On March 28, 2022, William Birdthistle, Director of the SEC’s Investment Management Division, spoke at the Investment Company Institute’s annual investment management conference.
Mr Birdthistle faced industry concerns that he is a critic of the asset management industry, noting the benefits the fund industry and collective investment vehicles in general have brought in protecting and increasing the savings of individual investors, the positive role that funds have played in the functioning and efficiency of US capital markets, and the important contribution of funds to capital formation.
After noting the benefits of funds and other collective investment vehicles, Mr. Birdthistle expressed a desire to see the fund “perform to the best of its abilities” and discussed ways to achieve this goal. Referring to the work of historian, philosopher and economist Albert Hirschman, Mr. Birdthistle observed that investors in a fund, as participants in a collective enterprise, have two options when the benefits of their continued investment threaten to diminish in due to low returns or high fees — in which case, investors can either walk away from their investment or voice their concerns through a proxy vote in an effort to improve the fund. He said “the regulatory regime should provide investors with sufficient tools to meaningfully participate in both of these choices.” He also discussed how investors’ loyalty to their advisors, funds or portfolio managers can influence decisions to exit their investment or raise concerns.
Mr. Birdthistle noted that there may be obstacles preventing investors in the fund from exercising these options. He noted that “[w]We are seeing cash inflows into low-cost, high-performing funds, as economists would expect, but we are also seeing a dearth of cash outflows from funds that underperform the market while charging relatively low fees. higher. In this regard, he suggested that individual investors may lack sufficient resources “to exercise eternal vigilance” over their fund investments, noting that “investors do not receive a uniform statement that explicitly identifies the dollars they have paid over the past year” in the same way. that banks, mortgage and auto lenders and credit card companies provide customers with a statement of charges. Further, he noted in particular that fund investors may be unaware of the full cost of their investments if a substantial portion of those costs take the form of revenue sharing, indirect dollars and other practices “with little visibility and even less familiarity. . . .”
Regarding proxy voting, Mr. Birdthistle expressed concern that fund investors “neglect to participate in the fund’s proxy voting process by adopting apathy instead”, and that investors who wish to vote may not have sufficient information on how the shares in the portfolio are voted.
Mr Birdthistle said he supported exploring potential reforms to address these issues, including, for example, streamlining shareholder reporting, changing prospectus disclosure of fees and expenses and improving the information report of the funds on their proxy votes. Discussing the fiduciary duty of fund advisers to the funds they manage, Mr. Birdthistle recalled that “[t]where to apply this [fiduciary] obligation, the shareholders of the fund or the Commission may bring an action [Section 36(b) of the Investment Company Act of 1940].” He observed that “[n]o the plaintiff has not yet won a 36(b) case, but if no adviser can ever lose one – and none have so far – one wonders if the [fiduciary] duty enacted in law is truly honored.
A transcript of Mr. Birdthistle’s remarks to HERE is available here.