On September 4, 2020, the Department of Labor (DOL) published a proposed regulation clarifying the rules regarding proxy voting and the exercise of other shareholder rights by fiduciaries for plans subject to ERISA.
With the proposed regulation, the DOL stated that it hopes to clarify the “confusion or misunderstandings” from prior guidance that ERISA fiduciaries are required to vote all proxies, noting that fiduciaries should only vote proxies “where it is financially in the interest of the plan to do so.”
Fiduciary Standards for Proxy Voting
The proposed rule identifies six considerations a fiduciary must take into account when deciding to vote a proxy or exercise other shareholder rights:
- Act solely in accordance with the economic interest of the plan considering only factors that they prudently determine will affect the economic value of the plan’s investment based on a determination of risk and return over an appropriate investment horizon consistent with the plan’s investment objectives and the funding policy of the plan;
- 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 these financial interests of the plan’s participants and beneficiaries or the purposes of the plan;
- Investigate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights (e.g., the fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm or other service provider without appropriate supervision and a determination that the service provider’s proxy voting guidelines are consistent with the economic interests of the plan and its participants and beneficiaries);
- Maintain records on proxy voting activities and other exercises of shareholder rights, including records that demonstrate the basis for particular proxy votes and exercises of shareholder rights; and
- Exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with exercises of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies, and recordkeeping and reporting services.
- Voting proxies per management recommendations;
- Voting proxies only on matters substantially related to business activities; and
- Refraining from voting proxies unless a certain investment exceeds a predetermined threshold.
