Fiduciary Rules and Practices
The Department of Labor (DOL) proposed a proxy voting rule Aug. 31 that says fiduciaries should “refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.”
The proposed regulation—issued with a goal of providing “clear guideposts” for plan fiduciaries—would amend the department’s 1979 Investment duties regulation to specify that—in voting proxies and in exercising other shareholder rights—plan fiduciaries must consider factors that may affect the value of the plan’s investment and not subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives.
Persistent Misunderstandings
The preamble explains that, since the DOL first spoke on these topics, a “persistent misunderstanding” among some stakeholders has set in that ERISA fiduciaries are required to vote all proxies. It also notes that the DOL decided to propose the regulation due to significant changes in the way ERISA plans invest and considering recent actions by the SEC related to the proxy voting process.
“The Avon Letter [from 1988] and subsequent sub-regulatory guidance from the Department has resulted in a misplaced belief among some stakeholders that fiduciaries must always vote proxies, subject to limited exceptions, in order to fulfill their obligations under ERISA,” the preamble states.
What’s more, the DOL notes that it has reason to believe that responsible fiduciaries may sometimes rely on third-party advice without taking sufficient steps to ensure that the advice is impartial and rigorous, falling short of ERISA’s standards of fiduciary care and loyalty in the exercise of plans’ shareholder rights.
What’s more, the DOL notes that it has reason to believe that responsible fiduciaries may sometimes rely on third-party advice without taking sufficient steps to ensure that the advice is impartial and rigorous, falling short of ERISA’s standards of fiduciary care and loyalty in the exercise of plans’ shareholder rights.
In proposing the regulation, the DOL says that it “wishes to be clear: there is no fiduciary mandate under ERISA always to vote proxies appurtenant to shares of stock. ...
Instead, ERISA mandates that fiduciaries manage voting rights prudently and for the ‘exclusive purpose’ of securing economic benefits for plan participants and beneficiaries—which may or may not require a proxy vote to be cast.”
Proposed Changes
The proposal includes provisions outlining general duties requiring fiduciaries to vote any proxy where the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan. Likewise, it also prohibits fiduciaries from voting any proxy unless the fiduciary prudently determines that the matter has an economic impact on the plan.
The new proposal includes a list of obligations with which fiduciaries must comply when making decisions on proxy voting and exercising shareholder rights, specifically to:
- act solely in accordance with the economic interest of the plan and its participants and beneficiaries considering only factors that they prudently determine will affect the economic value of the plan’s investment;
- consider the likely impact on the investment performance of the plan based on such factors as the size of the plan’s holdings in the issuer relative to the total investment assets of the plan, the plan’s percentage ownership of the issuer, and the costs involved;
- not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or sacrifice investment return or take on additional investment risk to promote goals unrelated to the financial interests of the plan’s participants and beneficiaries or the purposes of the plan;
- investigate material facts that form the basis for any proxy vote or other exercise of shareholder rights;
- maintain records on proxy voting activities and other exercises of shareholder rights, including records that demonstrate the basis for proxy votes and exercises of shareholder rights; and
- exercise prudence and diligence in the selection and monitoring of persons selected to advise or otherwise assist with exercises of shareholder rights.
The proposal also specifies that Interpretive Bulletin 2016-01 no longer represents the view of the department regarding the proper interpretation of ERISA with respect to the exercise of shareholder rights by fiduciaries and will be removed once a final rule is adopted.
Permitted Practices
To assist in complying with these duties, the proposal also sets forth “permitted practices” under which the plan fiduciary can adopt certain proxy voting policies and parameters “reasonably designed” to serve the plan’s economic interest. These include that a fiduciary may adopt a policy of:
- voting proxies in accordance with the voting recommendations of a corporation’s management on proposals the fiduciary has determined are unlikely to have a significant impact on the value of the plan’s investment;
- focusing its resources only on proposals that the fiduciary has determined are likely to have a significant impact on the value of the plan’s investment, such as proposals relating to corporate events (mergers and acquisitions transactions, dissolutions, conversions, or consolidations), corporate repurchases of shares (buy-backs), issuances of additional securities with dilutive effects on shareholders, or contested/elections for directors; and
- refraining from voting on proposals when the plan’s holding of the issuer relative to the plan’s total investment assets is below quantitative thresholds that the fiduciary prudently determines, considering its percentage ownership of the issuer and other relevant factors.
In addition to requesting comments on the particular proposed permitted practices, the Department requests comment on whether it should include additional examples regarding when advance proxy voting directions may be exercised pursuant to specific parameters designed to serve the plan’s economic interest and, if so, what situations those examples should cover.
The proposal includes a 30-day comment period from the time that it is published in the Federal Register. A factsheet on the proposal can be found here.
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