ERISA Plan Fiduciaries’ Proxy Voting: Regulatory Updates

In this Ropes & Gray podcast, asset management partner Lindsey Goldstein and ERISA partner Josh Lichtenstein discuss ERISA plan fiduciary proxy activities, addressing what the existing regulatory guidance provides as well as some of its ambiguities, and what clarifications we hope new guidance will include. 

Lindsey Goldstein: Hello, and thank you for joining us today on this Ropes & Gray podcast, the latest in our series of podcasts and webinars focused on ESG and corporate social responsibility issues. I’m Lindsey Goldstein, a partner in our asset management group based in New York. Joining me today is Josh Lichtenstein, a partner in our tax and benefits group who focuses on ERISA, also in New York. Today we are going to be talking about ERISA plan fiduciary proxy activities, addressing what the existing regulatory guidance provides as well as some of its ambiguities, and we’ll also discuss what clarifications we hope new guidance will provide. One note before we get started: today’s podcast is intended to provide a high-level overview of some key considerations you may want to bear in mind as you think about this space. We would be happy to discuss specific questions directly. With that, let’s begin. Josh, the Department of Labor (DOL) has already addressed the proxy voting activities of ERISA plan fiduciaries on a few different occasions in recent years. Why do you think the DOL feels the need to issue more guidance now?

Josh Lichtenstein: It’s a great question, Lindsey. You’re correct that the DOL has spoken on this and certain related topics several times recently, including interpretive bulletins in 2015 and 2016, as well as a field assistance bulletin for its regional enforcement directors in 2018. In these bulletins, the DOL has consistently held to a longstanding view that proxy voting is part of the fiduciary obligation involved in prudently managing plan investments. In most cases, proxy voting and other shareholder engagement is relatively low cost and does not involve a significant expenditure of funds by individual plan investors, especially if the activities are undertaken by institutional investment managers who are managing those plan assets. Moreover, investment managers often engage consultants, such as proxy advisory firms, to further reduce the individual plan costs of researching proxy matters and exercising shareholder rights. However, as I had discussed on a prior podcast, President Trump issued an Executive Order in April 2019 calling for the DOL to undertake a review of existing guidance on the fiduciary responsibilities associated with proxy voting to determine whether any such guidance should be rescinded, replaced or modified, and the justification for this was to ensure consistency both with current law and with policies that promote long-term growth and maximize return on ERISA plan assets investments. The review was supposed to be completed by December of this year. This has likely been a catalyst for the DOL to take further action with respect to proxy voting. There’s also a more organic reason for new guidance, as the existing guidance contains some ambiguities, which have long confused plan fiduciaries, asset managers and proxy advisors, so there’s a strong desire in the ERISA plan community for greater clarity on these issues.

Lindsey Goldstein: Speaking of existing guidance, can we step back a bit and discuss the current regulatory framework for proxy voting on behalf of ERISA plans?

Josh Lichtenstein: Sure. In the 2016 interpretive bulletin that I mentioned before, the DOL stated that an investment policy that contemplates engaging in shareholder activities, which are intended to monitor or influence the management of corporations in which the plan owns stock, can be consistent with a fiduciary’s obligations under ERISA, so long as the responsible fiduciary concludes there is a reasonable expectation that such activities (either by the plan alone or acting together with other shareholders) are likely to enhance the economic value of the plan’s investment in that corporation. And this after taking into account the costs involved in exercising those rights. So this is effectively a cost-benefit analysis that the plan has to undertake. Examples of actions that may enhance economic value include engaging with companies to learn about their corporate governance practices, or company actions to manage environmental risks, human capital risks, facilities, stakeholder relations, and long-term access to critical resources. But these principles all rely on the assumption that proxy voting and other forms of shareholder engagement typically will not involve a significant expenditure of plan assets by any individual plan investor because the activities are generally either not high-cost inherently or are undertaken by institutional investment managers or third-party proxy advisory firms that can help to evaluate a course of action in a cost-effective manner.

Lindsey Goldstein: So Josh, it seems like the current framework essentially describes a facts-and-circumstances analysis in which you need to weigh the pros and cons to determine whether or not special circumstances exist for an ERISA plan fiduciary to devote significant resources to proxy voting? Is that correct?

Josh Lichtenstein: You’re exactly right, Lindsey. As with any facts and circumstances test, the result is unfortunately uncertainty, including on whether shareholder engagement would constitute a sound exercise of fiduciary discretion. As I noted before, many plan fiduciaries choose to have their asset managers that hold the relevant securities handle proxy voting matters, or where the plan either holds the security directly or can not get the asset manager to handle proxy voting matters. They often hire a third party, such as a proxy advisory firm, either to vote on the plan’s behalf or to give them advice. The challenge with hiring a third party however, is that voting on the securities constitutes a fiduciary action itself, and as a result, the third party should be acknowledging its status as a plan fiduciary in writing. In reality, the contracts with these third parties are not always clear about what the status is and often don’t contain the sort of acknowledgement. As a result, the common solution of relying on a third party to carry out proxy voting activities on behalf of the plan can often lead to uncertainty with respect to (i) what the status is of that third party under ERISA, and (ii) whether the plan fiduciary has actually discharged its own duties just by hiring the third party or what level of monitoring may also need to be carried out.

Lindsey Goldstein: Now that we know that further regulatory guidance is forthcoming from the DOL, how can the agency address some of the ambiguities in their existing guidance?

Josh Lichtenstein: Well, according to the DOL’s current regulatory agenda, the goal of the new guidance would be to:

1. Address practices that could otherwise present conflicts of interest associated with proxy advisory firm recommendations;
2. Ensure that proxy voting decisions are based on the best information available; and
3. Ensure that proxy voting decisions are solely in the interest of, and for the exclusive purpose of providing plan benefits to participants, beneficiaries and plans.

While there is no way to predict exactly what type of rule the Department of Labor will put out, at a minimum, it would be very helpful if the agency could provide further guidance on the level of reasonable diligence that it expects a plan fiduciary to carry out when it appoints a third party, either an asset manager or a proxy advisory firm to carry out proxy voting activities. It would also be very helpful if the Department of Labor would create a safe harbor for plan fiduciaries who hire recognized authorities on proxy voting, as long as the fiduciary’s continuing to appropriately monitor that third party.

Lindsey Goldstein: Thank, Josh, for joining me here today. And thank you to our listeners. For more information on the topics that we discussed or other topics of interest to the asset management, ESG and impact investing communities, please visit our website at www.ropesgray.com. And of course, we can help you navigate any of the topics we discussed – please don't hesitate to get in touch. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including on Apple and Spotify. Thanks again for listening.