To Vote, or Not to Vote, That is the Question

On September 4, 2020, the U.S. Department of Labor (the “DOL”) issued a proposed rule regarding a plan fiduciary’s duties with respect to shareholder rights appurtenant to shares of stock held by an ERISA plan (the “Proposal”). ERISA requires that a plan fiduciary carry out its duties prudently and solely in the interests of participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan.

The DOL originally articulated its position that ERISA’s fiduciary duties extend to the voting rights of stock in an opinion letter published in 1988 (commonly known as the “Avon Letter”). Since that time, the DOL has provided additional sub-regulatory guidance in the form of Interpretive Bulletins and Field Assistance Bulletins. Much like the DOL’s guidance on ESG investing, the DOL’s guidance in this area has shifted in focus with each presidential administration; however, a published regulation, subject to review and comment like the Proposal, would be more difficult to overturn by a future administration if finalized.

The DOL’s previous guidance issued in 2016 generally encouraged the voting of proxies by plan fiduciaries, other than in certain limited circumstances. In contrast, the Proposal warns that a fiduciary can only vote proxies that it prudently determines to have an “economic impact on the plan after the costs of research and voting are taken into account.” The Proposal is concerned that significant plan resources are often required to come to a voting decision and that this may not be prudent, given the diversification of many plan portfolios and “mixed evidence” regarding the positive effect proxy voting has on investments. In the Proposal, the DOL voices concerns similar to those that it expressed in its recent proposed rule regarding the investment of plan assets into ESG-themed investments; namely, that plan assets would be used to pursue environmental, social or public policy agendas that would have a minimal economic impact on the plan’s participants and beneficiaries.

Accordingly, the Proposal requires that a plan fiduciary vote any proxy where the fiduciary prudently determines the matter would have an economic impact on the plan (taking into account the appropriate factors, including cost) and, conversely, not vote any proxy where the fiduciary determines the matter will not have an economic impact on the plan. The Proposal’s introduction lists several items that a fiduciary should consider when determining whether and how to vote a proposal, such as the cost of voting (including opportunity costs), whether the proposal relates to issues that have a direct economic impact on the plan’s investment or relates to “social or public policy agendas,” and the voting recommendations of management. The fiduciary must also maintain records on the exercise of the plan’s shareholder rights.

To alleviate the need for a fiduciary to separately consider each and every proxy vote, the proposal allows plans to adopt proxy voting policies pursuant to guidelines “reasonably designed to serve the plan’s economic interest.” The Proposal gives three examples of permitted proxy voting policies: (i) to follow the recommendations of management with respect to the types of issues that are unlikely to have a significant impact on the value of the plan’s investment, subject to any conditions requiring additional analysis (e.g., conflicts of interest from the board); (ii) to focus voting resources on issues determined to be substantially related to business activities or have a significant impact on the plan’s investment (e.g., mergers and acquisitions, buy-backs, or contested elections for directors); or (iii) to refrain from voting on certain proposals where the plan’s holding in the issuer relative to the plan’s total investments are below a threshold determined by the fiduciary to be sufficiently small so that the exercise of such rights would be unlikely to have a material impact on the investment performance of the plan’s portfolio. Any such policy must be reviewed at least once every two years. The Proposal requests comment on whether the DOL should provide additional examples of permitted policies. Even if such a policy is adopted, the Proposal would allow a fiduciary flexibility to override the policy if it makes an independent determination regarding the proxy’s economic impact on the plan.

Further, the DOL expresses concern with many of the same issues that prompted the SEC to issue guidance (originally issued in 2019 and supplemented earlier this year) regarding proxy advisory firms, including proxy advisory firms’ potential conflicts of interest and the practice of some advisory firms to make a uniform recommendation for all of its clients, rather than providing tailored advice to each client. Accordingly, the Proposal requires fiduciaries to investigate material facts regarding a proxy vote decision and not simply rely on a third-party advisory firm or other service provider without appropriate supervision and its own determination that such advice is consistent with the economic interests of the plan. Additionally, if a fiduciary delegates authority to vote proxies or exercise other shareholder rights, the fiduciary must require the applicable investment manager or proxy advisory firm to document the rationale for proxy voting decisions or recommendations.

The Proposal reiterates previous guidance that the responsibility for exercising shareholder rights lies with the plan’s trustee unless it is subject to the directions of a named fiduciary or discretion over relevant assets has been properly delegated to an investment manager. When authority over assets has been delegated to an investment manager, the manager has exclusive authority to exercise shareholder rights appurtenant to those assets unless the plan, trust document or investment management agreement expressly provides that another fiduciary has the right to direct the plan trustee regarding the exercise of any such rights.

Finally, the Proposal notes that when a pooled investment vehicle is subject to ERISA and several ERISA investors in the vehicle have investment policy statements that conflict with one another, the investment manager must attempt to reconcile the different policies (assuming such policies are in compliance with ERISA). With respect to proxy voting, the investment manager must vote proxies in proportion with each relevant plan’s interest in the pooled investment vehicle. Alternatively, an investment manager may require participating plans to review and approve of the investment manager’s proxy voting policy prior to investing, in which case the investing fiduciary must ensure that the investment manager’s policy is consistent with the plan’s own policy.

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