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Proxy Disclosures May Shift Fiduciary Obligations

Published: 14 Dec 2021

Prudence and Loyalty in Exercising Shareholder Rights

In December 2020, the Department of Labor (DOL) issued a rule that effectively stated that ERISA-qualified fiduciaries did not need to vote all proxies, mitigating the need for proxy disclosures.  Until this statement, the DOL had consistently articulated a view that under ERISA proxy voting is a fiduciary obligation. In March 2021, DOL announced clarifications on considering environmental, social and governance factors as part of an investment selection and monitoring process, as well as re-affirming that general ERISA prudence and loyalty duties require plan fiduciaries to exercise shareholder voting rights in the plan’s and participants’ best interests.  If the fiduciary is delegating this responsibility, the fiduciary must assess and monitor their service providers voting policies and actions to ensure alignment with protecting the plan, participants and their investments.  The DOL’s will allow ERISA fiduciaries to determine specific circumstances in which voting proxies may not be in the plan’s best interest (e.g., incurring significant costs).  Additionally, ERISA fiduciaries may consider ESG factors in making voting decisions, because these factors may have a material economic impact on an investment.

Fiduciary Responsibilities

Fiduciaries cannot simply accept an investment manager’s voting policies or take a policy off the shelf from a proxy advisor.  Fiduciaries must assess whether each provider’s policies determination that such firm or service provider’s proxy voting guidelines are consistent with the fiduciary’s obligations highlighting the need for proxy disclosures. When plan fiduciaries delegate authority to an investment manager, the manager has exclusive authority to exercise shareholder rights for those assets unless the plan, trust document or investment management agreement gives that authority to another fiduciary. When a pooled investment vehicle is subject to ERISA and several ERISA investors in the vehicle have investment policy statements that conflict, the investment manager must attempt to reconcile the policies. With respect to proxy voting, the investment manager must vote proxies in proportion with each relevant plan’s interest in the pooled investment vehicle. Alternatively, an investment manager may require participating plans to review and approve the investment manager’s proxy voting policy prior to investing, in which case the investing fiduciary must ensure that the investment manager’s policy is consistent with ERISA and in the plan’s and participants’ interests through the use of proxy disclosures.

The DOL proposal along with the Securities and Exchange Commission’s (SEC) proposed amendments to Form N-PX to enhance the information mutual funds, exchange-traded funds, and other funds report about their proxy votes will empower plan fiduciaries in managing and monitoring proxy activity. The SEC’s proposal would require funds to tie the description of each voting matter to the issuer’s proxy form and categorize each matter to help investors identify votes of interest and compare voting records. The proposal also prescribes how funds report and require them to use a structured data language to make the filings easier to analyze.

Collectively the proposed rules create an opportunity for plan fiduciaries to exercise greater influence over corporate governance issues, including ESG matters.  In combination with BlackRock’s announcement that they will allow institutional investors in commingled vehicles to vote their proxies, these proposals mean that ERISA fiduciaries may come under greater scrutiny for how they develop, monitor and implement corporate governance and proxy voting.  Once there is greater transparency around how fiduciaries are exercising their governance responsibilities, participants may want greater say on what is in their best interests.