Department of Labor Guidance and Regulations on the Exercise of Shareholder Rights by Private-Sector Pension Plans
March 27, 2023
Department of Labor Guidance and Regulations on the Exercise
of Shareholder Rights by Private-Sector Pension Plans
Introduction
Two firms—Institutional Shareholder Services (ISS) and
The fiduciary standards in the Employee Retirement
Glass Lewis—control much of the proxy advisory business.
Income Security Act of 1974 (ERISA; P.L. 93-406, as
Pension plan fiduciaries are subject to fiduciary
amended) require that individuals who make decisions for
responsibility in the selection and monitoring of proxy
private-sector pension plans (referred to as fiduciaries)
advisory firms and ensuring that any proxy advisory firm
adhere to specified standards of conduct. The standards
votes in the best interest of plan participants.
include an obligation to act prudently and solely for the
exclusive purpose of providing benefits to participants and
Concerns About Voting and Fiduciary Obligations
beneficiaries and for defraying reasonable expenses.
A pension plan’s fiduciary obligations include voting in a
Among those who are fiduciaries are individuals who
manner that reflects the duty to act solely in the interest of
choose and manage plan investments. The standards apply
plan participants and beneficiaries. Recent discussions
to defined benefit plans, in which retirees usually receive
focus on which factors are financially relevant to a
monthly payments (sometimes referred to as traditional
corporation and, thus, a pension plan’s investment
pensions), and defined contribution plans, in which
performance—and whether and how proposals related to
participants have individual accounts (e.g., 401(k) plans).
these factors should be voted on by institutional investors.
For example, are fiduciaries expressing their personal
Among other responsibilities, pension plan fiduciaries must
preferences or considering what they believe are important
manage plan assets that involve shares of corporate stock
financial factors when they support proposals to require
and, thus, may be required to make and monitor decisions
companies to disclose their greenhouse gas emissions?
about voting proxies and exercising shareholder rights. The
Another discussion is whether proxy advisory firms might
Department of Labor (DOL) has published guidance over
have conflicts of interest (such as making recommendations
the past few decades outlining these responsibilities.
on shareholder proposals while also providing consulting
services to those same firms).
Proxy Voting and Exercising Shareholder
Rights
Earlier DOL Guidance
Pension plans typically hold stocks as part of their
In a 1988 opinion letter to Avon Products, Inc., DOL took
investment portfolios. Ownership of a company’s stock
the position that “the fiduciary act of managing plan assets
confers partial ownership and grants the investor certain
that are shares of corporate stock includes the voting of
rights. One of these rights may include the right to vote on
proxies appurtenant to those shares” and that a pension plan
matters such as electing the board of directors and the
fiduciary “has a duty to monitor decisions made and actions
approval of mergers and acquisitions. Shareholders can
taken by investment managers with regard to proxy voting.”
exercise their vote in person. However, most shareholders
do not attend corporate annual meetings. Typically,
In 1994, 2008, and 2016, DOL issued non-regulatory
shareholders have the right to appoint proxies. A proxy is a
guidance in the form of Interpretive Bulletins (IBs), and in
written authorization that delegates the shareholder’s voting
2018, in the form of a Field Assistance Bulletin (FAB),
power to another person or, more typically, an institution.
concerning fiduciary duties when exercising shareholder
rights:
DOL’s long-standing position is that plan fiduciaries should
engage in proxy voting activities in discharging their
DOL, in IB 94-2, recognized that fiduciaries may
fiduciary obligation to prudently manage plan investments.
engage in shareholder activities if—after accounting for
A pension plan fiduciary is subject to fiduciary
costs—such activities are expected to enhance the value
responsibility when deciding whether to vote or not to vote
of the plan’s investment. DOL reiterated that fiduciaries
(via proxy or in person) and when deciding how to vote.
are not permitted to subordinate the economic interests
The details of how fiduciaries determine whether and how
of participants to unrelated objectives.
to vote have been the subject of various regulations.
DOL, in IB 2008-02, clarified that fiduciaries voting
Due to the large number and diverse array of issues that
proxies, after taking into account costs associated with
shareholders may vote on, institutional investors, such as
exercising shareholder rights, “shall consider only those
mutual funds and pension plans, frequently use proxy
factors that relate to the economic value of the plan’s
advisory firms for proposal voting recommendations. Proxy
investment and shall not subordinate the interests of the
advisory firms provide institutional investors with research
participants and beneficiaries in their retirement income
and recommendations on management and shareholder
to unrelated objectives.”
proposals that are voted on at annual corporate meetings.
