Interpretive Bulletin Relating to the Exercise of Shareholder Rights and Written Statements of Investment Policy, Including Proxy Voting Policies or Guidelines, 95879-95884 [2016-31515]
Download as PDF
<![CDATA[
rmajette on DSK2TPTVN1PROD with RULES
Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Rules and Regulations
unless the submitter requests and
provides justification for a longer
designation period.
(c) When notice to submitters is
required. (1) The Commission must
promptly provide written notice to the
submitter of confidential commercial
information whenever records
containing such information are
requested under the FOIA if the
Commission determines that it may be
required to disclose the records,
provided—
(i) The requested information has
been designated in good faith by the
submitter as information considered
protected from disclosure under
Exemption 4; or
(ii) The Commission has a reason to
believe that the requested information
may be protected from disclosure under
Exemption 4, but has not yet
determined whether the information is
protected from disclosure.
(2) The notice must either describe
the commercial information requested
or include a copy of the requested
records or portions of records
containing the information. In cases
involving a voluminous number of
submitters, the Commission may post or
publish a notice in a place or manner
reasonably likely to inform the
submitters of the proposed disclosure,
instead of sending individual
notifications.
(d) Exceptions to submitter notice
requirements. The notice requirements
of this section do not apply if:
(1) The Commission determines that
the information is exempt under the
FOIA, and therefore will not be
disclosed;
(2) The information has been lawfully
published or has been officially made
available to the public;
(3) Disclosure of the information is
required by a statute other than the
FOIA or by a regulation issued in
accordance with the requirements of
Executive Order 12600 of June 23, 1987;
or
(4) The designation made by the
submitter under paragraph (b) of this
section appears obviously frivolous. In
such case, the Commission must give
the submitter written notice of any final
decision to disclose the information
within 10 days prior to a specified
disclosure date.
(e) Opportunity to object to disclosure.
(1) The Commission must specify a
reasonable time period within which
the submitter must respond to the notice
referenced above.
(2) If a submitter has any objections to
disclosure, it should provide the agency
a detailed written statement that
specifies all grounds for withholding the
VerDate Sep<11>2014
14:51 Dec 28, 2016
Jkt 241001
particular information under any
exemption of the FOIA. In order to rely
on Exemption 4 as basis for
nondisclosure, the submitter must
explain why the information constitutes
a trade secret or commercial or financial
information that is confidential.
(3) A submitter who fails to respond
within the time period specified in the
notice will be considered to have no
objection to disclosure of the
information. The Commission is not
required to consider any information
received after the date of any disclosure
decision. Any information provided by
a submitter under this subpart may itself
be subject to disclosure under the FOIA.
(f) Analysis of objections. The
Commission must consider a submitter’s
objections and specific grounds for
nondisclosure in deciding whether to
disclose the requested information.
(g) Notice of intent to disclose.
Whenever the Commission decides to
disclose information over the objection
of a submitter, the Commission must
provide the submitter written notice,
which must include:
(1) A statement of the reasons why
each of the submitter’s disclosure
objections was not sustained;
(2) A description of the information to
be disclosed or copies of the records as
the Commission intends to release them;
and
(3) A specified disclosure date, which
must be 10 days after the notice.
(h) Notice of FOIA lawsuit. Whenever
a requester files a lawsuit seeking to
compel the disclosure of confidential
commercial information, the
Commission must promptly notify the
submitter.
(i) Requester notification. The
Commission must notify the requester
whenever it provides the submitter with
notice and an opportunity to object to
disclosure; whenever it notifies the
submitter of its intent to disclose the
requested information; and whenever a
submitter files a lawsuit to prevent the
disclosure of the information.
■ 17. Amend § 1610.21 as follows:
■ a. Revise the first sentence of
paragraph (a);
■ b. Redesignate paragraph (b) as
paragraph (c); and
■ c. Add new paragraph (b).
The revision and addition read as
follows:
§ 1610.21
Annual report.
(a) The Legal Counsel shall, on or
before February 1, submit individual
Freedom of Information Act reports for
each principal agency FOIA component
and one for the entire agency covering
the preceding fiscal year to the Attorney
General of the United States and to the
PO 00000
Frm 00027
Fmt 4700
Sfmt 4700
95879
director of the Office of Information
Government Services. * * *
(b) The Commission will make each
such report available for public
inspection in an electronic format. In
addition, the Commission will make the
raw statistical data used in each report
available in a timely manner for public
inspection in an electronic format,
which will be available—
(1) Without charge, license, or
registration requirement;
(2) In an aggregated, searchable
format; and
(3) In a format that may be
downloaded in bulk.
*
*
*
*
*
Dated: December 22, 2016.
For the Commission.
Jenny R. Yang,
Chair.
[FR Doc. 2016–31388 Filed 12–28–16; 8:45 am]
BILLING CODE 6570–01–P
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2509
RIN 1210–AB78
Interpretive Bulletin Relating to the
Exercise of Shareholder Rights and
Written Statements of Investment
Policy, Including Proxy Voting Policies
or Guidelines
Employee Benefits Security
Administration, Labor.
ACTION: Interpretive bulletin.
AGENCY:
This document sets forth
supplemental views of the Department
of Labor (Department) concerning the
legal standards imposed by sections
402, 403 and 404 of Part 4 of Title I of
the Employee Retirement Income
Security Act of 1974 (ERISA) with
respect to voting of proxies on securities
held in employee benefit plan
investment portfolios, the maintenance
of and compliance with statements of
investment policy, including proxy
voting policy, and the exercise of other
legal rights of a shareholder. In this
document, the Department withdraws
Interpretive Bulletin 2008–2 and
replaces it with Interpretive Bulletin
2016–1, which reinstates the language of
Interpretive Bulletin 94–2 with certain
modifications.
SUMMARY:
This interpretive bulletin is
effective on December 29, 2016.
