With the Department of Labor (DOL)’s recently proposed rule on employee benefit plan proxy voting, similarly to its recently proposed rule on environmental, social and governance (ESG) investing in retirement plans, the agency has decided to go the route of a regulation instead of sub-regulatory guidance, says Steven Rabitz, partner at Dechert LLP. “The department has upped the ante to create greater permanence,” he says.
Rabitz adds that the proposed rule is much broader than prior guidance. “It’s the first time I’ve seen the DOL prescribe categories for voting—saying you ‘must vote’ or ‘must not vote’ is particularly strong.”
The proposal includes provisions that would articulate general duties requiring fiduciaries to vote any proxy where the fiduciary prudently determines that the matter being voted upon would have an economic effect on the plan. It also prohibits fiduciaries from voting any proxy unless the fiduciary prudently determines that the matter has an economic impact on the plan.
“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 an announcement. “The proposal would provide clarity and further the prudent management of plan assets and resources.”
“I think the DOL got frustrated about the sub-regulatory cajoling over the years and that prior guidance did not get to where this administration wanted it to get,” says Andrew Oringer, Dechert’s ERISA [Employee Retirement Income Security Act] and Executive Compensation group co-chair. “Under current regulatory authority, it can’t force fiduciaries to do this the way it wants them to. To put some teeth in what it wants, it feels it must create actual regulatory rules.”
Oringer says that, while the point here is to create new substantive rules, he thinks the proposed regulation does not represent a sea change in the basic way that proxies should ultimately be voted under ERISA.
Rabitz says the DOL “doesn’t make any bones about” the fact it doesn’t want plan fiduciaries spending a disproportionate amount of time on things that don’t make an impact or have a low impact on plans.
While Acting Assistant Secretary of the DOL’s Employee Benefits Security Administration (EBSA) Jeanne Klinefelter Wilson said the proposal would reduce plan expenses, Rabitz notes that fiduciaries would have to demonstrate the basis for particular proxy votes, so it creates more work for sponsors, investment managers, trustees and trustee advisory firms. He says proxy advisory firms are in the crosshairs.
“It has a broader bite for service providers and proxy advisory firms that have to integrate this into their practices than for plan sponsors,” Rabitz says. He notes that within the 24 hours following the issuance of the proposed rule, some major investment management clients of Dechert’s that have a high degree of market penetration seemed to be reaching the consensus that the rule might have strong implications.
“The DOL is concerned with how to make sure that what plan sponsors and investment providers are getting from proxy adviser firms complies with the purpose of ERISA. It’s concerned they are just following the firms’ recommendations,” Rabitz adds.
Asked for comments about the rule, Lorraine Kelly, governance business head and managing director at Institutional Shareholder Services (ISS), a proxy advisory firm and parent company of PLANSPONSOR, said: “Once again, corporate interests and their lobbyists have successfully engineered action intended to mute the voice of shareholders. By attempting to impose unnecessary and draconian hurdles to proxy voting, this rule proposal and the broader, concerted campaign to disenfranchise investors will ultimately weaken portfolio company oversight and harm the ‘millions of American workers’ the DOL purports to protect.”
A Link Between Proxy Voting and ESG Investing?
The “broader, concerted campaign” Kelly mentioned likely is a reference to the pair of recently proposed rules—on ESG investing in retirement plans and on benefit plan proxy voting.
Rabitz says the ESG investing rule also shows the DOL’s stance that plan fiduciaries should not spend their time on social goals. “A fair reading of both proposals would be that the DOL is skeptical of other-than-financial motivations and of people using retirement funds to advance social goals,” he says. “The DOL is saying if you have to use ESG, you must use it for the right reasons—it’s one of many factors in evaluating investments.”
Oringer says the DOL did go the extra mile in saying it doesn’t want people pursuing social goals by using plan assets. With the ESG rule, however, the agency concedes that it is theoretically possible to have two equal investments, with one of those having ESG goals, but, with the proxy rule, it doesn’t want plans weighing in on ESG factors, he notes.
“The significance of the ESG proposed rule is that it would affect what plan assets will be invested in. The proxy rule doesn’t do that,” Oringer adds.
“Rippling through all of this appears to be a consistent distrust reflected by the DOL that people are looking at ESG factors for economic reasons,” Oringer says. “While it hasn’t said those exact words, I think it explains what the DOL is trying to do.
“If there were questions about what this administration thinks about ESG, those questions are waning now,” he says.
Rabitz says he thinks it’s fair to say the DOL is trying to eliminate the vacillation in guidance from different administrations and say, “This is what we intend.”
“The proxy rule is kind of a companion shot [to the ESG rule],” Rabitz says. “Both rules are worthy of consideration and study to decide whether the DOL is spot on or if it misunderstands the needs of plans.”
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