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On December 16, 2020, the Department of Labor (DOL) released a final rule (“Rule”) governing a fiduciary’s duties under ERISA regarding the exercise of shareholder rights and proxy voting. Specifically, the Rule addresses a fiduciary’s responsibilities under ERISA’s prudence and exclusive benefit provisions in connection with the exercise of shareholder rights, the use of written proxy voting policies and guidelines, and the selection and monitoring of investment managers and proxy advisory firms. Consistent with the final rule regarding selection of plan investments, the Rule’s primary purpose is to clarify that when exercising shareholder rights, a fiduciary must not subordinate the interests of plan participants and beneficiaries in receiving financial benefits to non-pecuniary objectives.

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ERISA generally requires that plan fiduciaries act prudently and solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and to defray reasonable plan administrative expenses. The DOL has consistently taken the position that the management of plan assets includes the management of voting rights and other shareholder rights. Since the 1980s, it has issued a variety of sub-regulatory guidance addressing fiduciary obligations in connection with proxy voting, some of which seemingly have taken inconsistent positions.

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On September 4, 2020, the DOL published a proposed rule that was highly prescriptive and intended, in part, to clarify what it termed a misplaced belief that fiduciaries must, with limited exception, vote proxies. Based on significant feedback from the public and as described below, the Rule departs from the prescriptive proposed rule and follows a principles-based approach.

The Rule provides that the duty to manage plan assets includes the management of shareholder rights, including the right to vote proxies. As a result, the decision of whether to exercise shareholder rights and the exercise of those rights are subject to the fiduciary duties to act prudently and solely in the interests of the participants and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries and to defray reasonable plan administrative expenses. The Rule explicitly states that these duties do not require a fiduciary to vote every proxy and exercise every shareholder right. When deciding whether and how to exercise shareholder rights, a fiduciary must:

The preamble to the Rule clarifies that it does not extend to shares of stock held by mutual funds but indicates that the Rule may extend to voting and other shareholder rights in the mutual fund. The Rule also does not apply to shareholder rights passed through to participants and beneficiaries with accounts holding such securities.

Some fiduciaries delegate the authority to vote proxies and exercise other shareholder rights to another person, such as an investment manager or proxy voting firm. In these circumstances, the Rule provides that the responsible plan fiduciary must prudently monitor its delegate’s proxy voting activities and exercises of shareholder rights to ensure such activities are consistent with the general principles described above and any written proxy voting policies adopted by the responsible plan fiduciary. Further, the Rule provides that a plan fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm or other service provider without first determining that the firm’s proxy voting guidelines are consistent with the fiduciary’s general obligations under the Rule.

The investment manager of a pooled investment vehicle in which more than one employee benefit plan invests generally must vote (or abstain from voting) in proportion to each plan’s economic interest in the pooled investment in a manner that reflects each plan’s investment policy. The investment manager may require investing plans to adopt the manager’s investment policy statement and proxy voting policy as a prerequisite to investing. In those circumstances, the plan fiduciary must consider and evaluate whether the manager’s policies are consistent with the Rule and Title I of ERISA before retaining the investment manager.

The Rule provides that fiduciaries may adopt proxy voting policies allowing that such rights will be exercised according to parameters prudently designed to serve the plan’s economic interests and must periodically review any such policies that are adopted. To provide greater certainty, the Rule includes descriptions of optional safe harbor means for satisfying ERISA’s loyalty and prudence requirements when making the decision whether to vote (but not for the vote itself):

Consistent with the final investment factors rule, the Rule does not explicitly reject the consideration of environmental, social and governance factors in the exercise of shareholder rights. However, the DOL has taken the position that these factors often are not pecuniary in nature and therefore cannot be considered.

Plan fiduciaries should carefully review the provisions of the plan, trust and relevant service agreements (including investment management agreements and agreements with vendors that provide proxy voting support) and the investment policy statement or other policy addressing the exercise of shareholder rights to identify any modifications that may be necessary to comply with the Rule.

The Rule generally became effective on January 15, 2021; however, plan fiduciaries other than investment advisers have until January 31, 2022 to comply with the Rule’s evaluation and recordkeeping requirements. All fiduciaries have until January 31, 2022 to comply with the requirement to not follow the recommendations of a proxy voting firm or other service provider without first determining that the third party’s guidelines are consistent with the fiduciary’s obligations under the Rule and obligations applicable to investment managers of pooled investment vehicles.

The Biden administration can be expected to take a very close look at the Rule. It would not be surprising to see changes made in the future.

Dominic DeMatties 202.973.2744 <a href="mailto:Dominic.DeMatties@ThompsonHine.com">Dominic.DeMatties@ThompsonHine.com</a>

Edward C. Redder 614.469.3258 <a href="mailto:Edward.Redder@ThompsonHine.com">Edward.Redder@ThompsonHine.com</a>

or any member of our <a href="https://www.thompsonhine.com/services/employee-benefits-amp-executive-compensation" target="_blank" rel="noopener">Employee Benefits &amp; Executive Compensation</a> group.

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions.

https://admin.thompsonhine.com/wp-content/uploads/2022/04/Employee_Benefits_Update_-_DOL_Final_Rule_on_Fiduciaries_Exercise_of_Proxy_Voting_and_Shareholder_Rights.pdf

DOL Final Rule on Fiduciaries’ Exercise of Proxy Voting and Shareholder Rights

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