Fund Managers Lobby SEC Against New Shorting And Proxy Voting Rules

by Glen Shapiro, LawAndTax-news.com, New York

24 February 2003

America's top financial regulator, SEC's new Chairman, William Donaldson, who once headed the New York Stock Exchange, is under pressure from hedge funds and mutual funds to relax proposed changes to the management of funds which would restrict short-selling and require disclosure of proxy votes.

"This (short selling) issue is something we've been looking at for some time," said SEC Commissioner Cynthia Glassman. However big business has long disliked traders who effectively bet against corporate prosperity and success, and have had the ability to repay loans used to purchase stock with less than their borrowings when stock prices fall. It is a widely used technique used by the US$600bn hedge fund industry.

Annette Nazareth, a director of Division of Market Regulation confirmed the "Short sale reform is one of a number of issues the SEC may address in the coming year, but we have no timetable set". The Financial Times reported last week that SEC staffers are expected to present proposals for reform to the new chairman this week. Among the proposals could be rules forcing traders to borrow stock to cover their short positions. Under the current rules, traders can take out "naked" short positions over an unlimited number of shares, putting huge downward pressure on an illiquid stock.

Meanwhile mutual funds are pressing the new SEC Chairman to withdraw a new SEC rule requiring fund management groups to disclose how they vote at company meetings when using proxy votes. The fund groups argue that disclosure will encourage pressure from special interest groups as well as increase costs in creating systems to collect, monitor and transmit the mass of data to the SEC. The fund industry's trade group, the Investment Company Institute, plans to send a letter to the Office of Management and Budget and the SEC.

The rule, approved by the SEC last month, for the first time requires fund firms to disclose their specific proxy votes. Proponents of the rule include a wide array of investor and consumer groups who say it will help restore investor confidence in a period riddled with corporate scandal.

The rule is scheduled to go into effect in time for the 2004 proxy season. Even if the OMB agrees with the fund industry and decides the rule requires too much paperwork, the SEC doesn't have to agree. Because it is an independent agency, the commission could vote not to accept OMB's conclusion and keep the rule intact.

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