Much has been written, on ML BeneBits and elsewhere, about the US Department of Labor’s (DOL’s) so-called “ESG Rule” issued in November 2022 (the DOL Rule). The DOL Rule, in part, addressed the appropriate factors for an ERISA fiduciary to consider when making investment decisions, including the potential use of environmental, social, and governance (hence, ESG) factors in ERISA investment decision-making. But there was more to that rule than the ESG topics that seem to dominate the spotlight.
In particular, the rule included provisions on proxy voting and the exercise of shareholder rights. For those old enough to remember 7-inch vinyls and record players, these provisions may be considered the “B” side to the bigger hit on the DOL Rule’s “A” side. But sometimes B sides end up being pretty important (see “We Will Rock You” by Queen, the B side to “We Are the Champions”).
Now that Queen is stuck in your head, let’s discuss the proxy voting provisions. The DOL Rule reiterates the longstanding DOL position that the fiduciary duty to manage assets includes the management of shareholder rights, such as the right to vote proxies. The DOL Rule then sets forth a number of requirements for a fiduciary considering whether, and how, to vote proxies and exercise other shareholder rights, including
- acting solely in accordance with the economic interest of the plan and its participants,
- considering any costs involved,
- not subordinating the interests of participants and beneficiaries in their retirement income or financial benefit to any other objective, and
- evaluating relevant facts that form the basis for any particular proxy vote or exercise of shareholder rights.
In addition, the DOL Rule sets forth some specific provisions about commonly used service provider relationships as they relate to proxy voting and shareholder rights.
Investment Managers
When an investment manager has responsibility for voting proxies on securities under its management, the appointing fiduciary must exercise prudence and diligence in the selection and ongoing monitoring of the manager. This is no different than an appointing fiduciary’s responsibilities generally, but it is a helpful reminder that proxy voting and exercising shareholder rights are part of a manager’s responsibilities and should be monitored.
Proxy Voting Service Providers
Plan sponsor fiduciaries and investment managers may engage service providers to advise on or assist with proxy voting or the exercise of shareholder rights, such as by providing research and analysis, administrative services, or recordkeeping or reporting services. The appointing fiduciary must employ prudence and diligence in selecting and monitoring a proxy voting service provider. In addition, the DOL Rule provides that a fiduciary may not adopt a practice of following the recommendation of a proxy voting service provider without a determination that such service provider’s proxy voting guidelines are consistent with the requirements of the DOL Rule.
Pooled Investment Vehicles
Pooled investment vehicles generally hold the assets of more than one employee benefit plan. The DOL Rule provides that managers of pooled investment vehicles may adopt a proxy voting policy for the pooled investment vehicle and require participating plans to accept the proxy voting policy before they are allowed to invest. In this case, the fiduciary investing the plan in the pooled investment vehicle must assess whether the manager’s proxy voting policy is consistent with Title I of ERISA and the DOL Rule.
Next Steps
While these provisions do not necessarily represent a major departure from current law or DOL position, they do provide some additional emphasis on the fiduciary review process for proxy voting and shareholder rights. As such, unlike the rest of the DOL Rule which became effective in January 2023, the DOL extended the effective date for the proxy rules until December 1, 2023 to allow both managers and plan sponsor fiduciaries to assess the contractual provisions currently in place regarding proxy voting.
We would not be surprised to see some clarifications or amendments to investment management agreements, service agreements, and pooled investment fund documentation to bolster these points. Our team stands ready to assist with all of these issues.