It was a short week, but a busy one for the Labor Department, as it dropped off a second final rule at the OMB for evaluation.
The final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” was received at the Office and Management Budget on Nov. 25, just a day after the final rule on its proposed advice package, “Improving Investment Advice for Workers & Retirees,” had been delivered there.
In a season of what seems to have been a period of extraordinarily active rule making, the Department of Labor proposed the proxy voting rule on Aug. 31, stating that fiduciaries should “refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.” While the rule did not reference the “pecuniary interests” that were at the core of the “Final Rule on Financial Factors in Selecting Plan Investments” (the rule previously and commonly referred to as “the ESG rule” before the emphasis on environmental social and governance standards were excised from the final rule), the concerns the Labor Department expressed as underlying this issuance were similar.
Proposal Purpose(s)
The proposed regulation—issued with a goal of providing “clear guideposts” for plan fiduciaries—would amend the department’s 1979 Investment duties regulation to specify that—in voting proxies and in exercising other shareholder rights—plan fiduciaries must consider factors that may affect the value of the plan’s investment and not subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives. The preamble explained that, since the Department first spoke on these topics, a “persistent misunderstanding” among some stakeholders has set in that ERISA fiduciaries are required to vote all proxies. It also noted that the DOL decided to propose the regulation due to significant changes in the way ERISA plans invest and considering recent actions by the SEC related to the proxy voting process. “The Avon Letter [from 1988] and subsequent sub-regulatory guidance from the Department has resulted in a misplaced belief among some stakeholders that fiduciaries must always vote proxies, subject to limited exceptions, in order to fulfill their obligations under ERISA,” the preamble stated.
Moreover, the Labor Department stated that the time that it had reason to believe that responsible fiduciaries may sometimes rely on third-party advice without taking sufficient steps to ensure that the advice is impartial and rigorous, falling short of ERISA’s standards of fiduciary care and loyalty in the exercise of plans’ shareholder rights. Said another way, the Labor Department had previously indicated that it wanted to address “…practices that could present conflicts of interest associated with proxy advisory firm recommendations,” and ensure “…that proxy voting decisions are solely in the interest of, and for the exclusive purpose of providing plan benefits to, participants and beneficiaries.”
Comments ‘Airing’
To date, just over 300 comment letters[i] had been received on the subject, including one from the Plan Sponsor Council of America. Many of these (including the PSCA response) indicated that the Labor Department had decided to address a problem that didn’t exist, and/or that in addressing the issue, the agency was creating a requirement to document certain decisions that did not currently exist, in effect creating additional work (and laying the groundwork for future litigation) in contrast to the stated intent of the proposal.
That said, a number of the comments in support of the proposal highlighted the growing emergence of ESG considerations in proxy votes, and their interest in separating those influences from the administration and operation of retirement plans.
As with the final fiduciary regulation dropped off just the day before this one, we don’t yet know what’s in the final version of this final rule. However, and unlike the fiduciary regulation, this final rule is marked as not “economically significant.”
We shall see.
[i] The Labor Department also posted two “petitions”—16 in the category of “answer in search of a problem,” and 6,755 signatures on one from “Green America”—both, for different reasons, calling for the withdrawal of the proposal.
