On December 1, 2022, the U.S. Department of Labor (DOL) published a final rule (Final Rule) regarding investment duties of fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA). Sidley Austin published a client alert providing an overview of this Final Rule. The Final Rule includes a special requirement relating to proxy voting by investment managers of pooled investment vehicles that are deemed to hold “plan assets” for purposes of ERISA (Plan Asset Investment Vehicles), which is scheduled to become effective December 1, 2023. As this deadline approaches, investment managers of Plan Asset Investment Vehicles should consider what action may be required to comply with this aspect of the Final Rule.
Overview of Investment Manager Proxy Voting Rules
The Final Rule generally requires an investment manager of a Plan Asset Investment Vehicle to reconcile, to the extent possible, differences between its own investment policy statement and the investment policy statements of each investing plan. Furthermore, in the case of proxy voting, the Final Rule states that the investment manager must vote, or abstain from voting, the relevant proxies to reflect such policies in proportion to each plan's economic interest in the vehicle.
For Plan Asset Investment Vehicles that hold assets of multiple employee benefit plans, this requirement would no doubt pose a significant administrative burden. In recognition of such burden, the Final Rule provides an alternative approach by which an investment manager can satisfy its responsibility by permitting investment managers to require each investing plan to accept the investment manager’s investment policy statement, including any related proxy voting policy, before the plan is allowed to invest. In such case, an investing plan fiduciary would be responsible for assessing whether the investment manager's investment policy statement and proxy voting policy are consistent with ERISA and the Final Rule before deciding to retain the investment manager.
In addition, the Final Rule includes a requirement that a fiduciary must exercise prudence and diligence in selecting and monitoring any persons chosen to exercise shareholder rights, or that advise on or assist with the exercise of shareholder rights, including by virtue of providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies, and recordkeeping and reporting services. Therefore, to the extent an investment manager of a Plan Asset Investment Vehicle uses third-party service providers that provide any such services (such as proxy voting firms), the investment manager must exercise prudence and diligence in the selection and monitoring of such providers and determine that the proxy voting policies of such providers are consistent with the Final Rule.
Complying with Fiduciary Obligations under the Final Rule
As the December 1, 2023 compliance deadline approaches, investment managers of Plan Asset Investment Vehicles should review any existing discussion of proxy voting in their current governing documents and consider their prior practice with respect to providing their investment policy statement, and proxy voting policies, to plan investors. Each investment manager’s compliance strategy may vary on a case-by-case basis depending on prior practice. Consideration should be given as to whether the following actions may be appropriate:
- With respect to prospective plan investors, include representations affirming the plan’s acceptance of the investment manager’s investment policy statement, and proxy voting policies, in the applicable subscription documents.
- With respect to existing plan investors who did not already accept the investment manager’s investment policy statement and proxy voting policies when they invested, provide copies of such investment policy statement, and proxy voting policies, and prepare notices informing the plan fiduciary of the proxy voting rule.
Sidley Austin is available to assist in reviewing applicable documentation and developing strategies for compliance with this new DOL requirement.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
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