It's time for fund companies to show their hands.

The new mutual fund corporate proxy voting disclosure rule that the Securities and Exchange Commission proposed at the height of the corporate accounting scandals nearly two years ago, takes effect this week -- drawing both applause and criticism. And even though the most enthusiastic proponents don't expect investors to take much notice at first, they do foresee interest in proxy votes gaining steam.

Those in favor see the new rule as a major victory for the increased transparency that will allow fund investors to see exactly how their fund managers are voting on various issues. That will allow them to gauge if their fund managers are voting in a way that is consistent with their own values, they reason. Detractors aren't thrilled with the new responsibility and the costs involved in collecting voting statistics, as well as preparing and filing the new document.

Barry James, executive vice president of James Investment Research of Dayton, Ohio, which manages $132 million among four James Advantage Funds, said his cost will top $22,000. That is a lot to a firm that manages total assets of $710 million and is looking to soon absorb additional costs due to other new SEC regulations. In fact, James spoke to his fund boards last week about potentially raising the advisor's all-inclusive management and administrative fee.

If funds don't pass along these additional costs to investors, they'll undoubtedly see their profit margins fall, an option some view as preferable. "I bet most advisors will eat the cost," said Tom Westle, a partner in the New York law firm of Blank Rome, who estimated that proxy disclosure will cost funds somewhere between $15,000 and $25,000 whether they do it themselves or outsource the task. But the case could be made that this is a fund expense, he added.

New Revelations

Open-end and closed-end fund advisors must file the new form N-PX annually with the SEC, detailing all of the votes that managers have or haven't made over the past 12 months ending June 30. Should a fund investor ask for this information, the advisor must make it available. They also have the option of posting it to their Web site. The form requires advisors to give a brief description of each proposal for voting, the date of the meeting, whether the proposal was from management or a shareholder, and the fund's vote, even if it's an abstention. Funds must also include in each prospectus's statement of additional information (SAI) the policies, procedures and guidelines that fund management uses to vote these corporate proxies.

The SEC's impetus for the passage of this rule was twofold: First, it wanted to be clear that fund advisors should take the power of their corporate votes very seriously. "The increased equity holdings and accompanying voting power of mutual funds place them in a position to have enormous influence on corporate accountability," the SEC noted in its final rule pronouncement. But the SEC also wanted to be sure that this information would trickle down to the ultimate fund investors. "This increased transparency will enable fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies, which may have a dramatic impact on shareholder value," the SEC explained.

Critics question whether investors, many of whom don't bother to read and digest fund prospectuses and often ignore their own fund's proxy requests, will even bother to notice the newly revealed information, or even understand what it all means. Issues can range from electing directors and approving independent auditors, to voting for or against the separation of the jobs of chairman and CEO, and executive compensation plans. Also up for vote can be social issues, such as addressing the impact and potential financial risk associated with climate changes and global warming and the expansion of diversity in a corporation's boardroom so that more women and minorities are included.

In a press teleconference last week, Anita Green, vice president for social research at the socially managed Pax World Funds of Portsmouth, N.H., admitted that there may be resistance among fund advisors in the beginning. She said that fund companies are likely to initially vote with corporate management and make it difficult for investors to obtain information about their votes. But that's unlikely to matter considerably to investors, she added, since most are unlikely to wade through the voluminous information the proxy disclosure will create.

In fact, that had been one of the industry's main arguments against the rule in the first place--that it would require funds to generate massive amounts of information that would only fall by the wayside. Nonetheless, in spite of a slow beginning, Green foresees interest in the proxy votes gaining steam, and potentially even causing a backlash among investors, especially on sensitive issues. She even foresees a cottage industry for collecting a fund company's data, distilling it and then presenting it in a readable format.

However, even though Green works at a socially responsible investing fund company, she doesn't foresee ethics overshadowing investors' primary concerns for performance and expense ratios.

"The eventual impact has yet to be seen," agreed Nahala Durrani, managing director for the social investment research service of Institutional Shareholder Services, the proxy and corporate governance service company. But the disclosure, especially when a fund advisor votes against a management-led proposal, can indicate an informed and engaged fund manager, Durrani said.

Still yet to be seen is how fund managers will tackle voting potential conflicts of interest, such as situations when a fund group may be vying for or already managing a company's 401(k) plan. The SEC now requires funds to include such policies in their SAIs. In many cases, the advisor will bring such a conflict to the board of directors or a subcommittee, Westle said.

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