FOR FURTHER INFORMATION CONTACT:
Office of Regulations and
DATES:
E:\FR\FM\29DER1.SGM
29DER1
95880
Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Rules and Regulations
Interpretations, Employee Benefits
Security Administration, (202) 693–
8500. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
rmajette on DSK2TPTVN1PROD with RULES
Background
Title I of the Employee Retirement
Income Security Act of 1974 (ERISA)
establishes minimum standards for the
operation of private-sector employee
benefit plans and includes fiduciary
responsibility rules governing the
conduct of plan fiduciaries. The
Department’s longstanding position is
that the fiduciary act of managing plan
assets which are shares of corporate
stock includes decisions on the voting
of proxies and other exercises of
shareholder rights. To assist plan
fiduciaries in understanding their
obligations under ERISA, the
Department issued Interpretive Bulletin
94–2 (IB 94–2) in 1994 and updated that
guidance in 2008 in Interpretive
Bulletin 2008–2 (IB 2008–2).1
IB 94–2 noted that the duty to vote
proxies lies exclusively with the plan
trustee unless ‘‘the power to manage,
acquire or dispose of the relevant assets
has been delegated by a named fiduciary
to one or more investment managers’’
pursuant to section 403(a)(2) of ERISA.
IB 94–2 also explained that when the
authority to manage plan assets has
been delegated to an investment
manager, ‘‘no person other than the
investment manager has authority to
vote proxies appurtenant to such plan
assets except to the extent that the
named fiduciary has reserved to itself
(or to another named fiduciary so
authorized by the plan document) the
right to direct a plan trustee regarding
the voting of proxies.’’ In addition, if the
plan document or the investment
management agreement does not
expressly preclude the investment
manager from voting proxies, the
investment manager has the exclusive
responsibility for proxy voting. An
investment manager is not relieved of its
own fiduciary responsibilities by
following directions of some other
person regarding the voting of proxies,
or by delegating such responsibility to
another person. IB 94–2 pointed out that
the maintenance of written statements
1 IB 94–2 was codified at 29 CFR 2509.94–2 and
published with an explanatory preamble in the
Federal Register at 59 FR 38863 (July 29, 1994). The
IB was presented as a restatement of views the
Department had expressed in two letters addressing
questions that arose concerning the voting of
proxies on shares of corporate stock held by plans.
The first letter was addressed to Helmuth Fandl,
Chairman of the Retirement Board of Avon Products
Inc. and dated February 23, 1988, and the second
letter was addressed to Robert A.G. Monks of
Institutional Shareholder Services, Inc. and dated
January 23, 1990.
VerDate Sep<11>2014
14:51 Dec 28, 2016
Jkt 241001
of investment policy, including
guidelines on voting proxies on
securities held in plan investment
portfolios, is consistent with Title I of
ERISA and that compliance with such a
policy would be required under ERISA
to the extent that such compliance with
respect to any given investment
decision is consistent with the
provisions of Title I and Title IV of
ERISA.
IB 94–2 also recognized that
fiduciaries may engage in other
shareholder activities intended to
monitor or influence corporate
management where the responsible
fiduciary concludes that there is a
reasonable expectation that such
monitoring or communication with
management, by the plan alone or
together with other shareholders, is
likely to enhance the value of the plan’s
investment in the corporation, after
taking into account the costs involved.
The bulletin observed that active
monitoring and communication may be
carried out through a variety of methods
including by means of correspondence
and meetings with corporate
management as well as by exercising the
legal rights of a shareholder.
IB 94–2 reiterated the Department’s
view that ERISA does not permit
fiduciaries to subordinate the economic
interests of participants and
beneficiaries to unrelated objectives in
voting proxies or in exercising other
shareholder rights, but pointed out that
a reasonable expectation of enhancing
the value of the plan’s investment
through shareholder activities may exist
in various circumstances, for example,
where plan investments in corporate
stock are held as long-term investments
or where a plan may not be able to
easily dispose of such an investment. IB
94–2 explained that active monitoring
and communication activities could
concern such issues as the
independence and expertise of
candidates for the corporation’s board of
directors and assuring that the board has
sufficient information to carry out its
responsibility to monitor management.
Other issues identified in the bulletin
included such matters as consideration
of the appropriateness of executive
compensation, the corporation’s policy
regarding mergers and acquisitions, the
extent of debt financing and
capitalization, the nature of long-term
business plans, the corporation’s
investment in training to develop its
work force, other workplace practices
and financial and non-financial
measures of corporate performance.2
2 The Department has not been alone in
emphasizing the significance of proxy voting to the
PO 00000
Frm 00028
Fmt 4700
Sfmt 4700
On October 17, 2008, the Department
replaced IB 94–2 with Interpretive
Bulletin 2008–2 codified at 29 CFR
2509.08–2.3 The Department’s intent
was to clarify and update the guidance
in IB 94–2 and to reflect interpretive
positions issued by the Department after
1994 on shareholder activism and
socially-directed proxy voting
initiatives. On the same date, the
Department published Interpretive
Bulletin 2008–1 (IB 2008–1) to update
Interpretive Bulletin 94–1 (IB 94–1),
which addressed issues regarding
fiduciary consideration of investments
and investment strategies that take into
account environmental, social and
governance (ESG) factors.
The Department believes that in the
eight years since its publication, the
changes made to IB 94–2 by IB 2008–2
have been misunderstood and may have
worked to discourage ERISA plan
fiduciaries who are responsible for the
management of shares of corporate stock
from voting proxies and engaging in
other prudent exercises of shareholder
rights.4 In particular, the Department is
concerned that IB 2008–2 has been read
by some stakeholders to articulate a
general rule that broadly prohibits
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
value of investments. See SEC Final Rule,
Disclosure of Proxy Voting Policies and Proxy
Voting Records by Registered Management
Investment Companies, Release Nos. 33–8188; 34–
47304; IC–25922 (Jan. 31, 2003) and SEC Final Rule,
Proxy Voting by Investment Advisers, Release No.
IA–2106 (Jan. 31, 2003). In addition, the SEC also
adopted a rule requiring corporations to provide
additional disclosure in proxy materials associated
with the election of directors. See SEC Final Rule,
Proxy Disclosure Enhancements, Release Nos. 33–
9089; 34–61175 (Dec. 16, 2009).
3 Also published in the Federal Register at 73 FR
61731 (Oct. 17, 2008).
