DOL Issues New Bulletin on Exercise of Proxy Voting Rights on
Behalf of ERISA Plans
By Michael G. Kushner,
Esq.
Curtis, Mallet-Prevost, Colt & Mosle LLP, New York, NY
The Department of Labor (“DOL”) has issued an
interpretive bulletin (the “Bulletin”) explaining the
application of ERISA's fiduciary rules to the exercise of shareholder
proxy rights on behalf of plans that hold corporate stock. The
Bulletin consolidates and updates prior IRS
guidance1 on proxy voting and
examines the impact of plans' written statements of investment policy,
shareholder activism and social investing on proxy
voting.2 In view of the current
market turmoil, the Bulletin is especially timely and provides welcome
guidance to plan trustees and investment managers regarding their
obligations in voting proxies. The Bulletin became effective on
October 17, 2008. This article examines the consolidated guidance
provided by the Bulletin.
Proxy Voting
A fiduciary's management of corporate stock on behalf of an ERISA
plan includes the duty to manage the stock's voting
rights.3 The duty of voting or
deciding not to vote proxies belongs to the plan trustee unless the
plan's “named
fiduciary”4 delegates it to
one or more investment managers.5
Where the authority has been delegated, only the investment manager
can make proxy voting decisions on stock that it manages on the plan's
behalf, unless the named fiduciary specifically reserves the right to
either vote the proxies or to direct the plan trustee how to vote
them. The Bulletin notes that a named fiduciary could, if desired,
delegate some authority for proxy voting to a manager, while reserving
to itself the right to vote on certain specific issues.
If the plan document or the plan's investment management agreement
(“IMA”) states that the investment manager is not required
to vote proxies, but does not expressly preclude the manager from
doing so, according to the Bulletin, the manager will be exclusively
responsible for proxy voting decisions and cannot delegate this duty.
Where either the plan document or the IMA expressly precludes the
manager from voting proxies, however, the duty belongs to the plan
trustee (or the named fiduciary, where the trustee is subject to the
named fiduciary's direction).
ERISA requires that, in voting proxies, a fiduciary consider only
factors relating to the economic value of the plan's
investment.6 If the fiduciary
determines that the cost of voting, including proxies, for example,
the cost of any required research, is likely to exceed the expected
economic benefits of voting, or if voting would trigger trading or
other restrictions, the fiduciary should not vote the
proxies.7 ERISA also requires a
named fiduciary that appoints an investment manager to monitor the
manager's proxy voting activities. To assist the fiduciary in
monitoring a manager, the manager must maintain records of its proxy
voting decisions, including the rationale for votes, their compliance
with plan investment policy and any applicable cost-benefit
analysis.8
Statements of Investment Policy
ERISA plans must maintain a written statement of investment policy
governing the manner in which plan assets will be invested. The
Bulletin notes that the statement can be set forth in the plan
document or in a separate document. Investment policy statements deal
with issues such as diversification, asset allocation, projected
return relative to risk and the relationship between the plan's
investment policy and its funding requirements. The Bulletin states
that investment policy statements should also set forth the plan's
policy on proxy voting. A named fiduciary who appoints one or more
investment managers must monitor their compliance with the plan's
written investment policy and may require a manager to acknowledge in
writing that it will follow the policy. The Bulletin makes clear,
however, that merely following the statement of investment policy does
not relieve a fiduciary of its other obligations under ERISA with
respect to proxy voting.9 If a
plan does not provide a written statement of investment policy, the
manager may determine how assets under its management will be
invested, subject to ERISA's general fiduciary duty rules regarding
prudence, diversification and “exclusive purpose.”
The Bulletin clarifies that a plan's statement of investment policy
is considered one of the “documents and instruments governing
the plan,”10 which an ERISA
fiduciary 11 is required to
follow unless it would violate ERISA.
