Posts Tagged ‘Mutual funds’

An Informed Approach to Issues Facing the Mutual Fund Industry

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Thursday April 10, 2014 at 9:22 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Mutual Fund Directors Forum’s 2014 Policy Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As a practicing securities lawyer for more than thirty years, I have in the past advised boards of directors, including mutual fund boards, and I am well acquainted with the important work that you do. I also understand the essential role that independent directors play in ensuring good corporate governance. As fiduciaries, you play a critical role in setting the appropriate tone at the top and overseeing the funds’ business. Thus, I commend the Mutual Fund Directors Forum’s efforts in providing a platform for independent mutual fund directors to share ideas and best practices. Improving fund governance is vital to investor protection and maintaining the integrity of our financial markets.

…continue reading: An Informed Approach to Issues Facing the Mutual Fund Industry

Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications

Editor’s Note: John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School.

The 2010 Dodd-Frank Act mandated over 200 new rules, bringing renewed attention to the use of cost-benefit analysis (CBA) in financial regulation. CBA proponents and industry advocates have criticized the independent financial regulatory agencies for failing to base the new rules on CBA, and many have sought to mandate judicial review of quantified CBA (examples of “white papers” advocating CBA of financial regulation can be found here and here). An increasing number of judicial challenges to financial regulations have been brought in the D.C. Circuit under existing law, many successful, and bills have been introduced in Congress to mandate CBA of financial regulation.

…continue reading: Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications

Corporate Political Spending and the Mutual Fund Vote

Posted by Bruce F. Freed, Center for Political Accountability, on Monday December 9, 2013 at 9:33 am
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Editor’s Note: Bruce F. Freed is president and a founder of the Center for Political Accountability. This post is based on the CPA’s Annual Mutual Fund Survey; the full report, including a description of the data source and appendix, is available here.

Mutual funds’ support for corporate political disclosure reached a new high in 2013, according to a ten-year analysis by the Center for Political Accountability. Forty large US mutual fund families voted in favor of corporate political spending disclosure an unprecedented 39% of the time, on average.

CPA’s review of mutual fund votes looks at how 40 of the largest U.S. fund families voted on 276 shareholder requests for disclosure of corporate political contributions at U.S. companies over proxy seasons from 2004 to 2013 (covering shareholder meetings from 1 July 2003 to 30 June 2013). Together, these fund families manage around $3.3 trillion in U.S. securities, according to Morningstar® fund data, and control a large portion of the shareholder vote in US securities.

…continue reading: Corporate Political Spending and the Mutual Fund Vote

The Separation of Ownership from Ownership

Editor’s Note: Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Arthur H. Kohn and Julie L. Yip-Williams; the complete publication, including footnotes, is available here.

The increase in institutional ownership of corporate stock has led to questions about the role of financial intermediaries in the corporate governance process. This post focuses on the issues associated with the so-called “separation of ownership from ownership,” arising from the growth of three types of institutional investors, pensions, mutual funds, and hedge funds.

To a great extent, individuals no longer buy and hold shares directly in a corporation. Instead, they invest, or become invested, in any variety of institutions, and those institutions, whether directly or through the services of one or more investment advisers, then invest in the shares of America’s corporations. This lengthening of the investment chain, or “intermediation” between individual investor and the corporation, translates into additional agency costs for the individual investor and the system, as control over investment decisions becomes increasingly distanced from those who bear the economic benefits and risks of owners as principals. The rapid growth in intermediated investments has led to concerns about the consequences of intermediation and the role of institutional investors and other financial intermediaries in the corporate governance process. These concerns are particularly relevant against a background of increasing demands for shareholder engagement and involvement in the governance of America’s corporations.

…continue reading: The Separation of Ownership from Ownership

SEC Sanctions Adviser, Broker-Dealer and Their Owner Over ETF Trades

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday November 17, 2013 at 9:11 am
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Editor’s Note: The following post comes to us from Eric R. Fischer, partner in the Business Law Department at Goodwin Procter LLP, and is based on a Goodwin Procter Financial Services Alert by Jackson B. R. Galloway.

The SEC settled claims against a registered investment adviser (the “Adviser”), its affiliated broker-dealer (the “Broker-Dealer”), and the founder, owner, and president of each (the “CEO”) that related to (1) investments in Class A shares of underlying funds made by funds managed by the Adviser (the “Funds”) and (2) commissions paid by the Funds to the Broker-Dealer for trades in exchange-traded funds (“ETFs”). Without admitting or denying its findings, the Respondents agreed to the settlement order (the “Order”), available here, which this post summarizes.

…continue reading: SEC Sanctions Adviser, Broker-Dealer and Their Owner Over ETF Trades

Remarks to the Independent Directors Council Annual Fall Meeting

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 13, 2013 at 9:21 am
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Editor’s Note: The following post comes to us from Norm Champ, director of the Division of Investment Management at the U.S. Securities and Exchange Commission. This post is based on Mr. Champ’s remarks at an Independent Directors Council Annual Fall Meeting; the full text, including footnotes, is available here. The views expressed in this post are those of Mr. Champ and do not necessarily reflect those of the Securities and Exchange Commission, the Division of Investment Management, or the Staff.

It is a privilege to appear before a group that is so important to the strength and integrity of the fund industry. Independent directors have significant responsibilities, and it requires tremendous effort and time on your part to do your job well. I applaud your efforts to learn from the professionals who are participating in this conference. The insights of the panels you heard yesterday and this morning, and those you will hear after lunch will provide valuable information.