4 The Department reached a similar conclusion in
rescinding IB 2008–1 on economically targeted
investments (ETIs) and reinstating the language
from its original 1994 guidance in IB 94–1. See
Interpretive Bulletin 2015–1, 80 FR 65135 (Oct. 26,
2015). The Department noted that the ETI market
which considers ESG factors had grown
internationally as new tools and measures were
developed leaving investors better equipped to
evaluate the question of whether a given investment
could both benefit the plan in financial terms and
advance environmental, social or corporate
governance goals. In fact, the new tools and
measures have revealed that environmental, social
and governance impacts can be intrinsic to the
market value of an investment. Based on those
developments, the Department concluded that its
attempt to update IB 94–1 in 2008, rather than
clarifying permissible ESG considerations, had in
practice had a chilling effect on ERISA plans
participating in the growth of economically targeted
investing.
E:\FR\FM\29DER1.SGM
29DER1
Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Rules and Regulations
rmajette on DSK2TPTVN1PROD with RULES
economic value of the plan’s
investment.
The essential point of IB 94–2,
however, was to articulate a general
principle that a fiduciary’s obligation to
manage plan assets prudently extends to
proxy voting. As such, IB 94–2 properly
read was meant to express the view that
proxies should be voted as part of the
process of managing the plan’s
investment in company stock unless a
responsible plan fiduciary determined
that the time and costs associated with
voting proxies with respect to certain
types of proposals or issuers may not be
in the plan’s best interest. IB 94–2 was
also intended to make it clear that
fiduciary duties associated with voting
proxies encompass the monitoring of
decisions made and actions taken with
regard to proxy voting, and that it was
appropriate for a plan fiduciary to incur
reasonable expenses in fulfilling those
fiduciary obligations. While there may
be special circumstances that might
warrant a discrete analysis of the cost of
the shareholder activity versus the
economic benefit associated with the
outcome of the activity, the Department
did not intend to imply that such an
analysis should be conducted in most
cases. In most cases, proxy voting and
other shareholder engagement does not
involve a significant expenditure of
funds by individual plan investors
because the activities are engaged in by
institutional investment managers
appointed as the responsible plan
fiduciary pursuant to sections 402(c)(3),
403(a)(2) and 3(38) of ERISA. Those
investment managers often engage
consultants, including proxy advisory
firms, in an attempt to further reduce
the costs of researching proxy matters
and exercising shareholder rights.5
Thus, such a conclusion ignores the fact
that many proxy votes involve very
5 In selecting an investment manager for a plan,
the responsible plan fiduciary should include a
review of any voting policies or guidelines that
would be followed in the management of plan
assets to ensure consistency with ERISA. Further,
as plan fiduciaries, investment managers who
utilize proxy advisory firms should engage in an
objective process that is designed to elicit
information necessary to assess the provider’s
qualifications, quality of services offered, and
reasonableness of fees charged for the service. The
process also must avoid self-dealing, conflicts of
interest or other improper influence. The
investment manager in considering any proxy
recommendation should assure that it is fully
informed of potential conflicts of proxy advisory
firms and the steps the firm has taken to address
them. See generally ‘‘Proxy Voting: Proxy Voting
Responsibilities of Investment Advisers and
Availability of Exemptions from the Proxy Rules for
Proxy Advisory Firms,’’ SEC Staff Legal Bulletin
No. 20 (IM/CF) (June 30, 2014) (discussing issues
that may arise under the federal securities laws for
registered investment advisers in connection with
selection and monitoring of proxy advisory firms,
among other things).
VerDate Sep<11>2014
14:51 Dec 28, 2016
Jkt 241001
little, if any, additional expense to the
individual plan shareholders to arrive at
a prudent result and that, depending on
the particular resolution and the extent
of the plan’s holdings, not voting, in
fact, may in effect count one way or
another.
The pervasiveness of US publiclytraded stock in ERISA plan investment
portfolios, both direct holdings and
through pooled investment funds,
including index funds, is another factor
that contributes to the importance of
proxy voting and shareholder
engagement practices. If there is a
problem identified with a portfolio
company’s management, selling the
stock and finding a replacement
investment may not be a prudent
solution for a plan fiduciary. As
Vanguard founder John Bogle put it in
the context of index funds, ‘‘the only
weapon [index funds] have, if we don’t
like the management, is to get a new
management or to force the management
to reform.’’ 6
The Department is also concerned
that despite the guidance on ESG issues
the Department recently provided in IB
2015–1, statements in IB 2008–2 may
cause confusion as to whether or how a
plan fiduciary may consider ESG issues
in connection with proxy voting or
undertaking other shareholder
engagement activities. The Department
has rejected a construction of ERISA
that would render ERISA’s tight limits
on the use of plan assets illusory and
that would permit plan fiduciaries to
expend trust assets to promote myriad
public policy preferences. Rather, plan
fiduciaries may not increase expenses,
sacrifice investment returns, or reduce
the security of plan benefits in order to
promote collateral goals. However, by
focusing on a ‘‘cost-benefit analysis’’
demonstrating a ‘‘more likely than not’’
enhancement in the economic value of
the investment, the Department believes
that IB 2008–2 may be read as
discouraging fiduciaries from
recognizing the long-term financial
benefits that, although difficult to
quantify, can result from thoughtful
shareholder engagement when voting
proxies, establishing a proxy voting
policy, or otherwise exercising rights as
shareholders.
The existence of financial benefits
associated with shareholder engagement
is suggested by the fact that a growing
number of institutional investors are
now engaging companies on ESG issues.
According to a 2014 survey by the US
6 Interview by Christine Benz with John Bogle,
Founder, Vanguard (Oct. 10, 2010) (available at
www.morningstar.com/videos/359002/bogle-indexfunds-power-in-corporate-governance.aspx).
PO 00000
Frm 00029
Fmt 4700
Sfmt 4700
95881
SIF Foundation, 202 institutional
investors or money managers
representing $1.72 trillion in USdomiciled assets filed or co-filed
shareholder resolutions on ESG issues at
publicly traded companies from 2012
through 2014.7 The members of the
Investor Network on Climate Risk
(INCR), a network of institutions
representing more than $14 trillion in
assets, engage with companies in their
portfolios on climate and sustainability
issues. Members include BlackRock,
California Public Employees’ Retirement
System, Deutsche Asset & Wealth
Management, Prudential Investment
Management, State Street Global
Advisors and TIAA Global Asset
Management.8 Globally, over 1300 asset
managers and asset owners have signed
the Principles for Responsible
Investment, the second principle of
which states that the managers and
owners will be active owners and
incorporate ESG issues into ownership
policies and practices.9 Companies are
also being required to be more
transparent in the way they address ESG
issues. For example, in 2010, the DoddFrank Act required publicly traded
companies to allow shareholders an
advisory vote on executive pay plans at
least once every three years.10 Similarly,
in 2009 the SEC issued rules which
required companies to disclose in proxy
statements relating to the election of
directors, among other things, their
policy for consideration of diversity in
the process by which candidates for
director are considered for nomination
by a company’s nominating
committee.11
Other market developments further
substantiate the financial benefits from
shareholder engagement. Companies
themselves are seeking more
engagement as a way of understanding
and responding to their shareholders’
7 US SIF FOUNDATION, Report on US
Sustainable, Responsible and Impact Investing
Trends 2014.