Where plan assets are invested in a pooled investment vehicle that
holds the securities of more than one plan, the manager may find
itself subject to conflicting proxy voting policies. Where this
occurs, the manager may be required to ignore one or more policies if
failing to do so would not be in the economic interest of plan
participants and beneficiaries in the aggregate. Alternatively, the
manager may attempt to pro rate the voting of proxies in accordance
with each plan's relative holdings in the pooled investment vehicle or
may require all participating plans to sign the manager's own
statement of investment policy, which will supersede the policies of
individual plans where they conflict.
Shareholder Activism
Shareholder activism, such as placing issues on the ballot for
shareholder meetings, supporting a slate for election to a
corporation's board of directors and discussing corporate policy with
corporate officers, has become increasingly prevalent in the last 20
years, as investors have become increasingly aware of how corporate
governance issues can affect a stock's performance. The Bulletin
endorses shareholder activism in connection with voting proxies when
the activism is likely to, either alone or in connection with other
investments, further the plan's economic interest. Before engaging in
activism, however, the manager must perform a cost-benefit analysis
that takes into account the likely costs of a particular action
relative to its potential economic
return.12
Socially Directed Voting
The investment of plan assets to further social purposes has been a
controversial area under ERISA. In general, the DOL has permitted a
fiduciary to take into account social goals in investing a plan's
assets only under the limited circumstances where doing so clearly
would be in the plan's economic interest and the investment would
provide at least as great a return at equal or less risk than other
available investments. The Bulletin makes it clear that fiduciaries
risk violating ERISA's exclusive purpose rule if they attempt to
further legislative, regulatory or public policy issues through the
proxy voting process. Although ERISA does not prohibit taking into
account social policy considerations, a fiduciary that does so must be
able to show that it has complied with its duty to maximize the
economic value of plan investments. Failure to do so would, in DOL's
view, violate ERISA's prudence and exclusive purpose rules. The
Bulletin provides as an example a fiduciary's attempt to require
corporate directors to disclose their political contributions. In the
DOL's view, this would be insufficiently related to promoting the
plan's economic interest in its investment to justify the
activity.13
Conclusion
Although the Bulletin breaks little new ground, it is extremely
helpful for plan fiduciaries and investment managers because it
harmonizes the individual positions on proxy voting issues that DOL
has taken over the years in various forms of administrative guidance
and consolidated them in one place. The updated and consolidated
guidelines should provide some level of comfort to plan fiduciaries
and investment managers that must make proxy voting decisions on
behalf of ERISA plans in this rigorous investment environment.
For more information, in the Tax Management Portfolios, see
Finston and D'Alessandro, 351 T.M., Plan Qualification--Pension
and Profit Sharing Plans, and in Tax Practice Series, see
¶5520, Plan Qualification Requirements.
1
29 CFR 2509.94-2.
2
29 CFR 2509.08-2; I.B. 08-2, 73 Fed. Reg. 61731-61734 (Oct. 17, 2008).
3
See letter from the Department of Labor to Helmut Fandl, Chairman of the Retirement Board of Avon Products, Inc. (Feb. 23, 1988).
4
See ERISA §403(a).
5
The definition of “investment manager” is set forth in ERISA §3(38). See also ERISA §403(a)(2), regarding delegating the authority to manage plan assets.
6
ERISA §404(a)(1).
7
See Advisory Opinion No. 2007-07A (Dec. 21, 2007).
8
See letter from the Department of Labor to Robert A.G. Monks, Institutional Shareholder Services, Inc., Jan. 23, 1990.
9
See ERISA §402(c)(3).
10
See ERISA §404(a)(1)(D).
11
Within the meaning of ERISA §3(21).
12
See Advisory Opinion No. 2008-05A (June 27, 2008) and letter from Department of Labor to Jonathan P. Hiatt, General Counsel, AFL-CIO (May 3, 2005).
13
See Advisory Opinion No. 2007-07A (Dec. 21, 2007).
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