Stradley Ronon: New DOL Rule Proposal Risks Chilling Proxy Voting and Shareholder Engagement

The U.S. Department of Labor (DOL) released its long-awaited proxy voting rule proposal on Aug. 31. If adopted without modification, fiduciaries of plans (e.g., investment managers) subject to the U.S. Employee Retirement Income Security Act of 1974, as amended (ERISA), may shy away from voting proxies and participating in shareholder engagement on matters that do not demonstrably improve the value of the plan’s holding in the short-term. Thus, the exercise of shareholder rights on environmental, social and governance (ESG) issues, the benefits of which may be long-term in nature, may indeed be squeezed out of proxy voting policies of ERISA plan fiduciaries. Here are the key takeaways:

  • The DOL’s longstanding position is that the fiduciary act of managing plan assets includes decisions on the voting of proxies and other exercises of shareholder rights. Over the past few decades, the DOL has issued guidance on a fiduciary’s responsibilities regarding proxy voting and shareholder engagement. The DOL’s most recent guidance is Interpretive Bulletin (IB) 2016-01, as modified by Field Assistance Bulletin 2018-01. The guidance generally permitted fiduciaries to engage in these activities when the responsible fiduciary concluded that there is a reasonable expectation (by the plan alone or together with other shareholders) that such activity is likely to enhance the value of the plan’s investment in the issuer, after taking into account the costs involved.
  • The DOL has also long held that, while ERISA does not permit fiduciaries to subordinate the economic interests of participants and beneficiaries to unrelated objectives in voting proxies or in exercising other shareholder rights, a “reasonable expectation” that the plan is likely to enhance the value of the plan’s investment may be demonstrated where, as is typically the case, the plan’s investment is long-term in nature, or where a plan may not be able to easily divest of the particular holding. The DOL noted in IB 2016-01, for example, that the benefits of shareholder engagement may be difficult to quantify in the short-term but nevertheless can be realized in the long-term.
  • As with its ESG guidance, the DOL’s stance on proxy voting and other forms of shareholder rights have been a political football. Starting with the Clinton Administration in the mid-90s, each administration has taken slightly different approaches. Ultimately, the administrations have gone back and forth as to whether a weighing of the costs and benefits associated with proxy voting is necessary for each such vote or whether such an analysis is reserved for unusually expensive votes or engagements. In 2016, the DOL pointed out that proxy voting rarely entails a significant expenditure of plan assets, and because the value of the vote/engagement may be long-term in nature, there was rarely an issue where the costs outweighed the benefits. Moreover, because many plans’ investments track indices, it is often necessary to engage issuer boards rather than to divest the plan’s exposure in that company. And so, the DOL reasoned in IB 2016-01, the general rule was that proxy voting and shareholder engagement was permissible in most instances. Read more…

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