8 See INCR membership list at www.ceres.org/
investor-network/incr/member-directory.
9 The Principles for Responsible Investment (PRI)
has been supported by the United Nations since its
launch. The PRI has two UN partners, the United
Nations Environment Programme Finance Initiative
and the United Nations Global Compact, which
play an important role in delivering the PRI’s
strategy. See ‘‘About the PRI’’ for further
explanation of PRI and their responsible investment
effort at www.unpri.org/about.
10 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law No. 111–203,
124 Stat. 1376 (2010), for section 951 requirements.
See also SEC Final Rule, Shareholder Approval of
Executive Compensation and Golden Parachute
Compensation, Release Nos. 33–9178; 34–63768
(Jan. 25, 2011).
11 SEC Final Rule, Proxy Disclosure
Enhancements, Release Nos. 33–9089; 34–61175
(Dec. 16, 2009).
E:\FR\FM\29DER1.SGM
29DER1
95882
Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Rules and Regulations
rmajette on DSK2TPTVN1PROD with RULES
views.12 There have also been market
events that were catalysts for the growth
of shareholder engagement. The
financial crisis of 2008 exposed some of
the pitfalls of shareholder inattention to
corporate governance and highlighted
the merits of shareholders taking a more
engaged role with the companies.
This is not a trend unique to the
United States. Other countries have
recognized these developments and
taken steps to provide guidance on
proxy voting and shareholder
engagement in the form of ‘‘stewardship
codes.’’ The first stewardship code was
published in 2010 by the UK’s Financial
Reporting Council, which traces its
origins to principles published by the
UK’s Institutional Shareholders
Committee in 2002 and later the
International Corporate Governance
Network Principles on Institutional
Investor Responsibilities in 2007.13
Other such codes have followed,
including in Canada, Italy, Japan,
Singapore, South Africa, Switzerland,
the Netherlands, and Malaysia.14
For all the above reasons, the
Department is concerned that the
changes to IB 94–2 in IB 2008–2 are out
of step with important domestic and
international trends in investment
management and have the potential to
dissuade ERISA fiduciaries from
exercising shareholder rights, including
the voting of proxies, in areas that are
increasingly being recognized as
important to long-term shareholder
value. In fact, the Department believes
the principles originally articulated in
IB 94–2, with certain updates to reflect
the trends on shareholder engagement
discussed above, are a better expression
of a fiduciary’s obligations under
sections 402(c)(3), 403(a) and
404(a)(1)(A) of ERISA on these issues.
The Department therefore has decided
to withdraw IB 2008–2 and replace it
with Interpretive Bulletin 2016–1 which
reinstates the language of IB 94–2 with
minor updates.
The following Interpretive Bulletin
deals solely with the applicability of the
prudence and exclusive purpose
requirements of ERISA as applied to
fiduciary decisions with respect to
voting of proxies on securities held in
employee benefit plan investment
portfolios, the maintenance of and
12 Blackrock and Ceres, 21st Century Engagement:
Investor Strategies for Incorporating ESG
Considerations into Corporate Interactions (2015).
See also Joseph McCahery, Zacharias Sautner &
Laura T. Starks, Behind the Scenes The Corporate
Governance Preferences of Institutional Investors,
71 The Journal of Finance 2905–2932 (Dec. 2016).
13 BLACKROCK AND CERES, supra footnote 12,
at 34.
14 Id.
VerDate Sep<11>2014
14:51 Dec 28, 2016
Jkt 241001
compliance with statements of
investment policy, including proxy
voting policy, and the appropriateness
under ERISA of shareholder engagement
with corporate management by plan
fiduciaries. The bulletin does not
supersede the regulatory standard
contained at 29 CFR 2550.404a–1, nor
does it address any issues which may
arise in connection with the prohibited
transaction provisions under ERISA
section 406 or the statutory exemptions
under ERISA section 408 from those
provisions. This Interpretative Bulletin
is a restatement of IB 94–2 with certain
updates to the examples of areas where
monitoring or communication with
management is likely to enhance the
value of the plan’s investment in the
corporation.
List of Subjects in 29 CFR Part 2509
Employee benefit plans, Pensions.
For the reasons set forth in the
preamble, the Department is amending
part 2509 of title 29 of the Code of
Federal Regulations as follows:
PART 2509—INTERPRETIVE
BULLETINS RELATING TO THE
EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974
1. The authority citation for part 2509
continues to read as follows:
■
Authority: 29 U.S.C. 1135. Secretary of
Labor’s Order 1–2003, 68 FR 5374 (Feb. 3,
2003). Sections 2509.75–10 and 2509.75–2
issued under 29 U.S.C. 1052, 1053, 1054. Sec.
2509.75–5 also issued under 29 U.S.C. 1002.
Sec. 2509.95–1 also issued under sec. 625,
Public Law 109–280, 120 Stat. 780.
§ 2509.08–2
[Removed]
2. Remove § 2509.08–2.
■ 3. Add § 2509.2016–01 to read as
follows:
■
§ 2509.2016–01 Interpretive Bulletin
relating to the exercise of shareholder
rights and written statements of investment
policy, including proxy voting policies or
guidelines.
This interpretive bulletin sets forth
the Department of Labor’s (the
Department) interpretation of sections
402, 403 and 404 of the Employee
Retirement Income Security Act of 1974
(ERISA) as those sections apply to
voting of proxies on securities held in
employee benefit plan investment
portfolios and the maintenance of and
compliance with statements of
investment policy, including proxy
voting policy. In addition, this
interpretive bulletin provides guidance
on the appropriateness under ERISA of
active engagement with corporate
management by plan fiduciaries.
