PIMCO is making it easier for shareholders to nominate trustees to the board that oversees star manager Bill Gross's giant bond fund and dozens of other offerings, drawing praise from analysts and academics concerned about fund oversight.
The move could help PIMCO to improve the middling grades it has received for its fund stewardship. But it also could heat up the ongoing debate over just how much oversight fund boards provide.
Under new rules which apply to Gross's $281 billion Total Return Fund and some 82 others, a fund shareholder with at least $25,000 invested for two years can seek to nominate someone for the board of trustees.
Previously, shareholders had to meet a much higher threshold to nominate a board candidate, owning at least five percent of a fund for two years. The firm also did away with a few other minor restrictions on shareholder nominations.
The changes make it much more practical for an average fund shareholder to nominate a trustee, according to Morningstar senior analyst Eric Jacobson.
"This dramatically increases the possibility that someone could reach the threshold to make the nomination," he said.
Morningstar has assigned PIMCO's funds an overall stewardship grade of "C," lower than grades for competitors like American Funds and Dodge & Cox, which each got an "A." The seven-member PIMCO Funds board includes five independent trustees and two who work for PIMCO. Brent Harris, the board's chairman, is a PIMCO managing director.
Despite the reduced threshold for making nominations, PIMCO's fund board does not have to accept shareholder candidates, Jacobson cautioned. "The board still has tremendous discretion," he said.
Newport Beach, California-based PIMCO, which is short for Pacific Investment Management Company LLC, provided no explanation for the new rules, described in an October 23 securities filing. The firm oversees a total of about $1.8 trillion in mutual funds and in accounts for institutional investors.
Spokesman Mark Porterfield said PIMCO executives were not available to comment. Several independent trustees on the fund board did not return messages.
Mutual funds are owned by their shareholders and, in theory, fund boards should represent shareholder interests above all else by seeking lower management fees and otherwise pressing sponsoring companies for better deals.
But in practice, fund boards are dominated by fund sponsors, one reason that the boards hardly ever invoke their power to fire fund management companies.
The Securities and Exchange Commission aimed to make fund boards more independent in 2004 when it passed a rule requiring funds boards be chaired by independent directors. But many fund companies objected and the rules were tossed out by a court in 2006. The SEC did not press further.
Also, market competition from the rising popularity of low-cost exchange-traded funds has helped check mutual fund costs, reducing pressure for regulatory changes.
Industrywide, fund boards have largely escaped the wrath of activist shareholders more focused on publicly-traded companies. One reason is that fund boards rarely hold public annual meetings, reducing opportunities for protest and keeping board members out of sight.
LESS RESTRICTIVE RULES
Analyst Jacobson said that he sampled about ten of PIMCO's largest competitors but found no others with rules as restrictive those PIMCO did away with. PIMCO's prior rules seemed based on those common to closed-end funds, which traditionally make it harder to nominate directors as a way to fight takeovers and similar events, he said.
The shift could help attract more customers, University of Michigan finance professor E. Han Kim said. The change "will make them look good to investors," Kim said. "It's low-cost advertising from their perspective."
Kim agreed that the change alone may not lead to a reform for PIMCO's board. Just making it easier for shareholders to nominate themselves or other candidates does not mean they will be chosen, he said.
The change could have been put in place just to make it easier to put a preferred candidate of PIMCO's own on the board, noted William Birdthistle of the Chicago-Kent College of Law.
"Maybe PIMCO has a good friend who wanted on," he said.
(Reporting By Ross Kerber; editing by Aaron Pressman and Nick Zieminski)