Art by J. Ciardiello
The U.S. Department of Labor (DOL) recently issued Interpretive Bulletin 2016-01 (IB 16-01), which provided the department’s latest views regarding the voting of proxies under the Employee Retirement Income Security Act of 1974 (ERISA), as amended. IB 16-01 rescinds the prior proxy voting guidance because, in the DOL’s view, IB 08-2 may have discouraged ERISA plan fiduciaries from voting proxies and engaging in other prudent exercises of shareholder rights. It is clear, based on the changing of positions by recent administrations, that the guidance in this area has political motivations. Background
As plan sponsors know, ERISA requires that plan fiduciaries act with the care, skill, prudence and diligence a hypothetical prudent person would use. It also requires fiduciaries to act solely in the interest of a plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and paying reasonable administrative expenses. These requirements must be applied not only to the investment of the plan’s assets but also to the management of those assets, which includes decisions related to the voting of proxies and other exercises of shareholder rights.
The DOL initially commented on the subject in IB 94-02, where it explained that fiduciaries may engage in shareholder activity designed to influence corporate management if the fiduciary concludes, after considering the costs involved in voting proxies, that doing so will enhance the value of the plan’s investment. The department noted that ERISA does not permit fiduciaries to subordinate the economic interests of the plan to unrelated objectives in voting proxies or exercising other shareholder rights.
In 2008, the DOL issued IB 08-02, which repealed and replaced IB 94-02. This time, the agency took a more conservative approach and required plan fiduciaries to vote proxies only if they concluded that the vote would more likely than not result in an increase in the plan’s investment relative to the expenses incurred in taking the action. That was interpreted by many to essentially require fiduciaries to perform a cost-benefit analysis before voting. If the cost of voting a proxy was greater than the value of the exercise of the vote, then a plan fiduciary would not be required to vote the proxy. The Latest Guidance
IB 16-01 largely repeals IB 08-02 and reverts to the same key principles described in IB 94-02. However, the DOL provided some additional flexibility to plan fiduciaries who are determining how to proceed. It was concerned that IB 08-2 may be read to broadly prohibit ERISA plans from “exercising shareholder rights, including voting of proxies, unless the plan has performed a cost-benefit analysis and concluded in the case of each particular proxy vote or exercise of shareholder rights that the action is more likely than not to result in a quantifiable increase in the economic value of the plan’s investment.”
In IB 16-01, the DOL takes the position that fiduciaries should consider whether the plan’s vote, either alone or together with votes of other shareholders, is expected to affect the value of the plan’s investment vs. the additional cost of voting shares. The DOL also cautioned that if a potential investment requires that an inordinate expenditure of resources is needed to vote shares the fiduciary should consider whether the difficulty involved affects the market price.
Importantly, a plan fiduciary need not engage in a cost-benefit analysis before voting proxies. Rather, the fiduciary need only consider whether the issue up for vote would affect the value of the plan’s investment against the cost of voting shares. Thus, when considering whether that cost would prohibit the fiduciary from taking action, the fiduciary need not consider whether the plan’s individual exercise of its voting rights would affect the value of its investment but rather whether the votes of all shareholders would affect the value. Implications
While politically driven, IB 16-01 does not significantly change many of the longstanding rules for voting proxies, but it may remove some of the perceived obstacles. It also clarifies that plan fiduciaries should still ensure that issues voted on will likely enhance the value of the plan’s investment and that the plan fiduciary would not be viewed as subordinating the economic interests for unrelated objectives. Plan fiduciaries should consider reviewing their proxy voting policies and procedures in light of the new guidance.