PO 00000
Frm 00030
Fmt 4700
Sfmt 4700
(1) Proxy Voting
The fiduciary act of managing plan
assets that are shares of corporate stock
includes the voting of proxies
appurtenant to those shares of stock. As
a result, the responsibility for voting
proxies lies exclusively with the plan
trustee except to the extent that either
(1) the trustee is subject to the directions
of a named fiduciary pursuant to ERISA
section 403(a)(1), or (2) the power to
manage, acquire or dispose of the
relevant assets has been delegated by a
named fiduciary to one or more
investment managers pursuant to ERISA
section 403(a)(2). Where the authority to
manage plan assets has been delegated
to an investment manager pursuant to
section 403(a)(2), no person other than
the investment manager has authority to
vote proxies appurtenant to such plan
assets except to the extent that the
named fiduciary has reserved to itself
(or to another named fiduciary so
authorized by the plan document) the
right to direct a plan trustee regarding
the voting of proxies. In this regard, a
named fiduciary, in delegating
investment management authority to an
investment manager, could reserve to
itself the right to direct a trustee with
respect to the voting of all proxies or
reserve to itself the right to direct a
trustee as to the voting of only those
proxies relating to specified assets or
issues.
If the plan document or investment
management agreement provides that
the investment manager is not required
to vote proxies, but does not expressly
preclude the investment manager from
voting proxies, the investment manager
would have exclusive responsibility for
voting proxies. Moreover, an investment
manager would not be relieved of its
own fiduciary responsibilities by
following directions of some other
person regarding the voting of proxies,
or by delegating such responsibility to
another person. If, however, the plan
document or the investment
management contract expressly
precludes the investment manager from
voting proxies, the responsibility for
voting proxies would lie exclusively
with the trustee. The trustee, however,
consistent with the requirements of
ERISA section 403(a)(1), may be subject
to the directions of a named fiduciary if
the plan so provides.
The fiduciary duties described at
ERISA section 404(a)(1)(A) and(B),
require that, in voting proxies, the
responsible fiduciary consider those
factors that may affect the value of the
plan’s investment and not subordinate
the interests of the participants and
beneficiaries in their retirement income
E:\FR\FM\29DER1.SGM
29DER1
Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Rules and Regulations
rmajette on DSK2TPTVN1PROD with RULES
to unrelated objectives. These duties
also require that the named fiduciary
appointing an investment manager
periodically monitor the activities of the
investment manager with respect to the
management of plan assets, including
decisions made and actions taken by the
investment manager with regard to
proxy voting decisions. The named
fiduciary must carry out this
responsibility solely in the interest of
the participants and beneficiaries and
without regard to its relationship to the
plan sponsor.
It is the view of the Department that
compliance with the duty to monitor
necessitates proper documentation of
the activities that are subject to
monitoring. Thus, the investment
manager or other responsible fiduciary
would be required to maintain accurate
records as to proxy voting. Moreover, if
the named fiduciary is to be able to
carry out its responsibilities under
ERISA section 404(a) in determining
whether the investment manager is
fulfilling its fiduciary obligations in
investing plans assets in a manner that
justifies the continuation of the
management appointment, the proxy
voting records must enable the named
fiduciary to review not only the
investment manager’s voting procedure
with respect to plan-owned stock, but
also to review the actions taken in
individual proxy voting situations.
The fiduciary obligations of prudence
and loyalty to plan participants and
beneficiaries require the responsible
fiduciary to vote proxies on issues that
may affect the value of the plan’s
investment. This principle applies
broadly. However, the Department
recognizes that in some special cases
voting proxies may involve out of the
ordinary costs or unusual requirements,
for example in the case of voting proxies
on shares of certain foreign
corporations. Thus, in such cases, a
fiduciary should consider whether the
plan’s vote, either by itself or together
with the votes of other shareholders, is
expected to have an effect on the value
of the plan’s investment that warrants
the additional cost of voting. Moreover,
a fiduciary, in deciding whether to
purchase shares for which this may be
the case, should consider whether the
difficulty and expense in voting the
shares is reflected in their market price.
(2) Statements of Investment Policy
The maintenance by an employee
benefit plan of a statement of
investment policy designed to further
the purposes of the plan and its funding
policy is consistent with the fiduciary
obligations set forth in ERISA section
404(a)(1)(A) and (B). Since the fiduciary
VerDate Sep<11>2014
14:51 Dec 28, 2016
Jkt 241001
act of managing plan assets that are
shares of corporate stock includes the
voting of 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. For purposes of this
document, the term ‘‘statement of
investment policy’’ means a written
statement that provides the fiduciaries
who are responsible for plan
investments with guidelines or general
instructions concerning various types or
categories of investment management
decisions, which may include proxy
voting decisions as well as policies
concerning economically targeted
investments or incorporating
environmental, social or governance
(ESG) factors in investment policy
statements or integrating ESG-related
tools, metrics and analyses to evaluate
an investment’s risk or return or choose
among equivalent investments. A
statement of investment policy is
distinguished from directions as to the
purchase or sale of a specific investment
at a specific time or as to voting specific
plan proxies.
In plans where investment
management responsibility is delegated
to one or more investment managers
appointed by the named fiduciary
pursuant to ERISA section 402(c)(3), the
named fiduciary responsible for
appointment of investment managers
has the authority to condition the
appointment on acceptance of a
statement of investment policy. Thus,
such a named fiduciary may expressly
require, as a condition of the investment
management agreement, that an
investment manager comply with the
terms of a statement of investment
policy which sets forth guidelines
concerning investments and investment
courses of action which the investment
manager is authorized or is not
authorized to make. Such investment
policy may include a policy or
guidelines on the voting of proxies on
shares of stock for which the investment
manager is responsible. In the absence
of such an express requirement to
comply with an investment policy, the
authority to manage the plan assets
placed under the control of the
investment manager would lie
exclusively with the investment
manager. Although a trustee may be
subject to the directions of a named
fiduciary pursuant to ERISA section
403(a)(1), an investment manager who
has authority to make investment
decisions, including proxy voting
decisions, would never be relieved of its
fiduciary responsibility if it followed
directions as to specific investment
PO 00000
Frm 00031
Fmt 4700
Sfmt 4700
95883
decisions from the named fiduciary or
any other person.
