Just When You Thought Voting Questions Were Over: U.S. Department of Labor Changes Rules on Proxy Voting for ERISA Fiduciaries

On December 11, 2020, the U.S. Department of Labor (DOL) issued its final rule, which amends its 1979 investment duties regulation under the Employee Retirement Income Security Act of 1974, as amended (ERISA), to add new rules for plan fiduciaries to follow when voting proxies or exercising other shareholder rights on behalf of ERISA plans. This rule was proposed on September 4, 2020, and is consistent with the DOL’s recent guidance requiring plan fiduciaries to focus on “pecuniary factors” when making investment decisions for ERISA plans.

Prior Guidance

In December 2016, just before President Barack Obama left office, the DOL issued an Interpretive Bulletin on proxy voting. The 2016 guidance was intended to provide flexibility to plan fiduciaries in exercising shareholder rights on behalf of ERISA plans. The guidance was issued to reverse prior DOL guidance that was thought to discourage plan fiduciaries from voting proxies and otherwise exercising shareholder rights unless it was likely that exercising those rights would increase the value of the plan’s investment when balanced against the expenses of exercising those rights. The 2016 guidance indicated that when deciding whether to exercise shareholder rights, a cost/benefit analysis is not needed, absent unusual circumstances, because there is usually no significant cost to exercising such rights. Most practitioners have taken the position that this guidance means that unless significant costs are involved in exercising shareholder rights, which might be the case when exercising shareholder rights with respect to foreign securities, all proxies should be voted and all shareholder rights should be exercised.

New Regulation

A. Fiduciary Rules on the Exercise of Shareholder Rights

The final proxy voting rule specifically repeals the 2016 guidance discussed above and amends the ERISA investment duties regulation set forth in 29 CFR 2550.404a-1 to add a section regarding proxy voting and the exercise of shareholder rights that provides the following:

• The fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights relating to those shares, and, when deciding whether to exercise shareholder rights, fiduciaries must act prudently and solely in the interests of plan participants.
• The fiduciary duty to manage shareholder rights does not require the voting of every proxy or the exercise of every shareholder right. Instead, to meet the ERISA fiduciary obligations under ERISA, fiduciaries must

1. act solely in accordance with the economic interest of the plan and its participants
2. consider any costs involved
3. not subordinate the interests of the participants in their retirement income under the plan to any non-pecuniary objective
4. evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights
5. maintain records on proxy voting activities and other exercises of shareholder rights
6. exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with the exercises of shareholder rights

• Where a proxy advisor firm has been retained or proxy voting is delegated to an investment manager, the plan fiduciary must monitor the activities of the proxy advisor firm or investment manager to ensure compliance with these rules.

B. Proxy Voting Policies

The new regulation sets forth two types of proxy voting policies that, if adopted, will satisfy an ERISA plan fiduciary’s responsibilities regarding decisions on whether to vote proxies. A plan fiduciary may adopt either or both of these policies.

• One type of policy limits voting to proposals that are substantially related to the issuer’s business or are expected to materially affect the value of the investment.
• The other type of policy is to refrain from voting when the plan’s ownership of a single issuer of stock is relatively small, relative to the plan’s total assets, so that voting on a particular matter is not expected to materially affect the investment performance of the plan’s portfolio (or the portion of a plan’s portfolio managed by an investment manager).

Even if a plan fiduciary adopts either or both of these policies, the plan fiduciary would not be precluded from voting on a matter that is expected to materially affect the value of the plan’s investment after considering any costs involved.

C. Identification of Party Responsible to Vote

Under the regulation, the plan’s trustee is responsible to exercise shareholder rights unless the trustee is required to follow the directions of a named fiduciary or an investment manager that has been appointed to manage the assets. In the case of an investment manager of a pooled investment vehicle that holds the assets of more than one plan, the investment manager must take into account the voting policies of the various plan investors unless the investment manager develops its own policies and requires the investing plans to accept those policies when they invest in the vehicle.

D. Effective Date

The new regulation becomes effective 30 days after publication in the Federal Register. However, fiduciaries that are not registered investment advisers have until January 31, 2022 to comply with (a) the requirement to evaluate material facts that form the basis for the exercise of shareholder rights and (b) the requirement to maintain records. This delayed effective date does not apply to fiduciaries who are registered investment advisers.

All fiduciaries have until January 31, 2022 to comply with (a) the requirement to review service provider proxy voting guidelines and (b) the requirement applicable to investment managers of pooled investment vehicles.