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 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.