Statements of investment policy
issued by a named fiduciary authorized
to appoint investment managers would
be part of the ‘‘documents and
instruments governing the plan’’ within
the meaning of ERISA section
404(a)(1)(D). An investment manager to
whom such investment policy applies
would be required to comply with such
policy, pursuant to ERISA section
404(a)(1)(D) insofar as the policy
directives or guidelines are consistent
with titles I and IV of ERISA. Therefore,
if, for example, compliance with the
guidelines in a given instance would be
imprudent, then the investment
manager’s failure to follow the
guidelines would not violate ERISA
section 404(a)(1)(D). Moreover, ERISA
section 404(a)(1)(D) does not shield the
investment manager from liability for
imprudent actions taken in compliance
with a statement of investment policy.
The plan document or trust agreement
may expressly provide a statement of
investment policy to guide the trustee or
may authorize a named fiduciary to
issue a statement of investment policy
applicable to a trustee. Where a plan
trustee is subject to an investment
policy, the trustee’s duty to comply with
such investment policy would also be
analyzed under ERISA section
404(a)(1)(D). Thus, the trustee would be
required to comply with the statement
of investment policy unless, for
example, it would be imprudent to do
so in a given instance.
Maintenance of a statement of
investment policy by a named fiduciary
does not relieve the named fiduciary of
its obligations under ERISA section
404(a) with respect to the appointment
and monitoring of an investment
manager or trustee. In this regard, the
named fiduciary appointing an
investment manager must periodically
monitor the investment manager’s
activities with respect to management of
the plan assets. Moreover, compliance
with ERISA section 404(a)(1)(B) would
require maintenance of proper
documentation of the activities of the
investment manager and of the named
fiduciary of the plan in monitoring the
activities of the investment manager. In
addition, in the view of the Department,
a named fiduciary’s determination of
the terms of a statement of investment
policy is an exercise of fiduciary
responsibility and, as such, statements
may need to take into account factors
such as the plan’s funding policy and its
liquidity needs as well as issues of
prudence, diversification and other
fiduciary requirements of ERISA.
E:\FR\FM\29DER1.SGM
29DER1
95884
Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Rules and Regulations
rmajette on DSK2TPTVN1PROD with RULES
An investment manager of a pooled
investment vehicle that holds assets of
more than one employee benefit plan
may be subject to a proxy voting policy
of one plan that conflicts with the proxy
voting policy of another plan.
Compliance with ERISA section
404(a)(1)(D) would require the
investment manager to reconcile, insofar
as possible, the conflicting policies
(assuming compliance with each policy
would be consistent with ERISA section
404(a)(1)(D)) and, if necessary and to the
extent permitted by applicable law, vote
the relevant proxies to reflect such
policies in proportion to each plan’s
interest in the pooled investment
vehicle. If, however, the investment
manager determines that compliance
with conflicting voting policies would
violate ERISA section 404(a)(1)(D) in a
particular instance, for example, by
being imprudent or not solely in the
interest of plan participants, the
investment manager would be required
to ignore the voting policy that would
violate ERISA section 404(a)(1)(D) in
that instance. Such an investment
manager may, however, require
participating investors to accept the
investment manager’s own investment
policy statement, including any
statement of proxy voting policy, before
they are allowed to invest. As with
investment policies originating from
named fiduciaries, a policy initiated by
an investment manager and adopted by
the participating plans would be
regarded as an instrument governing the
participating plans, and the investment
manager’s compliance with such a
policy would be governed by ERISA
section 404(a)(1)(D).
(3) Shareholder Engagement
An investment policy that
contemplates activities intended to
monitor or influence the management of
corporations in which the plan owns
stock is consistent with a fiduciary’s
obligations under ERISA where the
responsible fiduciary concludes that
there is a reasonable expectation that
such monitoring or communication with
management, by the plan alone or
together with other shareholders, is
likely to enhance the value of the plan’s
investment in the corporation, after
taking into account the costs involved.
Such a reasonable expectation may exist
in various circumstances, for example,
where plan investments in corporate
stock are held as long-term investments,
where a plan may not be able to easily
dispose of such an investment, or where
the same shareholder engagement issue
is likely to exist in the case of available
alternative investments. Active
monitoring and communication
VerDate Sep<11>2014
14:51 Dec 28, 2016
Jkt 241001
activities would generally concern such
issues as the independence and
expertise of candidates for the
corporation’s board of directors and
assuring that the board has sufficient
information to carry out its
responsibility to monitor management.
Other issues may include such matters
as governance structures and practices,
particularly those involving board
composition, executive compensation,
transparency and accountability in
corporate decision-making,
responsiveness to shareholders, the
corporation’s policy regarding mergers
and acquisitions, the extent of debt
financing and capitalization, the nature
of long-term business plans including
plans on climate change preparedness
and sustainability, governance and
compliance policies and practices for
avoiding criminal liability and ensuring
employees comply with applicable laws
and regulations, the corporation’s
workforce practices (e.g., investment in
training to develop its work force,
diversity, equal employment
opportunity), policies and practices to
address environmental or social factors
that have an impact on shareholder
value, and other financial and nonfinancial measures of corporate
performance. Active monitoring and
communication may be carried out
through a variety of methods including
by means of correspondence and
meetings with corporate management as
well as by exercising the legal rights of
a shareholder.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits
Security Administration, Department of
Labor.
[FR Doc. 2016–31515 Filed 12–28–16; 8:45 am]
BILLING CODE 4510–29–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[EPA–HQ–OAR–2016–0691; FRL–9957–28–
OAR]
Extension of Deadline for Action on
the November 2016 Section 126
Petition From Delaware
Environmental Protection
Agency (EPA).
ACTION: Final rule.