The importance of mutual funds in the lives of American investors is clear. Mutual funds hold close to $14 trillion of the hard earned savings of over 53 million American households. The majority of Americans access the markets through mutual funds. They invest in funds, and hope their investments will grow, for many reasons—to make a down payment on a house, to save for a college education, and ultimately to pay for a retirement.

…continue reading: Remarks to the Independent Directors Council Annual Fall Meeting

SEC Unanimously Votes to Propose Money Market Funds Reforms

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday June 22, 2013 at 11:18 am
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Editor’s Note: The following post comes to us from Frederick Wertheim, partner focusing on investment management and broker-dealer regulation at Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication.

On June 5, 2013, the SEC voted unanimously to propose alternatives for amending rules that govern money market mutual funds under the Investment Company Act of 1940. Two alternative reforms to rule 2a-7 under the Investment Company Act of 1940 could be adopted separately or combined into a single reform package:

  • Alternative One: Floating Net Asset Value (“NAV”): The proposal would require all institutional prime money market funds to sell and redeem shares based on the current market value of the fund’s portfolio securities, rounded to the fourth decimal place, rather than at a $1.00 stable share price. Retail and government money market funds would be exempt from the floating net asset value requirement and would be allowed to continue using the penny-rounding method of pricing to maintain a stable share price but would not be allowed to use the amortized cost method to value securities.
  • Alternative Two: Liquidity Fees and Redemption Gates: Money market funds, other than government money market funds, would be required to impose a 2% liquidity fee if the fund’s level of weekly liquid assets fell below 15% of its total assets, unless the fund’s board of directors (a “Board”) determined that it was not in the best interest of the fund or that a lesser liquidity fee was in the best interests of the fund. After a fund has fallen below the 15% weekly liquid assets threshold, the Board would also be able to temporarily suspend redemptions in the fund for no more than 30 days in any 90-day period.

…continue reading: SEC Unanimously Votes to Propose Money Market Funds Reforms

The Separation of Investments and Management

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday April 29, 2013 at 9:28 am
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Editor’s Note: The following post come to us from John Morley, Associate Professor of Law at University of Virginia School of Law.

This paper suggests that the essence of these funds and their regulation lies not just in the nature of their investments, as is widely supposed, but also—and more importantly—in the nature of their organization.

Specifically, every enterprise that we commonly think of as an investment fund adopts a pattern of organization that I am calling the “separation of investments and management.” These enterprises place their securities, currency and other investment assets and liabilities into one entity (a “fund”) with one set of owners, and their managers, workers, office space and other operational assets and liabilities into a different entity (a “management company” or “adviser”) with a different set of owners. Investment enterprises also radically limit fund investors’ control. A typical hedge fund, for example, cannot fire and replace its management company or its employees—not even by unanimous vote of the fund’s board and equity holders.

I explain this pattern of organization and explore its costs and benefits. I argue, paradoxically, that the separation of investments and management benefits fund investors by limiting their control over managers and their exposure to managers’ profits and liabilities.

…continue reading: The Separation of Investments and Management

Are Mutual Funds Active Voters?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday January 25, 2013 at 9:12 am
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Editor’s Note: The following post comes to us from Peter Iliev and Michelle Lowry, both of the Department of Finance at Penn State University.

In our paper, Are Mutual Funds Active Voters?, which was recently made publicly available on SSRN, we document that mutual funds vary significantly in how they fulfill their fiduciary duty to vote their shares in shareholders’ interests. Approximately 25% of mutual funds vote with ISS on nearly all company agenda items throughout our five-year sample period. However, many other mutual funds disagree frequently with ISS, particularly on contentious votes. We find that certain types of funds are more likely to find it optimal to incur the costs of evaluating the necessary information to independently assess the items up for vote. For example, large funds and funds from top 5 families can spread the costs over a wider asset base, and low turnover funds are more likely to own the stocks long enough to realize the valuation effects of the vote outcome and any consequent changes in company governance. We would thus expect such funds to be more likely to actively vote. A summary measure of fund activism, which is based on six fund characteristics, highlights the extent to which variation in funds’ costs and benefits of actively voting translates into dramatically different voting patterns. Across a sample of contentious compensation and governance votes, we find that passive funds follow ISS in 86% of the compensation and 77% of the governance votes, compared to analogous rates of only 15% and 19% among actively voting funds. Similarly, across a sample of contentious director votes, passive funds are approximately three times more likely than active funds to follow ISS.

…continue reading: Are Mutual Funds Active Voters?

Survey of Mutual Fund Support for Corporate Political Disclosure

Posted by Bruce F. Freed, Center for Political Accountability, on Sunday December 23, 2012 at 9:56 am
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Editor’s Note: Bruce F. Freed is president and a founder of the Center for Political Accountability. This post is based on the CPA’s Annual Mutual Fund Survey; the full report is available here.

The Center for Political Accountability released on December 10, 2012 its annual survey of mutual fund support for corporate political disclosure. The analysis, which is available on CPA’s website, reviewed how 40 of the largest mutual fund families voted on shareholder resolutions that asked for disclosure of political spending based on the CPA model.

The review’s key findings include the following:

…continue reading: Survey of Mutual Fund Support for Corporate Political Disclosure

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