On August 31, 2020, the U.S. Department of Labor (DOL) released a proposal under the Employee Retirement Income Security Act of 1974 (ERISA) to amend fiduciary duties regarding proxy voting and shareholder rights.
“This particular rule is only in the proposal phase, but it’s really a clarification of a policy the DOL has had in place for some time,” said Kurt Nunez, Senior Compliance Consultant for Core Compliance and Legal Services. “Rules can be made and then letters are sent on how to comply with the rule.
“In the past, those letters have been misinterpreted and caused plan advisers to spend an inordinate amount of time and energy researching and voting ERISA plan proxies on behalf of their clients instead of acting on existing policies and procedures and minimizing costs.”
For example, some have taken the view that the DOL’s guidance requires fiduciaries to vote all proxies presented to them. This misunderstanding can result in use of plan assets on proxy proposals for purposes that have no connection to increasing the value of the plan’s investments.
Among other things, the DOL’s proposed guidance would limit fiduciaries and other asset managers from voting by proxy or exercising other shareholder rights affecting a retirement plan unless a matter has an economic impact on pension and 401(k) plans. The public was given 30 days to submit a comment.
A Closer Look
The DOL’s proposed language codifies the Department’s longstanding position that ERISA requires plan fiduciaries to carry out their duties prudently and solely in the interests of the plan 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 proposal provides a list of obligations fiduciaries must comply with when making decisions on exercising shareholder rights, including proxy voting, in order to meet their prudence and loyalty duties under ERISA law. It also outlines certain “permitted practices” under which plan fiduciaries may adopt proxy voting policies and parameters reasonably designed to serve the plan’s economic interest.
The proposal would require plan fiduciaries who adopt such policies to review them at least once every two years.
The DOL estimates that the incremental costs of these provisions will be small or likely offset by cost savings on a per plan basis. The Department anticipates that most, if not all, plans will adopt policies that utilize the permitted practices and because the activities that would be required under the proposal are already reflected in common best practices.
Because such practices are not universal, those plans who do not meet the requirements pertaining to shareholder rights would have to modify their processes.
The proposal also addresses the selection and monitoring of proxy advisory firms. In July, the Securities and Exchange Commission (SEC) approved sweeping changes to the rules governing proxy advisory firms, including a requirement for those firms to disclose conflicts of interests to clients and allow companies that are the subject of voting advice to be able to access that advice before or at the same time as the advice is disseminated to clients.
Points of Consideration for RIAs
To prepare for the DOL’s pending proposal, Nunez cites three steps Registered Investment Advisory (RIA) firms should take if they have engagements with ERISA plans.
“First, there are many firms that haven’t addressed proxy voting in their ERISA policies, and they should,” Nunez said. “This is a great time for RIAs to review their current policies and check to see how proxy voting is being addressed. It’s a really good, important first step.
“Among the advisers that do have proxy voting policies within their ERISA guidelines, a second consideration should be looking to see if their firm’s policies and procedures meet those described in the DOL proposal.
“A third step is the knowledge that crafting these policies and procedures can sometimes be difficult,” Nunez added. “Some of these regulations are up to interpretation. It’s a good idea to interact with your particular consultant or corporate attorney to try to craft policies and procedures that meet the guidelines.”
RIAs would be well-served to study Nunez’s three options and balance them against their current policy. If there is no proxy voting policy within their ERISA proxy voting procedures, firms should create one. Nunez recommends your procedure be built around the options provided by the DOL’s new proposal.
If you’re uncertain your firm has the sufficient guidance and expertise to address these pending changes to ERISA proxy voting and shareholder rights, CCLS has experienced professionals who can help. Contact us at 619.278.0020 or firstname.lastname@example.org.