AGENCY:
In this action, the
Environmental Protection Agency (EPA)
is determining that 60 days is
insufficient time to complete the
technical and other analyses and public
notice-and-comment process required
SUMMARY:
PO 00000
Frm 00032
Fmt 4700
Sfmt 4700
for our review of a petition submitted by
the state of Delaware pursuant to section
126 of the Clean Air Act (CAA). The
petition requests that the EPA make a
finding that Homer City Generating
Station, located in Indiana County,
Pennsylvania, emits air pollution that
significantly contributes to
nonattainment and interferes with
maintenance of the 2008 and 2015
ozone national ambient air quality
standards (NAAQS) in the state of
Delaware. Under section 307(d)(10) of
CAA, the EPA is authorized to grant a
time extension for responding to a
petition if the EPA determines that the
extension is necessary to afford the
public, and the agency, adequate
opportunity to carry out the purposes of
the section 307(d) notice-and-comment
rulemaking requirements. By this
action, the EPA is making that
determination. The EPA is therefore
extending the deadline for acting on the
petition to no later than July 9, 2017.
DATES: This final rule is effective on
December 29, 2016.
ADDRESSES: The EPA has established a
docket for this action under Docket ID
No. EPA–HQ–OAR–2016–0691. All
documents in the docket are listed on
the https://www.regulations.gov Web
site. Although listed in the index, some
information is not publicly available,
e.g., Confidential Business Information
or other information whose disclosure is
restricted by statute. Certain other
material, such as copyrighted material,
is not placed on the Internet and will be
publicly available only in hard copy
form. Publicly available docket
materials are available electronically
through https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Mr.
Benjamin Gibson, Office of Air Quality
Planning and Standards (C545–E), U.S.
EPA, Research Triangle Park, North
Carolina 27709, telephone number (919)
541–3277, email: gibson.benjamin@
epa.gov.
SUPPLEMENTARY INFORMATION:
I. Background and Legal Requirements
for Interstate Air Pollution
This is a procedural action to extend
the deadline for the EPA to respond to
a petition from the state of Delaware
filed pursuant to CAA section 126(b).
The EPA received the petition on
November 10, 2016. The petition
requests that the EPA make a finding
under section 126(b) of the CAA that the
Homer City Generating Station, located
in Indiana County, Pennsylvania, is
operating in a manner that emits air
pollutants in violation of the provisions
of section 110(a)(2)(D)(i)(I) of the CAA
E:\FR\FM\29DER1.SGM
29DER1
]]>Agencies
[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Rules and Regulations]
[Pages 95879-95884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31515]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2509
RIN 1210-AB78
Interpretive Bulletin Relating to the Exercise of Shareholder
Rights and Written Statements of Investment Policy, Including Proxy
Voting Policies or Guidelines
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Interpretive bulletin.
-----------------------------------------------------------------------
SUMMARY: This document sets forth supplemental views of the Department
of Labor (Department) concerning the legal standards imposed by
sections 402, 403 and 404 of Part 4 of Title I of the Employee
Retirement Income Security Act of 1974 (ERISA) with respect to voting
of proxies on securities held in employee benefit plan investment
portfolios, the maintenance of and compliance with statements of
investment policy, including proxy voting policy, and the exercise of
other legal rights of a shareholder. In this document, the Department
withdraws Interpretive Bulletin 2008-2 and replaces it with
Interpretive Bulletin 2016-1, which reinstates the language of
Interpretive Bulletin 94-2 with certain modifications.
DATES: This interpretive bulletin is effective on December 29, 2016.
FOR FURTHER INFORMATION CONTACT: Office of Regulations and
[[Page 95880]]
Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
Background
Title I of the Employee Retirement Income Security Act of 1974
(ERISA) establishes minimum standards for the operation of private-
sector employee benefit plans and includes fiduciary responsibility
rules governing the conduct of plan fiduciaries. The Department's
longstanding position is that the fiduciary act of managing plan assets
which are shares of corporate stock includes decisions on the voting of
proxies and other exercises of shareholder rights. To assist plan
fiduciaries in understanding their obligations under ERISA, the
Department issued Interpretive Bulletin 94-2 (IB 94-2) in 1994 and
updated that guidance in 2008 in Interpretive Bulletin 2008-2 (IB 2008-
2).\1\
---------------------------------------------------------------------------
\1\ IB 94-2 was codified at 29 CFR 2509.94-2 and published with
an explanatory preamble in the Federal Register at 59 FR 38863 (July
29, 1994). The IB was presented as a restatement of views the
Department had expressed in two letters addressing questions that
arose concerning the voting of proxies on shares of corporate stock
held by plans. The first letter was addressed to Helmuth Fandl,
Chairman of the Retirement Board of Avon Products Inc. and dated
February 23, 1988, and the second letter was addressed to Robert
A.G. Monks of Institutional Shareholder Services, Inc. and dated
January 23, 1990.
---------------------------------------------------------------------------
IB 94-2 noted that the duty to vote proxies lies exclusively with
the plan trustee unless ``the power to manage, acquire or dispose of
the relevant assets has been delegated by a named fiduciary to one or
more investment managers'' pursuant to section 403(a)(2) of ERISA. IB
94-2 also explained that when the authority to manage plan assets has
been delegated to an investment manager, ``no person other than the
investment manager has authority to vote proxies appurtenant to such
plan assets except to the extent that the named fiduciary has reserved
to itself (or to another named fiduciary so authorized by the plan
document) the right to direct a plan trustee regarding the voting of
proxies.'' In addition, if the plan document or the investment
management agreement does not expressly preclude the investment manager
from voting proxies, the investment manager has the exclusive
responsibility for proxy voting. An investment manager is not relieved
of its own fiduciary responsibilities by following directions of some
other person regarding the voting of proxies, or by delegating such
responsibility to another person. IB 94-2 pointed out that the
maintenance of written statements of investment policy, including
guidelines on voting proxies on securities held in plan investment
portfolios, is consistent with Title I of ERISA and that compliance
with such a policy would be required under ERISA to the extent that
such compliance with respect to any given investment decision is
consistent with the provisions of Title I and Title IV of ERISA.
IB 94-2 also recognized that fiduciaries may engage in other
shareholder activities intended to monitor or influence corporate
management where the responsible fiduciary concludes that there is a
reasonable expectation that such monitoring or communication with
management, by the plan alone or together with other shareholders, is
likely to enhance the value of the plan's investment in the
corporation, after taking into account the costs involved. The bulletin
observed that active monitoring and communication may be carried out
through a variety of methods including by means of correspondence and
meetings with corporate management as well as by exercising the legal
rights of a shareholder.
