Published by Ignites.
By Peter Ortiz May 17, 2012
ING Funds has lost its fight to exclude a shareholder proposal for a stricter anti-genocide policy from its proxy. The SEC in early May rejected the firm’s pleas that the agency forgo enforcement action if ING omitted the proposal.
ING sought assurance that the Securities and Exchange Commission would not bring an enforcement action against the firm if it omitted the proposal for its ING Emerging Countries Fund because it already has procedures and systems designed to prohibit investments in companies linked to human rights abuses. ING argued that its policy, adopted by the fund’s board on Feb. 10, made the shareholder proposal “moot,” and that another proposal in the same proxy to merge the fund into an existing fund “would result in significant confusion among shareholders.”
ING claimed that SEC rules allow it to exclude the shareholder proposal because the fund has largely already implemented it, and because the proposal directly conflicts with the fund’s proposal that calls for its liquidation. ING also said it could exclude the proposal because it interferes with the fund’s ordinary business practices.
The SEC responded to ING’s request by saying it couldn’t assure the firm that it wouldn’t recommend enforcement action if ING omitted the proposal. The shareholder who submitted the proposal, Sandra Rosenfeld, argued in a letter to the SEC that ING’s claims that its policy already addresses genocide concerns are “false.” The advocacy group Investors Against Genocide assisted Rosenfeld in making her argument.
Rosenfeld filed the shareholder proposal in 2008, but the first opportunity to challenge ING occurred in February. In January, ING called for a shareholder meeting to approve the liquidation and merger of the ING Emerging Countries Fund into the Emerging Markets Equity Fund. That same month it wrote Rosenfeld suggesting she withdraw her proposal, noting, “If the [ING] proposal were approved, it would be impossible for the Fund to implement your proposal because the Fund would no longer exist.”
ING followed up with the SEC in March, noting that despite the board’s acting to address Rosenfeld’s concern by adopting its own policy Feb. 10, she declined to withdraw her proposal. ING added Rosenfeld’s proposal to the proxy when it failed to win over the SEC. Shareholders vote on June 28. The proposal is not binding.
“The Fund’s policy simply states that the Fund will not make investments that U.S. sanctions already prevent it from making,” Rosenfeld told the SEC in response to ING’s no-action request. “The shareholder proposal goes further by asking the Fund to establish procedures that would prevent holding companies [from] contributing to genocide, regardless of whether or not required by U.S. law.”
Rosenfeld’s win comes as Investors Against Genocide is also targeting institutional investors in JPMorgan Chase with a proxy campaign against the firm’s holdings that have been linked to ethnic genocide in Sudan. Investors Against Genocide says preliminary results show 9.2% of shareholders voted for its proposal to eliminate such holdings.
What’s notable about Rosenfeld’s proposal is ING’s decision to remain neutral, marking the first time a mutual fund has not urged shareholders to oppose similar proposals, says Eric Cohen, chairman of the advocacy group.
ING also argued that including Rosenfeld’s proposal could put it in a tricky situation.
“Affirmative votes on both proposals would be possible, wherein shareholders would, on the one hand, be approving immediate action to prepare the Fund for its reorganization and liquidation, while, on the other hand, requiring the Board to develop and implement procedures to prevent certain investments by the Fund on a ongoing-forward basis, even though their procedures would not be used,” ING writes. “The Proponent’s proposal could not be fully realized without supplanting the reorganization proposal.”
While it is conceivable that shareholders may be confused by the proposals, ING could have explained the proposals to avoid confusion, Cohen says.
ING took issue as well with Rosenfeld’s contention that a 2008 Fidelity proposal submitted by 14 Fidelity fund shareholders coordinated by Investors Against Genocide served as a model for her proposal. At the time, Fidelity also objected to the group’s proposal, arguing that it sought to “micro-manage” how each fund’s assets are invested and would interfere with the fund managers’ ability to run the funds successfully, according to its letter to the SEC. As with ING, the SEC rejected Fidelity’s request for no-action relief for omitting the proposal.
But ING contended that the shareholder proposal submitted to Fidelity was quite different from the one it received, and that those differences warranted no-action relief from the SEC.
“While the Fidelity letter calls for ‘oversight’ procedures, the Proponent’s proposal [for ING] does not specify the procedures be for ‘oversight,’ apparently implying that the procedures would require more direct action by the Board,” according to ING’s February letter to the SEC. ING added, “By requiring the Board to take on additional, direct responsibilities with respect to the day-to-day management of the Fund, the Proponent’s proposal would amount to significantly greater micro-management of essential business functions by shareholders than the proposals in the Fidelity Letter.”
But this argument is weak, as shareholders understand that board members assign responsibilities and depend on staff support from the fund advisor, Rosenfeld writes. Vanguard, American Funds, Putnam Investments and JPMorgan Chase have included similar shareholder proposals without making similar claims, her letter states.
Cohen says he’s concerned that shareholders will buy ING’s argument that the fund already addresses human rights abuses. ING wrote in its letter to the SEC that the fund’s “investment advisor and other service providers already have implemented procedures and systems to prevent the Fund from investing in companies subject to sanctions under United States law, including sanctions against companies that ‘substantially contribute to genocide or crimes against humanity, the most egregious violations of human rights.’”
Cohen adds that while uninformed shareholders may view ING’s policy as favorable, “all [ING] committed to do is not invest in countries that they are already prohibited from investing in.”
“They are following the law. We are not impressed,” he says.
ING declined to comment.