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DOL Floats Proxy Voting Rules for Retirement Plans

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The Labor Department has proposed new rules on employee benefit plan proxy voting intended to “clarify” duties for Employee Retirement Income Security Act fiduciaries, specifically making sure that any vote they make must have an “economic impact on the plan.” Interested parties will have a 30-day comment period to respond.

Due to confusion with current rules, the department stated that the new proposed rules are intended to utilize industry comments to “build a public record” to help the agency make improvements to ensure that fiduciaries execute their duties “in an appropriate and cost-efficient manner when exercising shareholder rights.”

The Securities and Exchange Commission has been reviewing proxy rules as well, setting down rules for proxy advisory firms as well as proposing fiduciary rules for investment advisors.

“The proposed proxy rule would ensure that individuals responsible for the retirement savings of millions of American workers are voting proxies only where it is financially in the interest of the plan to do so,” said Secretary of Labor Eugene Scalia in a statement. “The proposal would provide clarity and further the prudent management of plan assets and resources.”

There are multiple trends for the reason of clarifying the rule, the department states:

  • Increase in the percentage of corporate America’s stock held by, and plan assets managed by, institutional investors, diminishing the scope of proxy voting obligations attributable to ERISA fiduciaries.
  • Broader diversification of ERISA plan assets.
  • Change in proxy voting behavior, that is, according to ISS Analytics “proxy voting policies are becoming more complex, as investors continue to add to the list of factors they consider in their review and analysis of governance practices, including board independence, board accountability, diversity, myriads of executive compensation 6F factors, shareholder rights, and environmental and social factors.”
  • Mixed evidence on effectiveness of shareholder voting.

The Provision

The proposal would require fiduciaries to vote on any proxy where the matter being voted on would have an economic impact on the plan. It also “prohibits” fiduciaries from voting any proxy that doesn’t have an economic impact on the plan.

It outlines “permitted practices” fiduciaries can use to streamline and adopt proxy voting policies. For example, determining whether not to vote by setting a cap such as percentage of ownership of the issuer and material impact on the plan. The department is soliciting whether a 5% cap would be appropriate.

The department says its main concerns and purpose for the proposals are twofold: first, that in the effort to vote on proxy issues, fiduciaries may not be taking into consideration the costs to the plan, and second, some fiduciaries rely too heavily on third-party firms to handle voting (i.e. proxy advisors) “without taking sufficient steps to ensure that the advice is impartial and rigorous.” Thus, the fiduciary is not fulfilling its duty to the investor according to Labor.

The department also recognizes that the SEC rule could reduce “the overall number of shareholder proposals that appear on issuer proxy statements.”

Labor says there are several benefits to its new proposal, especially that “it allows plan fiduciaries and asset managers to focus on where they can add value the most. The rule allows plan fiduciaries to determine if diverting resources away from proxy voting and into researching new investment opportunities presents a better use of time and resources to increase value.”

Further, “the proposal would clarify [ERISA] fiduciary duties for proxy voting and monitoring proxy advisory firms,” according to Jeanne Klinefelter Wilson, the acting head of Labor’s Employee Benefits Security Administration. “The proposed rule would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.”

The proposal includes a 30-day comment period and instructions on submitting comments through

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