In the wake of countless business scandals including the Enron and Worldcom calamities, the Securities and Exchange Commission recently proposed rules requiring mutual funds and investment advisors to disclose their proxy voting policies and histories. The rules address the concern that mutual funds and investment advisors too often side with management and do not consistently vote in their investors' best interests. The rules are designed to deter mutual funds and investment advisors from voting in a self-dealing manner without regard to the best interests of the investor. Indeed, following the SEC's proposal, Chairman Harvey Pitt remarked that, "[t]his is a very good for transparency, responsibility and accountability."

We cannot help but wonder, however, if that day was also a good day for plaintiffs' attorneys. Undoubtedly, investors have a right to know how the stocks they own are being voted and whether their advisor and mutual fund are looking out for their best interests. But on what basis will an investor, or more likely a corporate activist group, decide that a mutual fund has voted in a manner that is inconsistent with the best interests of investors?

More than likely, the new rules will be seen as an invitation by plaintiffs' attorneys to bring even more lawsuits against investment advisors and mutual funds. Thus, whether the proposed rules prove to be an effective remedy or just another arrow in the quiver of plaintiffs' attorneys will largely depend on how the SEC interprets them.

Investment advisors and mutual funds already have a fiduciary responsibility to vote the stocks they control in a manner that is consistent with the best interests of their clients and shareholders. Yet, as everyone knows, investment advisors can be subject to conflicts of interest which complicate the discharge of their fiduciary responsibilities.

For example, assume that the "Four Star" mutual fund owns a significant amount of stock in "Giant Corporation." Giant Corp.'s Pension Plan also owns a significant amount of Four Star's shares. Since Giant Corp.'s management is likely to be the trustees of its pension plan, what is the likelihood that Four Star will risk losing Giant Corp. as a shareholder by voting against the recommendation of Giant Corp.'s management? This is the type of conflict the proposed rules are intended to address.

The proposed rules would affect investment advisors and mutual funds in essentially the same manner: Advisors will be required to adopt policies and procedures to ensure they are voting in the best interests of their clients and to provide such policies to clients upon request.

Advisors will also be required to inform their clients how they may obtain the advisor's proxy voting history. Funds will be required to disclose in their registration statements the policies and procedures they use to determine how to vote proxies. Funds must also outline the procedures they use when there is a conflict of interest. Funds will be required to file a proxy voting record with the SEC detailing how they voted on proxy matters. Funds will be required to disclose proxy votes that are inconsistent with their policies and provide reasons for the inconsistencies. Funds will be required to disclose in their registration statements, shareholder reports, on their Web sites and on the SEC's Web site that proxy disclosure information is available without charge.

The spirit of the rules is to discourage investment advisors and mutual funds from voting in a manner that is inconsistent with their fiduciary duties and to expose conflicts of interests in voting. Disclosure of proxy voting histories would allow investors to monitor compliance with fiduciary duties.

The proposed rules are strikingly similar to rules implemented by the Department of Labor that require disclosure of proxy voting policies by pension funds. The Department of Labor interpreted Sections 402, 403 and 404 of ERISA as applying to the proxy voting policy requirements. Section 404(a)(1)(D) outlines the fiduciary duty that a pension plan owes to its participants and provides such participants with a private right of action. If the SEC follows the lead of the Department of Labor and interprets its proposed rules to provide investors with a private right of action, plaintiffs' attorneys will have a field day.

To us, the motivation behind the proposed rules is admirable, and the problem they are designed to avoid is real. However, like so many other government regulations, they have the potential to be manipulated by plaintiffs' attorneys to bedevil investment advisors and mutual funds. Given the myriad of statutes and regulations that already comprise the Investment Advisors and Investment Company Acts, more rules hardly seem necessary.

Attorney John D. Hughes is a partner in the law firm of Edwards & Angell LLP. Attorney Robert D. Laurie is an associate with the firm. They work in the firm's Boston office.