On March 28, 2022, William Birdthistle, Director of the SEC’s Division of Investment Management, provided remarks at the Investment Company Institute’s annual Investment Management Conference.
Mr. Birdthistle confronted industry concerns that he is a critic of the asset management industry, noting the benefits that the fund industry and collective investment vehicles in general have brought about in protecting and increasing the savings of individual investors, the positive role funds have played in the operation and efficiency of U.S. capital markets, and the significant contribution funds have made to capital formation.
After noting the benefits of funds and other collective investment vehicles, Mr. Birdthistle expressed a desire to see the fund “done to the best of its ability,” and addressed ways in which that goal may be achieved. 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 as a result of poor returns or high fees—in this case, investors may either exit their investment or voice their concerns through proxy voting in an attempt to improve the fund. He stated that the “regulatory regime should provide investors with sufficient tools to participate meaningfully in both those choices.” He also discussed how investors’ loyalty to their advisers, funds or portfolio managers can influence decisions to exit their investment or voice their concerns.
Mr. Birdthistle observed that there may be obstacles preventing fund investors from exercising these options. He noted that “[w]e see inflows of money into funds with low costs and high performance, as economists would expect, but we also see a dearth of outflows from funds that underperform the market while charging relatively higher fees.” In that regard, he suggested that individual investors may lack sufficient resources “to conduct eternal vigilance” on their investments in funds, noting that “investors do not receive a uniform statement explicitly identifying the dollars they paid in the past year” in the same manner that banks, mortgage and auto lenders and credit card companies provide customers with a statement of fees. Furthermore, he noted in particular that fund investors may not be aware of the total cost of their investments if a substantial portion of those costs take the form of revenue sharing, soft dollars and other practices “with little visibility and even less familiarity . . . .”
Regarding proxy voting, Mr. Birdthistle shared his concerns that fund investors “neglect to participate in the fund proxy voting process by embracing apathy instead,” and that investors who are interested in voting may not have sufficient information about how portfolio shares are voted.
Mr. Birdthistle stated his support for exploring potential reforms to address these issues, including, for example, streamlining shareholder reports, amending prospectus fee and expense disclosure and enhancing the information funds report about their proxy votes. In discussing the fiduciary duty owed by fund advisers to the funds that they manage, Mr. Birdthistle provided a reminder that “[t]o enforce this [fiduciary] duty, fund shareholders or the Commission may bring an action under [Section 36(b) of the Investment Company Act of 1940].” He observed that “[n]o plaintiff has yet won a 36(b) case, but if no adviser can ever lose one—and none has, so far—one wonders whether the [fiduciary] duty enacted in the statute is truly being honored.”
A transcript of Mr. Birdthistle’s remarks to the ICI is available here.