Douglas G. Ober, Chairman, Adams Express Company and Petroleum & Resources Corporation President, Closed-End Fund Association

It is probably fair to say that we are now witnessing the most significant revamping of federal securities laws and regulations since enactment of the Securities Exchange Act of 1934.  As new proposals from the securities and accounting regulatory bodies and legislation from Congress are put into force, fund shareholders have the right to know how such proposals and policies will impact their investments.

The objectives of legal, legislative and regulatory relief have been to punish the wrongdoers and prevent offenses from recurring.  I offer an additional objective: to provide investors with better methods of judging the fair value of companies based on reliable company filings, conference calls and earnings releases.  Investors should expect no less and will continue to show their lack of confidence in the financial information reported by corporations by voting with their feet.

The invigorated Securities and Exchange Commission has moved against the excesses of corporate executives ranging from those who received favorable IPO allocations from investment bankers to those who accepted exorbitant pay packages whose true cost to stockholders is only now emerging.  But a few highly publicized cases provide little illumination on the practices of the thousands of other public companies that investors consider daily. 

A focal point of government attention has been stock options – the time-honored executive incentive whose use by some companies has been excessive by almost any reasonable standard.  Pressure from investors, legislators and regulators is squeezing corporations to expense options in their financial statements for greater visibility – but no universally accepted valuation method has emerged.

When you think about it, an award of stock options may cost a company zero cash at the time it is granted, but costs the shareholders in diluted future value.  That being said, whatever standard will be used to determine the bottom line impact of stock options and whoever bears the cost of expense and taxation, standardization should be the major objective so that investors will be able to evaluate the impact of options on an apples-to-apples basis.

But stock options are not the pariah that the popular press has painted them to be. Throughout the last two decades, broad-based employee stock option plans have been effective in aligning management’s interests with those of shareholders, enhancing corporate performance in the process. Stock option plans that permit a majority of employees to share in the company’s success are often a good deal for investors, especially if they can be achieved without significantly diluting shareholder interests.

Another SEC proposal serving transparency would require mutual funds and other registered investment companies to disclose their proxy voting policies and procedures, and their actual proxy votes cast.  The proposal is intended to allow shareholders to view their fund managers’ voting policies and their consistency in observing the stated policies.  While adding an additional burden of disclosure, and unsupported by a strong drum beat of calls from fund shareholders for this information, the proposal looks like it will serve the interests of shareholders.

The American stock markets have been the envy of the rest of the world for their stability, liquidity and safeguards. These and other emerging laws and regulations will serve the long-term interests of all shareholders here and throughout the world as they will help to restore confidence in individual companies and the markets in general.

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