What is Fidelity hiding?

In a white paper bearing the same heading, the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), a Washington-based voluntary federation of leading unions, asked, and answered, just that.

And to make its point even louder, the AFL-CIO has called upon its 13 million members, representing $400 billion in pension assets, to leaflet Fidelity retail offices in 20 major cities this Wednesday.

According to the AFL-CIO, "Fidelity used its clients' share voting power to support captive boards of directors, overpay corporate executives and vote for conflicted audit committees at... troubled companies," firms such as "Enron, WorldCom and other alleged corporate wrongdoers," the union giant alleged.

What proof do they have of these alleged misdemeanors? Proxy votes. Or rather, the AFL-CIO maintains, the lack of them.

Disclosure of individual proxy votes has been a point of contention among mutual funds, shareholders and the SEC lately, and the AFL-CIO's main beef with Fidelity and other complexes is their secrecy concerning the way they vote proxies received by corporate management.

"If Fidelity is the largest shareholder in [a] company, it goes to follow that however Fidelity votes is going to hold significant weight," said Kathy Roeder, an AFL-CIO spokeswoman. "It's worker money," she added, referring to AFL-CIO pension fund investments. "There shouldn't be this shield on how that money is used."

If Fidelity's got nothing to hide, why does the firm withhold this information? AFL-CIO sure has a mouthful to say. Its white paper alleges that Fidelity, as the No. 1 provider of 401(k) plans in the nation, may have an incentive to vote shares to please company management, even if it may not be in the best interest of its shareholders.

According to the federation, "Fidelity faced conflicts of interests, for example, at Enron, which offered Fidelity funds in its 401(k) plan and at Lockheed Martin, where a Fidelity subsidiary was a co-fiduciary for employee benefit plans."

It also says the appointment of former Enron director Frank Savage to the board at Lockheed Martin was approved, despite opposition from 28% of its shareholders. "If Fidelity and one more mutual fund had withheld their votes for Savage, he would not have been re-elected."

AFL-CIO's proof? "We know what they're voting on because shareholder proposals have to be publicly listed," Roeder said. However, according to extra-fine print in the AFL-CIO's own report: "We do not know what the actual vote was, because Fidelity does not disclose it."

However, a large chart prominently placed in the front of the paper attests: "It appears that Fidelity is supporting companies moving to Bermuda to evade taxes." The gist of the chart is the fact that Fidelity is a major, if not primary, shareholder in companies such as Nabors Industries and Tyco International, which recently relocated to Bermuda. The AFL-CIO maintains that despite "worker pension funds [running] vote-no' initiatives against re-incorporation proposals this year [and] worker pension funds [filing] a shareholder proposal asking Tyco's board to reincorporate the company from Bermuda to Delaware," the companies still have not left the sun and beaches behind.

But again, upon closer inspection, the report also concedes further down: "Fidelity has not yet disclosed how it voted on these proposals." It seems to be a double-edged sword. On the one hand, Fidelity's refusal to disclose information makes it appear as though it has something to hide. On the other, its confidentiality makes it impossible to prove these allegations.

Commentary Deadline

Regardless, the AFL-CIO may be winning the battle. The proxy-disclosure rule was passed unanimously by the SEC's five-member commission in late September, requiring mutual funds to report their proxy votes semiannually to the SEC. The proposed rule is in a public-comment stage, ending Dec. 6, after which the SEC is expected to weigh the pros and cons for several months before deciding on how and when it should be implemented.

Fidelity, however, maintains its stance with a guilt-free conscience. Fidelity spokesman Vin Loporchio said: "Shareholders want us to maximize our fund. Our goal is to maximize performance. When we vote proxies, we only consider our shareholders' interests, because it's in our own interest." There are four reasons why Fidelity withholds its proxy voting records, however, Loporchio said:

First, proxy voting guidelines, and thus Fidelity's principles, are available on the Web. Second, Fidelity has a long-standing belief in "quiet diplomacy." With more than 5,000 proxy votes each year, the active voting process involves complex negotiations with companies, he said.

When Fidelity Talks . . .

Third, Fidelity doesn't disclose economic analyses of companies, because "people pay us to do that. Many want to know what we buy and sell, and that's in our proxies," Loporchio said. If that information were to be publicly released, it could have a negative effect on the price of the stock Fidelity portfolio managers own, he said.

Finally, he concluded, proxy voting is a more formal way in which the company makes judgments about management. "Most importantly, we buy and sell stocks every day. If we're not comfortable with a company's management, we don't have to wait for proxy votes. We just sell them right away," he said.

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