DOL’s Proposed Regulations Likely to Lead to Fiduciary Re-evaluation of Proxy Voting

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:

  1. 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; 
  2. 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; 
  3. 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; 
  4. 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); 
  5. 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 
  6. 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. 

Proxy Voting Policies

If adopted as written, the proposal would also require that proxy voting policies be included in ERISA plans and made available to plan participants. The proposal allows for fiduciaries to include certain standing rules in proxy voting policies and provides examples of permitted practices, including:

  • 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.

In addition, the proposed rule rescinds Interpretative Bulletin 2016-01, effectively rejecting the DOL’s prior position that a fiduciary need only consider whether the matter up for vote would affect the value of the plan’s investment more than the cost of voting shares. The proposal also reinforces the DOL’s proposed rule of June 23, 2020, regarding ESG (economic, social, and governance) investing, where the agency stated that a fiduciary satisfies its duties of prudence and loyalty under ERISA when it has “selected investments and/or investment courses of action based solely on their pecuniary factors and not on the basis of any non-pecuniary factor.” 

The experienced, responsive team of ERISA attorneys at Hall Benefits Law helps plan administrators understand what regulations and rulings are relevant and how best to apply these rulings in practice. Learn more by calling 678-439-6236.

The following two tabs change content below.

Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

Latest posts by Hall Benefits Law, LLC (see all)

%d bloggers like this: