PLANSPONSOR - October/November 2020 - 39

INSIDE ANGLE
DOL Shifts Course
On Proxy Voting
New proposed rule would up the fiduciary requirements
O
n September 4, the Department of
Labor (DOL) published a proposed
regulation concerning proxy voting
by plans subject to the Employee Retirement
Income Security Act (ERISA). If published in
its current form, the proposed rule could significantly
change how plan fiduciaries must
analyze the decision to vote proxies held by
virtue of the plan's investment. The rule would
incorporate the same themes as the DOL's controversial,
and recently proposed, rule on environmental,
social and governance (ESG) investing
and have the same effective date.
Similar to the DOL's proposed rule
... it believes
the current
guidance
permits
fiduciaries to
incur proxy
voting costs
regarding ESG, the new rule has generated
significant interest in the retirement
plan community. In essence, it would make
it harder for fiduciaries to justify voting proxies on behalf of
ERISA-covered plans. Significantly, it would require that plan
fiduciaries analyze each proxy vote for its economic benefit to
the plan with respect to the plan's investment in the stock of
the corporate issuer.
Why Change the Rule?
The DOL's justification for the new rule is it believes the current
guidance permits fiduciaries to incur proxy voting costs that
exceed the benefits to the plan. The rule would rescind the
existing guidance on proxy voting (IB 2016-01) because, according
to the DOL, that guidance no longer reflects the agency's views.
IB 2016-01 permits fiduciaries to consider whether they expect
the plan's vote, either alone or together with votes of other shareholders,
to effect the value of the plan's investment. The proposed
rule would instead require an evaluation of the economic benefits
of the vote with respect to that particular plan investment.
The proposed rule maintains the department's long-held
position that proxy voting rights are plan assets subject to ERISA.
Therefore, fiduciaries are subject to ERISA's twin duties of
loyalty and prudence when considering whether to vote proxies.
The proposal would require that fiduciaries:
* Act solely in accordance with the plan's economic interests;
* Consider the impact of a vote on investment performance
with respect to the plan's investment in the issuer of the stock;
that exceed the
benefits to the
plan.
* Not subordinate financial interests, sacrifice
returns, or take on additional risk for nonpecuniary
objectives;
* Investigate material facts underlying a
proxy vote, including an obligation to appropriately
monitor a proxy adviser firm or other
providers under proxy voting guidelines;
* Maintain records on proxy voting; and
* Exercise prudence and diligence in
selecting and monitoring any service provider
related to proxy voting.
Under the propose rule, a fiduciary must
vote a proxy where the issue could have an
economic impact on the plan but must not do
so where the matter has none.
To the extent that a named fiduciary has
delegated responsibility for voting proxies to
another-e.g., an investment manager-the rule would require
the fiduciary to ensure that the other party satisfies the conditions
by requiring documentation explaining its voting decisions.
Proxy Voting Policies
The proposed rule would require that plans have a proxy voting
policy. In recognition that the rule could increase plan costs,
it allows for fiduciaries to incorporate standing rules into
the policy. The rule gives examples of " permitted practices, "
including voting proxies per management's recommendations,
with conditions for additional analysis of certain matters;
voting proxies only on specific proposals that are substantially
related to business activities; and refraining from voting
proxies unless a plan's investment in a specific issuer exceeds a
specific quantitative threshold.
In conclusion, this proposal represents an important evolution
in the DOL's views on proxy voting. Although many of the
concepts are consistent with longstanding interpretations of
ERISA, the rule would likely have a material impact on plan
fiduciaries' proxy voting policies and practices, particularly
concerning how fiduciaries conduct a cost-benefit analysis.
Steve Saxon is a partner with Groom Law Group, Chartered,
and George Sepsakos is a principal with Groom. Offices for
Groom are in Washington, D.C.
PLANSPONSOR.COM October - November 2020 39
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