Pension & Benefits News EBSA issues final regs on fiduciary duties regarding proxy voting
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Tuesday, January 12, 2021

EBSA issues final regs on fiduciary duties regarding proxy voting

By Pension and Benefits Editorial Staff

The Employee Benefits Security Administration (EBSA) has issued final regulations addressing the application of the prudence and exclusive purpose duties under the ERISA to the exercise of shareholder rights, including proxy voting, the use of written proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms. This document also removes Interpretive Bulletin 2016-01 from the Code of Federal Regulations as it no longer represents the view of the Department of Labor regarding the proper interpretation of ERISA with respect to the exercise of shareholder rights by fiduciaries of ERISA-covered plans.

The final regulations are intended to protect the interests of participants and beneficiaries by: (1) confirming that proxy voting decisions and other exercises of shareholder rights must be solely in the interest of, and for the exclusive purpose of, providing plan benefits to participants and beneficiaries considering the impact of any costs involved; (2) ensuring that plan fiduciaries not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals; and (3) improving fiduciary practices relating to the selection and monitoring of proxy advisory firms.

The final regulations reflect significant modifications to the proposal based on the public record and commenters’ feedback. The most significant change from the proposed regulations is the adoption in the final regulations of a more principles-based approach, which eliminated some of the proposed provisions many commenters identified as likely to result in potentially significant increases in costs to plans and liability exposure for plan fiduciaries if adopted as part of a final rule.

Fiduciary duties. The final regulations cover fiduciary obligations that include the following:

  • The final rules expressly state that the fiduciary duty to manage shareholder rights does not require the voting of every proxy or the exercise of every shareholder right.
  • The final rules detail the obligations for ERISA plan fiduciaries when making decisions on exercising shareholder rights, including proxy voting, in order to meet their prudence and loyalty duties under ERISA Secs. 404(a)(1)(A) and (B). Plan fiduciaries must:

  1. Act solely in accordance with the economic interest of the plan and its participants and beneficiaries;
  2. Consider any costs involved;
  3. Not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries or the purposes of the plan;
  4. Evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights;
  5. Maintain records on proxy voting activities and other exercises of shareholder rights; and
  6. Exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with exercises of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies, and recordkeeping and reporting services.

Proxy voting policies. The final regulations permit fiduciaries to adopt optional means (safe harbors) for satisfying their fiduciary responsibilities with respect to decisions on whether to vote proxies. Specifically, plan fiduciaries may adopt either, or both, of the following policies:

  1. A policy that voting resources will focus only on particular types of proposals that the fiduciary has prudently determined are substantially related to the corporation’s business activities or are expected to have a material effect on the value of the plan’s investment;
  2. A policy of refraining from voting on proposals or types of proposals when the size of the plan’s holdings in the stock subject to the vote are below quantitative thresholds that the fiduciary prudently determines, considering its percentage ownership of the stock and other relevant factors, is sufficiently small that the matter being voted upon is not expected to have a material effect on the investment performance of the plan’s portfolio (or assets under management in the case of an investment manager).

The final regulations provide that plan fiduciaries must periodically review proxy voting policies that are adopted under these rules. A new provision has been added, clarifying that the final rules do not apply to voting and similar rights on shares held in defined contribution plans (including ESOPs) that are passed through to participants and beneficiaries that hold the shares in their individual accounts. Plan fiduciaries would, however, still need to comply with ERISA’s statutory duties of prudence and loyalty when administering pass-through provisions in the plan.

The final regulations also continue to provide guidance on a number of specific issues, such as the role of plan trustees and investment managers, practices of following proxy advisory firm recommendations (robo-voting practices), and the treatment of conflicting plan policies in pooled investment vehicles.

Effective and compliance dates. In general, the final regulations are effective 30 days after the rules are published in the Federal Register and apply to exercises of shareholder rights after such date. The final regulations include delayed compliance dates to January 31, 2022, for certain recordkeeping and proxy voting policy requirements, subject to conditions set forth in the regulations.

Specifically, in response to commenters’ concerns about the feasibility of compliance with certain provisions without undue cost and burden, the regulations include two later compliance dates. Fiduciaries that are not Securities and Exchange Commission (SEC)-registered investment advisers have until January 31, 2022 to comply with the new requirements to evaluate material facts providing the basis for exercising a right and to maintain records on proxy voting activities. SEC-registered investment advisers must comply as of the 30-day effective date, however, as these requirements are intended to align with their existing obligations under the Investment Advisers Act of 1940.

All fiduciaries have until January 31, 2022 to comply with the requirements that fiduciaries review service provider proxy voting guidelines prior to following their recommendations to determine that the guidelines are consistent with their obligations under the final regulations and the requirements pertaining to investment managers of pooled investment vehicles.

Source: EBSA News Release No. 20-2278-NAT. Fact Sheet on Fiduciary Duties Regarding Proxy Voting and Shareholder Rights

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