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EBSA Eyes Fiduciary Investment Duties

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The Employee Benefits Security Administration has released a pair of interpretive bulletins that could affect how benefit plan fiduciaries invest plan assets and exercise shareholder rights.

One of the bulletins, which covers “investing in economically targeted investments,” puts tight restrictions on efforts to use plan assets to promote local economic growth, and a second limits efforts to use plan investments to promote political goals or other goals not directly related to the economic interests of a plan’s participants.

If plan investment managers want to try to use plan assets to promote local economic growth, they must be able to show that the investments they chose were at least as attractive, on a risk-adjusted basis, as alternatives that would not have promoted local economic growth, EBSA officials write in the bulletin, which appears today in the Federal Register.

EBSA officials describe several examples of forbidden investment strategies.

If, for example, a plan owns an interest in a limited partnership that is considering investing in a company that competes with the plan sponsor, the fiduciaries may not replace the limited partnership investment with another investment based on this fact unless they prudently determine that a replacement investment is economically equal or superior to the original limited partnership investment, officials write.

If another plan sponsor wants to favor “green” companies, or companies that meet specified environmental criteria, “fiduciaries may not simply consider investments only in green companies,” officials write. “They must consider all investments that meet the plan’s prudent financial criteria.”

The fiduciaries can filter out companies that meet their environmental requirements “only if they appropriately determine that other available investments provide equal or better returns at the same or lower risks, and would play the same role in the plan’s portfolio,” officials write.

In the second bulletin, which deals with benefit plan fiduciaries’ exercise of shareholder rights, EBSA officials says fiduciaries should cast shareholder votes solely in accordance with a plan’s economic interests.

“If the responsible fiduciary reasonably determines that the cost of voting (including the cost of research, if necessary, to determine how to vote) is likely to exceed the expected economic benefits of voting, or if the exercise of voting results in the imposition of unwarranted trading or other restrictions, the fiduciary has an obligation to refrain from voting,” EBSA officials write. “In making this determination, objectives, considerations, and economic effects unrelated to the plan’s economic interests cannot be considered.”

EBSA officials also write in the shareholder duties bulletin that maintaining a “statement of investment policy” is consistent with Employee Retirement Income Security Act benefit plan fiduciary obligations.

“Such investment policy may include a policy or guidelines on the voting of proxies on shares of stock for which the investment manager is responsible,” officials write. “Such guidelines must be consistent with the fiduciary obligations set forth in ERISA … and this interpretive bulletin, and may not subordinate the economic interests of the plan participants to unrelated objectives.”

EBSA officials also write about benefit plan fiduciary “shareholder activism.”

Fiduciaries can engage in “active monitoring and communication activities” relating to corporate governance matters, such as the independence of company directors and the appropriateness of executive compensation, EBSA officials write.

But fiduciaries “shall not use an investment policy to promote myriad public policy preferences,” EBSA officials write. “Plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process.”

Fiduciaries must be able to “articulate a clear basis” for concluding that a proxy vote or other activity “is more likely than not to enhance the economic value of the plan’s investment before expending plan assets,” officials write.

“For example, the likelihood that the adoption of a proxy resolution or proposal requiring corporate directors and officers to disclose their personal political contributions would enhance the economic value of a plan’s investment in the corporation appears sufficiently remote that the expenditure of plan assets to further such a resolution or proposal clearly raises compliance issues,” EBSA officials write.


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