Key Notes:
- The duty to manage plan assets includes management of shareholder rights.
- Fiduciaries are not required to vote every proxy or exercise every shareholder right.
- When deciding whether to exercise shareholder rights and when exercising such rights, fiduciaries must act solely in accordance with the economic interests of the plan and its participants and beneficiaries, and not to promote non-pecuniary objectives or goals.
On December 16, 2020, the Department of Labor (DOL) released a final rule (“Rule”) governing a fiduciary’s duties under ERISA regarding the exercise of shareholder rights and proxy voting. Specifically, the Rule addresses a fiduciary’s responsibilities under ERISA’s prudence and exclusive benefit provisions in connection with the exercise of shareholder rights, the use of written proxy voting policies and guidelines, and the selection and monitoring of investment managers and proxy advisory firms. Consistent with the final rule regarding selection of plan investments, the Rule’s primary purpose is to clarify that when exercising shareholder rights, a fiduciary must not subordinate the interests of plan participants and beneficiaries in receiving financial benefits to non-pecuniary objectives.
Background
ERISA generally requires that plan fiduciaries act prudently and solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and to defray reasonable plan administrative expenses. The DOL has consistently taken the position that the management of plan assets includes the management of voting rights and other shareholder rights. Since the 1980s, it has issued a variety of sub-regulatory guidance addressing fiduciary obligations in connection with proxy voting, some of which seemingly have taken inconsistent positions.
On September 4, 2020, the DOL published a proposed rule that was highly prescriptive and intended, in part, to clarify what it termed a misplaced belief that fiduciaries must, with limited exception, vote proxies. Based on significant feedback from the public and as described below, the Rule departs from the prescriptive proposed rule and follows a principles-based approach.
The Rule
General Requirements
The Rule provides that the duty to manage plan assets includes the management of shareholder rights, including the right to vote proxies. As a result, the decision of whether to exercise shareholder rights and the exercise of those rights are subject to the fiduciary duties to act prudently and solely in the interests of the participants and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries and to defray reasonable plan administrative expenses. The Rule explicitly states that these duties do not require a fiduciary to vote every proxy and exercise every shareholder right. When deciding whether and how to exercise shareholder rights, a fiduciary must:
- Act solely in the economic interest of the plan and its participants and beneficiaries.
- Consider any costs involved.
- Not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits to any non-pecuniary interests, or promote non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries.
- Evaluate material facts that form the basis for any proxy vote or exercise of shareholder rights.
- Maintain records on proxy voting activities and other exercises of shareholder rights.
- If applicable, exercise prudence and diligence in the selection and monitoring of persons selected to advise or assist with the exercise of shareholder rights.
The preamble to the Rule clarifies that it does not extend to shares of stock held by mutual funds but indicates that the Rule may extend to voting and other shareholder rights in the mutual fund. The Rule also does not apply to shareholder rights passed through to participants and beneficiaries with accounts holding such securities.
Delegation of Authority
Some fiduciaries delegate the authority to vote proxies and exercise other shareholder rights to another person, such as an investment manager or proxy voting firm. In these circumstances, the Rule provides that the responsible plan fiduciary must prudently monitor its delegate’s proxy voting activities and exercises of shareholder rights to ensure such activities are consistent with the general principles described above and any written proxy voting policies adopted by the responsible plan fiduciary. Further, the Rule provides that a plan fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm or other service provider without first determining that the firm’s proxy voting guidelines are consistent with the fiduciary’s general obligations under the Rule.
The investment manager of a pooled investment vehicle in which more than one employee benefit plan invests generally must vote (or abstain from voting) in proportion to each plan’s economic interest in the pooled investment in a manner that reflects each plan’s investment policy. The investment manager may require investing plans to adopt the manager’s investment policy statement and proxy voting policy as a prerequisite to investing. In those circumstances, the plan fiduciary must consider and evaluate whether the manager’s policies are consistent with the Rule and Title I of ERISA before retaining the investment manager.
Proxy Voting Policies
The Rule provides that fiduciaries may adopt proxy voting policies allowing that such rights will be exercised according to parameters prudently designed to serve the plan’s economic interests and must periodically review any such policies that are adopted. To provide greater certainty, the Rule includes descriptions of optional safe harbor means for satisfying ERISA’s loyalty and prudence requirements when making the decision whether to vote (but not for the vote itself):
- A policy limiting voting resources to particular types of votes that the fiduciary has prudently determined are substantially related to the issuer’s business activities or are expected to have a material effect on the value of the investment, such as proposals related to certain corporate transactions such as mergers and acquisitions.
- A policy of refraining from voting on proposals or particular types of proposals when the plan’s holdings in the issuer are below an objective threshold that the fiduciary has prudently determined is sufficiently small that the matter being voted upon is not expected to have a material effect on the investment performance of the plan’s portfolio.
Discussion and Effective Date
Consistent with the final investment factors rule, the Rule does not explicitly reject the consideration of environmental, social and governance factors in the exercise of shareholder rights. However, the DOL has taken the position that these factors often are not pecuniary in nature and therefore cannot be considered.
Plan fiduciaries should carefully review the provisions of the plan, trust and relevant service agreements (including investment management agreements and agreements with vendors that provide proxy voting support) and the investment policy statement or other policy addressing the exercise of shareholder rights to identify any modifications that may be necessary to comply with the Rule.
The Rule generally became effective on January 15, 2021; however, plan fiduciaries other than investment advisers have until January 31, 2022 to comply with the Rule’s evaluation and recordkeeping requirements. All fiduciaries have until January 31, 2022 to comply with the requirement to not follow the recommendations of a proxy voting firm or other service provider without first determining that the third party’s guidelines are consistent with the fiduciary’s obligations under the Rule and obligations applicable to investment managers of pooled investment vehicles.
The Biden administration can be expected to take a very close look at the Rule. It would not be surprising to see changes made in the future.
FOR MORE INFORMATION
For more information, please contact:
Dominic DeMatties
202.973.2744
Dominic.DeMatties@ThompsonHine.com
Edward C. Redder
614.469.3258
Edward.Redder@ThompsonHine.com
or any member of our Employee Benefits & Executive Compensation group.
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