PLANADVISER - September/October 2020 - 43

compliance consult
David Kaleda
Whether-and How-to Vote Proxies
DOL proposal could complicate this plan-fiduciary job
ON SEPTEMBER 4, the Department of Labor (DOL) published
a proposed regulation regarding the fiduciary duties under
the Employee Retirement Income Security Act (ERISA)
that apply when a fiduciary exercises proxy voting rights.
The proposal, if finalized in its current form, could have a
substantial impact on how investment managers approach
the voting of proxies. The DOL's proposal comes on the heels
of the final proxy voting regulations adopted by the Securities
and Exchange Commission (SEC) on July 22.
Background
The DOL has held the position that the fiduciary act of
managing ERISA-covered plan assets includes the management
of voting rights, and shareholder rights, appurtenant
to shares of stock. A fiduciary must exercise such duties
prudently and solely for the " economic benefit " of participants
and beneficiaries. In many cases, a plan's named fiduciary
will delegate its management authority, including that
of exercising proxy voting rights, to a registered investment
adviser (RIA) or other financial institution that manages plan
assets on a discretionary basis. That manager, in turn, will
often engage a third-party proxy voting advice business to,
among other things, exercise proxy rights or provide advice
as to how the manager should do so. In other cases, the plan's
named fiduciary will retain the authority to vote by proxy,
but may engage a proxy voting advice business as well.
The Proposal
In the proposal, the DOL emphasizes its view that plan fiduciaries
fail to understand that ERISA's fiduciary rules don't
require a fiduciary to vote each and every proxy. It expressed
concern that plan fiduciaries may be imposing costs on the
plan that exceed the economic benefits it receives from
voting the proxies. Further, the department is of the view that
many plan fiduciaries rely on third parties such as investment
managers or proxy voting advice businesses to exercise
a plan's proxy rights or to provide recommendations without
taking steps to confirm that the voting advice is rigorous,
impartial and consistent with the plan's economic goals.
To address its concerns, the DOL proposes to impose
specific requirements on the party responsible for exercising
proxy rights. These requirements must be met for purposes
of determining whether the plan should exercise its proxy
rights in the first place and, if so, how to do so. The responsible
fiduciary must, among other things, act solely in accordance
with the economic interests of the plan and not subordinate
those to any non-pecuniary objectives, or sacrifice
investment risk or return to promote nonfinancial interests.
To conduct its analysis, the fiduciary must investigate material
facts concerning the vote. Further, the fiduciary must
consider the proxy's " 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. " The DOL appears to be stating
that a fiduciary should not vote a proxy if its interest in the
issuer is insufficient to influence the outcome of the vote.
The proposed regulation also imposes substantial requirements
on the fiduciary who delegates proxy voting authority
to a manager or who engages a proxy advisory business.
Such fiduciary would have to ensure the manager or advisory
firm has policies and procedures in place designed to assure
compliance with the regulatory requirements. Additionally,
in the case of a pooled " plan asset " vehicle, the fiduciary
would have to confirm the vehicle's manager has procedures
in place to make sure it properly voted proxies with regard
to each plan investor. The proposal also appears to require
the fiduciary to engage in a process whereby it reviews each
of the proxy decisions. Traditionally,
fiduciaries who have
delegated investment management functions have not been
required to perform this level of oversight over the delegate.
Sponsor Implications
One may read the proposal as suggesting that the DOL
believes that managers who exercise proxy rights on behalf
of ERISA plans do so when the economic benefits to the plan
are so small that they are outweighed by the costs of exercising
the proxy rights, including whether to exercise the
rights in the first place. Additionally, some fiduciaries apparently
make decisions based upon non-pecuniary factors that
are not solely for protecting the economic interests of the
plan-e.g., to promote social or policy causes. As a result, if
the DOL adopts the regulation, named fiduciaries, managers
of employee benefit plan assets and proxy advisory businesses
likely will have to make substantial changes to their
proxy voting policies and procedures.
David Kaleda is a principal in the fiduciary responsibility practice group
at Groom Law Group, Chartered, in Washington, D.C. He has an extensive
background in the financial services sector. His range of experience
includes handling fiduciary matters affecting investment managers,
advisers, broker/dealers, insurers, banks and service providers.
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PLANADVISER - September/October 2020

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