The U.S. Department of Labor (DOL) Interpretive Bulletin 2016-01 (the 2016 Bulletin), which was published in the Federal Register on December 29, 2016, provides guidance on application of the Employee Retirement Income Security Act of 1974 (ERISA) to the responsibilities of fiduciaries of employee benefit plans with respect to proxy voting and other shareholder rights pertaining to securities held by those plans. The 2016 Bulletin also provides guidance on investment policy statements for employee benefit plans. Named fiduciaries of plans may want to review whether their plans are compliant with the guidance set forth in the 2016 Bulletin.
Background of the 2016 Bulletin
In the preamble to the 2016 Bulletin, the DOL explains that the 2016 Bulletin reinstates guidance provided in 1994 by Interpretive Bulletin 94-2 (the 1994 Bulletin), which may have become unclear as a result of statements made in 2008 in Interpretive Bulletin 2008-2 (the 2008 Bulletin). The DOL was concerned that fiduciaries interpreted the 2008 Bulletin to require the voting of a proxy only when the fiduciary concluded that the voting would likely result in an increase in the value of the plan’s investment.
As background, the DOL explains in the 2016 Bulletin that the fiduciary act of managing plan assets which are shares of corporate stock includes decisions regarding proxy voting and other shareholder rights. Consequently, a fiduciary may not vote proxies or exercise other shareholder rights in a manner that subordinates the economic interests of the plan participants to unrelated objectives of the fiduciary or some other person.
The DOL also explains that when deciding whether to exercise shareholder rights, a cost/benefit analysis is not needed, absent unusual circumstances, because there is usually no significant cost to exercising such rights, especially where an institutional investment manager is the responsible plan fiduciary. In addition, with plans more often making stock investments that mirror stock indexes, plans do not have the choice of selling particular corporate stocks included in those indexes. The DOL stated that, for this reason, exercising shareholder rights by voting proxies and in other ways might be more appropriate than in the past.
Specific Guidance Regarding Proxy Voting
Which Fiduciary Is Responsible? The 2016 Bulletin states that the fiduciary act of managing plan assets consisting of shares of corporate stock includes the voting of proxies for those shares. Accordingly, the voting responsibility lies with the trustee of the plan except (i) to the extent that the trustee is subject to the direction of the named fiduciary, or (ii) a named fiduciary has delegated the power to manage those shares to an investment manager, subject to any reservation of such power by the named fiduciary. In the case of the appointment of an investment manager, if the plan document or investment management agreement provides that the investment manager is not required to vote proxies but does not expressly prohibit the investment manager from doing so, the investment manager nevertheless has the exclusive responsibility for doing so. On the other hand, if the plan document or investment management agreement expressly precludes the investment manager from voting proxies, the responsibility for doing so remains with the trustee, although the trustee may be subject to the directions of the named fiduciary if the plan so provides.
Considerations for, and monitoring of, proxy voting. The 2016 Bulletin states that the responsible fiduciary must, when exercising shareholder rights, consider the factors that may affect the value of the plan’s investment and not subordinate the interests of the plan participants to unrelated objectives. In special cases where voting proxies involve out of the ordinary costs or unusual requirements, for example in the case of voting proxies on shares of certain foreign corporations, the fiduciary should consider whether the plan’s vote, either alone or with the votes of other shareholders, is expected to have an effect on the value of the plan’s investment that warrants the additional cost of voting. When such costs or requirements are anticipated, the fiduciary should consider whether they are reflected in the market price of the shares before the shares are purchased.
If the named fiduciary has appointed an investment manager to vote proxies, the named fiduciary must monitor the proxy voting activities of the investment manager. The investment manager must maintain accurate proxy voting records, enabling the named fiduciary to review the investment manager’s voting procedure and the actions taken in individual situations.
Specific Guidance Regarding Statements of Investment Policy
Scope of statement of investment policy. The 2016 Bulletin explains that the maintenance of a statement of investment policy designed to further the purposes of a plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA, and a proxy voting policy is an important part of any such policy. The 2016 Bulletin considers a statement of investment policy to mean a written statement that provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions, which may include proxy voting, considerations regarding economically targeted investments, or incorporating environmental, social or governance (ESG) factors or integrating ESG-related tools and analyses to evaluate an investment’s risk or return or to choose among equivalent investments.
Adherence to statement. The 2016 Bulletin explains that if a plan has a statement of investment policy and investment management responsibility is delegated to an investment manager, the named fiduciary has the authority to condition the appointment of the investment manager on the manager’s acceptance of the statement of investment policy. Statements of investment policy are part of the “documents and instruments governing the plan” within the meaning of ERISA §404(a)(1)(D), and an investment manager to whom an investment policy applies is required to comply with the policy to the extent the policy and its application in the specific situation is consistent with ERISA. In the absence of an express requirement that the investment manager comply with an investment policy, the authority to manage the plan assets placed under the control of the investment manager would lie exclusively with the investment manager.
A named fiduciary appointing an investment manager or trustee must do so prudently and must periodically monitor the activities of the appointed investment manager or trustee. Accordingly, there must be proper maintenance of documentation of the activities of the investment manager, including with regard to the application of any statement of investment policy, and of the named fiduciary’s monitoring of those activities.
An investment manager of a pooled investment vehicle that holds assets of more than one employee benefit plan may be subject to a proxy voting policy of one plan that conflicts with that of another plan. In that case, the investment manager must reconcile to the extent possible the conflicting policies and “if necessary and to the extent permitted by applicable law,” vote the relevant proxies to reflect the policies in proportion to each plan’s interest in the pooled investment vehicle. Alternatively, in order to avoid policy conflicts, the investment manager may require participating investors to accept the investment manager’s own investment policy statement before they are allowed to invest.
Specific Guidance Regarding Shareholder Engagement
Reasons for engagement. The 2016 Bulletin provides that an investment policy that contemplates activities intended to monitor or influence the management of corporations in which the plan owns stock is consistent with a fiduciary’s obligations under ERISA if the responsible fiduciary concludes that there is a reasonable expectation that those activities, by the plan alone or together with other shareholders, is likely to enhance the value of the plan’s investment in the corporation, after considering the costs involved. Such an expectation may exist in various circumstances, for example, where plan investments in corporate stock are held as long-term investments, where a plan may not be able to easily dispose of such an investment, or where the same shareholder engagement issue is likely to exist with available alternative investments.
Corporate issues and shareholder activities. The DOL explains that fiduciary activities relating to plan investments in corporate stock might involve issues regarding the independence and expertise of board candidates and governance structures and practices, executive compensation, and other issues, including climate change preparedness, policies and practices for avoiding criminal liability and ensuring that employees comply with applicable laws and regulations, the corporation’s workforce practices, policies and practices to address environmental or social factors that have an impact on shareholder value, and other financial and non-financial measures of corporate performance. Fiduciary activities may include correspondence and meetings with corporate management and exercising the plan’s legal rights as a shareholder.
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|Michael J. Kinn
+1 312 853 7749
Sidley Employee Benefits Practice
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