the majority of the industry, as all the large players were there. Forward Funds were the only ones to discuss shutting SecLending down prior to the fall of 2008. While no one present believed many of their shareholders had any idea of the process, it did withstand significant turmoil in the upcoming months. At that time, and still today, I am aware of little revenue on a percentage basis that is made by this activity, except in the most speculative areas. These revenues had historically depended on high short-term rates or significant volatility. One might also question if the cash pool used for collateral was supporting other business initiatives. Today I must question how many investors would agree to such undertaking, with full disclosure of risk and complexity, understanding that their voice, their proxy vote would be given up, as the securities are rarely called to vote proxies?
Secondly, while a larger question, is allowing someone else to vote the lent security a benefit for shareholders? Could someone buy that right to manipulate the vote? Lastly, is there any case where our economy is served by short-term shareholders given the right to vote these shares?
I can not see why a certain type of proxy vote (say on pay) would be due any preference over any other. This appears to be politically driven. Should one want to pursue such work, they should consider the board members, the compensation committee chair, as well as their votes on similar topics at other companies and at companies they worked at.
Clearly I applaud the Commission's work on proxy governance, but I must ask that we actually focus on the law, the purpose of the 40 ACT and not the inconveniences to the marketplace.
Your truly,
J. Alan Reid, Jr.
Alan Reid has authored prior comments to the SEC on money markets, as well as mutual fund liquidity and mutual fund market timing. His career includes years at Morgan Stanley Dean Witter where was a Western Regional Consultant, before running trading, operations, call centers and mutual funds for Morgan Stanley Online. Mr. Reid founded Forward Funds and ReFlow Management, serving 14 years as CEO of Forward Management, LLC. During this period his firm ran The Sierra Club Funds, and were pioneers in mutual fund alternative products, coining the term Liquid Alts. He served on The Investment Company Institute Board of Governors from 2008-2015. Recently Alan has focused on proxy governance, looking to ensure shareholders understand and enjoy their voice and transparency in public markets.