DOL Updates Guidance on Proxy Voting by Plan Fiduciaries

On December 29, 2016, the U.S. Department of Labor (the “DOL”) released Interpretive Bulletin 2016-1 (“IB 2016-1”) relating to the voting of proxies on securities held in employee benefit plans.  IB 2016-1 withdraws the current Interpretive Bulletin dealing with the voting of such proxies (Interpretive Bulletin 2008-2 or “IB 2008-2”) and reinstates the prior Interpretive Bulletin dealing with the proxy voting (Interpretive Bulletin 94-2) with updates.

In the background to IB 2016-1, the DOL noted that IB 2008-2 “has been read by some stakeholders to articulate a general rule that broadly prohibits ERISA plans from exercising shareholder rights, unless the plan has performed a cost-benefit analysis and concluded in the case of each 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 contrast, IB 2016-1 states that the “fiduciary act of managing plan assets that are shares of corporate stock includes the voting of the proxies appurtenant to those shares of stock”.  Thus, the DOL views proxy voting with respect to corporate stock as part of a fiduciary’s obligation to prudently manage plan assets in conformity with Section 404 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

While corporate shares with their voting rights give rise to certain fiduciary obligations, it is important to note that these fiduciary obligations (and the potential liability arising therefrom) will depend on the type of plan, the actual investments and the nature of the plan investments.  For example, an employee stock ownership plan with assets invested solely in Employer Securities (with pass through voting rights) will give rise to different fiduciary obligations than a profit sharing plan whose assets are invested in shares of individual corporations.  As such, plan fiduciaries should review the type of plan and the plan investments as part of their analysis of their fiduciary obligations with respect to proxy voting.

While a full review of IB 2016-1 is beyond the scope of this article, the following three items that are continued in IB 2016-1 (i.e., contained in both IB 2008-2 and IB 2016-1) warrant identification and further discussion.

First, the Interpretive Bulletin notes that, subject to two exemptions, the responsibility for voting proxies lies exclusively with the plan trustee.  The exceptions to trustee responsibility for voting proxies are (1) the trustee is subject to the direction of a named fiduciary pursuant to ERISA 403(a)(1) (a “Directed Trustee”); or (2) the relevant corporate stock is held by an investment manager (within the meaning of Section 3(38) of ERISA).

In the case of corporate stock held by an investment manager, the investment manager acknowledges in writing that he is a fiduciary with respect to the plan and it is reasonable for the other plan fiduciaries to expect the investment manager to prudently vote the proxies.  However, the other fiduciaries may still be obligated to monitor the performance of the investment manager (including the voting of proxies).

In the case of a Directed Trustee, there is a risk that the person responsible for voting the proxies is not voting or will fail to vote the proxies because they are not aware of their proxy voting responsibilities.  In a Directed Trustee arrangement, the Directed Trustee typically enters into a Directed Trustee trust agreement with the Plan Sponsor which affirmatively states that the Directed Trustee is not responsible for proxy voting.  However, in some cases, the Plan Sponsor fails to identify the plan committee or any other person as the responsible party for proxy voting.  Alternatively, in documentation, the Plan Sponsor may have identified a responsible party of this designation but the responsible person is unaware of their responsibilities.

Second, IB 2016-1 states that it is the DOL’s view “that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring.  Thus, the …. responsible fiduciary would be required to maintain accurate records as to proxy voting.”

Unfortunately, while the DOL’s position with respect to maintaining proxy voting records is consistent with the general recordkeeping requirements for taking fiduciary actions, there is a risk that appropriate records will not be maintained in connection with some proxy votes.

As described above in the Directed Trustee discussion, a plan committee or an officer of the Plan Sponsor may be designated as the named fiduciary for proxy voting.  In the case of the plan committee being designated for proxy voting, adequate records may be maintained if the proxy voting determinations are made at plan committee meetings and appropriate minutes are taken at the meeting (i.e., which document the factors surrounding the proxy voting determination).  Unfortunately, in the case where an officer of the Plan Sponsor is designated for proxy voting, there is a risk that the officer will not document the factors supporting the proxy voting determination.

Finally, IB 2016-1 states that “[s]ince the fiduciary act of managing plan assets that are shares of corporate stock includes the voting proxies appurtenant to those shares of stock, a statement of proxy voting policy would be an important part of any comprehensive statement of investment policy.”

Generally, plan fiduciaries adopt an Investment Policy Statement (“IPS”) which governs the selection and management of investments held by the plan.  While IPSs are adopted with respect to most plans, the form of IPSs vary dramatically.  In many cases, the IPS is silent as to proxy voting or is limited to identifying the party that is responsible for proxy voting.  In many cases, the IPS does not identify or discuss any parameters or guidelines to be considered in the proxy voting determination.

In summary, the DOL’s release of IB 2016-1 clarifies the fiduciary obligations that arise in connection with proxy voting with respect to plan assets invested in corporate securities.  As described above, plan fiduciaries should review the plan documents and plan procedures to ensure that they are properly fulfilling these fiduciary obligations.

 

About the Author

Jonathan H. Nason
Jon is a tax lawyer who advises employers on the design, implementation and administration of employee benefit plans, including ERISA and HIPAA compliance.