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Department of Labor Guidance and Regulations on the Exercise of Shareholder Rights by Private-Sector Pension Plans
Later, IB 2016-01 reinstated IB 94-2 with some
refrain from voting on proposals when the plan’s
modifications, noting that IB 2008-02 “worked to
holding in a single issuer relative to the plan’s total
discourage ERISA plan fiduciaries who are responsible
investment assets was below a quantitative threshold,
for the management of shares of corporate stock from
the specific monitoring obligations for the use of
voting proxies and engaging in other prudent exercises
of shareholder rights.” In IB 2016
investment managers or proxy voting firms (noting that
-01, DOL stated that a
plan’s investment policy that “contemplates engaging in
monitoring obligations are included more generally
elsewhere in the regulation), and
shareholder activities that are intended to monitor or
influence the management of corporations can be
the requirement to maintain records on proxy voting
consistent with a fiduciary’s duties under ERISA,”
activities and other exercises of shareholder rights.
provided the activity is likely to enhance the value of the
plan’s investment.
In the final rule, DOL stated that the purpose was to clarify
the application of ERISA’s fiduciary duties on the exercise
Later, FAB 2018-01 stated that fiduciaries that engage
of shareholder rights, noting that the 2020 final rule had a
“negative impact on plans’ financia
in activities to influence corporate policy might warrant
l performance as they
“a documented analysis of the cost of the shareholder
shy away from proxy votes and shareholder engagement
activities that are economically relevant.”
activity compared to the expected economic benefit
(gain) over an appropriate investment horizon.”
Response to DOL December 2022 Regulation
December 2020 Regulation
On January 26, 2023, a coalition of 25 states filed suit to
On December 16, 2020, under the Trump Administration,
block the rule, saying that DOL overstepped its authority
DOL issued a final rule relating to the application of
under ERISA to issue the rule.
ERISA’s prudence and exclusive purpose duties to the
exercise of shareholder rights. The regulation stated that
In the 118th Congress, H.J.Res. 30, which would use the
fiduciaries were not required to vote all proxies, and proxies
Congressional Review Act (CRA; enacted in P.L. 104-121)
must be voted—after taking into account associated costs—
to nullify the 2022 regulation, was passed by the House and
with the economic interests of plans and plan participants
Senate and vetoed by President Biden on March 20, 2023.
and in a manner that did not subordinate their interests to
The House failed to override the veto.
any non-economic (what the regulation called non-
For More Information
pecuniary) objectives or promote goals unrelated to
financial interests of participants and beneficiaries. The
Employee Benefits Security Administration (EBSA),
“
regulation included two safe harbors that permitted
Interpretive Bulletin Relating to the Employee Retirement
fiduciaries to limit or refrain from voting in certain
Income Security Act of 1974,” 59 Federal Register 38860,
situations. In addition, the regulation stated that fiduciaries
July 29, 1994, https://www.federalregister.gov/d/94-18198.
who delegated proxy voting authority to investment
EBSA, “Interpretive Bulletin Relating to Exercise of
managers or proxy voting firms had to monitor and
Shareholder Rights,” 73
maintain records on the proxy voting activities and other
Federal Register 61731, October
exercises of shareholder rights.
17, 2008, https://www.federalregister.gov/d/E8-24552.
EBSA, “Interpretive Bulletin Relating to the Exercise of
On March 10, 2021, under the Biden Administration, DOL
announced that it would not enforce the December 2020
Shareholder Rights and Written Statements of Investment
Policy, Including Proxy Voting Policies or Guidelines,” 81
final rule or pursue enforcement actions and that it intended
to revisit the rule in the future.
Federal Register 95879, December 29, 2016,
https://www.federalregister.gov/d/2016-31515.
December 2022 Regulation
EBSA, “Field Assistance Bulletin No. 2018
On December 1, 2022, under the Biden Administration,
-01,” April 23,
DOL issued a final rule that addressed proxy voting and the
2018, https://www.dol.gov/agencies/ebsa/employers-and-
exercise of shareholder rights (and the application of
advisers/guidance/field-assistance-bulletins/2018-01.
fiduciary duty when selecting plan investments, discussed
EBSA, “Fiduciary Duties Regardin
in CRS In Focus IF12328, Department of Labor Guidance
g Proxy Voting and
Shareholder Rights,” 85
and Regulations on Selecting Private-Sector Pension Plan
Federal Register 81658, December
Investments). The final rule became effective on January
16, 2020, https://www.govinfo.gov/app/details/FR-2020-
30, 2023 (with some exceptions). Among other things,
12-16/2020-27465.
DOL noted that the final rule removed from the previous
EBSA, “Prudence and Loyalt
regulation:
y in Selecting Plan
Investments and Exercising Shareholder Rights,” 87
language stating that fiduciaries are not required to vote
Federal Register 73822-73886, December 1, 2022,
all proxies,
https://www.govinfo.gov/content/pkg/FR-2022-12-01/pdf/
2022-25783.pdf.
two safe harbor provisions that permitted fiduciaries to
(1) limit proxy voting resources to proposals that the
John J. Topoleski, Specialist in Income Security
fiduciary had determined “were substantially related to
the issuer’s business ac
Elizabeth A. Myers, Analyst in Income Security
tivities or were expected to have
a material effect on the value of the investment” and (2)
IF12362
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Department of Labor Guidance and Regulations on the Exercise of Shareholder Rights by Private-Sector Pension Plans
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