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This regulatory action would address the application of the prudence and exclusive purpose duties under the Employee Retirement Income Security Act of 1974 to the exercise of shareholder rights, including proxy voting, the use of written proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms. 

Statement of Need:

The Department has tried to convey in its prior sub-regulatory guidance that fiduciaries need not vote all proxies. A fiduciary’s duty is to vote those proxies that are prudently determined to have an economic impact on the plan after the costs of research and voting are taken into account. Nevertheless, a misunderstanding that fiduciaries must research and vote all proxies continues to persist, causing some plans to expend their assets unnecessarily on matters not economically relevant to the plan.  This rule, therefore, is necessary to provide clarity and certainty regarding the application of fiduciary obligations of loyalty and prudence with respect to exercises of shareholder rights, including proxy voting.  Despite past efforts to make clear fiduciary obligations in this regard, the Department is concerned that its existing sub-regulatory guidance may have inadvertently created the perception that fiduciaries must vote proxies on every shareholder proposal to fulfill their obligations under ERISA.  This belief may have caused some fiduciaries to pursue proxy proposals that have no connection to increasing the value of investments used to pay benefits or defray reasonable plan administrative expenses.  The Department believes that addressing these issues in the form of a notice and comment regulation will help safeguard the interests of participants and beneficiaries in their plan benefits.

Summary of the Legal Basis:

This regulation is proposed under ERISA section 404 Fiduciary Duties (29 USC 1104).  Other bases of authority include section 505 of ERISA (Public Law 93-406, 88 Stat. 894; 29 U.S.C. 1135) and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), effective December 31, 1978 (44 FR 1065, January 3, 1979), 3 CFR 1978 Comp. 332, and under Secretary of Labor's Order No. 1-2011, 77 FR 1088 (January 9, 2012).

Alternatives:

Various alternatives are under consideration, including a purely principles-based approach, a permitted practices approach with examples, and a materiality approach with a specific numeric cap.

Anticipated Costs and Benefits:

Anticipated Benefits:  This rule will benefit plans by clarifying the duties of fiduciaries in regard to proxy voting and monitoring proxy advisory firms.  Plan fiduciaries will be better able to conserve plan assets by researching and voting only on proposals that they prudently determine will have pecuniary impact on the value of the plan’s investment.  The Department expects that cost savings and other benefits attributable to the rule will flow to plan participants and beneficiaries and plan sponsors. 

Anticipated Costs:  The Department expects that the incremental costs of the rule will be small on a per plan basis, because the Department anticipates that most, if not all, plan activities required under the proposal already are reflected in common best practices.  Nonetheless, because such practices are not universal, plans that do not meet the requirements pertaining to shareholder rights will incur costs to modify their processes.

Risks:

Absent this rulemaking, the Department is concerned that a plan’s proxy voting activity sometimes will impair rather than benefit participants’ economic interests.  The Department’s objective is to ensure that plan fiduciaries only incur costs to vote proxies and exercise other shareholder rights that are economically justified.  The Department further seeks to ensure that plans’ shareholder rights are exercised by responsible fiduciaries consistent with ERISA’s fiduciary requirements.