IB 94-2 reiterated the Department's view that ERISA does not permit
fiduciaries to subordinate the economic interests of participants and
beneficiaries to unrelated objectives in voting proxies or in
exercising other shareholder rights, but pointed out that a reasonable
expectation of enhancing the value of the plan's investment through
shareholder activities may exist in various circumstances, for example,
where plan investments in corporate stock are held as long-term
investments or where a plan may not be able to easily dispose of such
an investment. IB 94-2 explained that active monitoring and
communication activities could concern such issues as the independence
and expertise of candidates for the corporation's board of directors
and assuring that the board has sufficient information to carry out its
responsibility to monitor management. Other issues identified in the
bulletin included such matters as consideration of the appropriateness
of executive compensation, the corporation's policy regarding mergers
and acquisitions, the extent of debt financing and capitalization, the
nature of long-term business plans, the corporation's investment in
training to develop its work force, other workplace practices and
financial and non-financial measures of corporate performance.\2\
---------------------------------------------------------------------------
\2\ The Department has not been alone in emphasizing the
significance of proxy voting to the value of investments. See SEC
Final Rule, Disclosure of Proxy Voting Policies and Proxy Voting
Records by Registered Management Investment Companies, Release Nos.
33-8188; 34-47304; IC-25922 (Jan. 31, 2003) and SEC Final Rule,
Proxy Voting by Investment Advisers, Release No. IA-2106 (Jan. 31,
2003). In addition, the SEC also adopted a rule requiring
corporations to provide additional disclosure in proxy materials
associated with the election of directors. See SEC Final Rule, Proxy
Disclosure Enhancements, Release Nos. 33-9089; 34-61175 (Dec. 16,
2009).
---------------------------------------------------------------------------
On October 17, 2008, the Department replaced IB 94-2 with
Interpretive Bulletin 2008-2 codified at 29 CFR 2509.08-2.\3\ The
Department's intent was to clarify and update the guidance in IB 94-2
and to reflect interpretive positions issued by the Department after
1994 on shareholder activism and socially-directed proxy voting
initiatives. On the same date, the Department published Interpretive
Bulletin 2008-1 (IB 2008-1) to update Interpretive Bulletin 94-1 (IB
94-1), which addressed issues regarding fiduciary consideration of
investments and investment strategies that take into account
environmental, social and governance (ESG) factors.
---------------------------------------------------------------------------
\3\ Also published in the Federal Register at 73 FR 61731 (Oct.
17, 2008).
---------------------------------------------------------------------------
The Department believes that in the eight years since its
publication, the changes made to IB 94-2 by IB 2008-2 have been
misunderstood and may have worked to discourage ERISA plan fiduciaries
who are responsible for the management of shares of corporate stock
from voting proxies and engaging in other prudent exercises of
shareholder rights.\4\ In particular, the Department is concerned that
IB 2008-2 has been read by some stakeholders to articulate a general
rule that broadly prohibits 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
[[Page 95881]]
economic value of the plan's investment.
---------------------------------------------------------------------------
\4\ The Department reached a similar conclusion in rescinding IB
2008-1 on economically targeted investments (ETIs) and reinstating
the language from its original 1994 guidance in IB 94-1. See
Interpretive Bulletin 2015-1, 80 FR 65135 (Oct. 26, 2015). The
Department noted that the ETI market which considers ESG factors had
grown internationally as new tools and measures were developed
leaving investors better equipped to evaluate the question of
whether a given investment could both benefit the plan in financial
terms and advance environmental, social or corporate governance
goals. In fact, the new tools and measures have revealed that
environmental, social and governance impacts can be intrinsic to the
market value of an investment. Based on those developments, the
Department concluded that its attempt to update IB 94-1 in 2008,
rather than clarifying permissible ESG considerations, had in
practice had a chilling effect on ERISA plans participating in the
growth of economically targeted investing.
---------------------------------------------------------------------------
The essential point of IB 94-2, however, was to articulate a
general principle that a fiduciary's obligation to manage plan assets
prudently extends to proxy voting. As such, IB 94-2 properly read was
meant to express the view that proxies should be voted as part of the
process of managing the plan's investment in company stock unless a
responsible plan fiduciary determined that the time and costs
associated with voting proxies with respect to certain types of
proposals or issuers may not be in the plan's best interest. IB 94-2
was also intended to make it clear that fiduciary duties associated
with voting proxies encompass the monitoring of decisions made and
actions taken with regard to proxy voting, and that it was appropriate
for a plan fiduciary to incur reasonable expenses in fulfilling those
fiduciary obligations. While there may be special circumstances that
might warrant a discrete analysis of the cost of the shareholder
activity versus the economic benefit associated with the outcome of the
activity, the Department did not intend to imply that such an analysis
should be conducted in most cases. In most cases, proxy voting and
other shareholder engagement does not involve a significant expenditure
of funds by individual plan investors because the activities are
engaged in by institutional investment managers appointed as the
responsible plan fiduciary pursuant to sections 402(c)(3), 403(a)(2)
and 3(38) of ERISA. Those investment managers often engage consultants,
including proxy advisory firms, in an attempt to further reduce the
costs of researching proxy matters and exercising shareholder
rights.\5\ Thus, such a conclusion ignores the fact that many proxy
votes involve very little, if any, additional expense to the individual
plan shareholders to arrive at a prudent result and that, depending on
the particular resolution and the extent of the plan's holdings, not
voting, in fact, may in effect count one way or another.
---------------------------------------------------------------------------
\5\ In selecting an investment manager for a plan, the
responsible plan fiduciary should include a review of any voting
policies or guidelines that would be followed in the management of
plan assets to ensure consistency with ERISA. Further, as plan
fiduciaries, investment managers who utilize proxy advisory firms
should engage in an objective process that is designed to elicit
information necessary to assess the provider's qualifications,
quality of services offered, and reasonableness of fees charged for
the service. The process also must avoid self-dealing, conflicts of
interest or other improper influence. The investment manager in
considering any proxy recommendation should assure that it is fully
informed of potential conflicts of proxy advisory firms and the
steps the firm has taken to address them. See generally ``Proxy
Voting: Proxy Voting Responsibilities of Investment Advisers and
Availability of Exemptions from the Proxy Rules for Proxy Advisory
Firms,'' SEC Staff Legal Bulletin No. 20 (IM/CF) (June 30, 2014)
(discussing issues that may arise under the federal securities laws
for registered investment advisers in connection with selection and
monitoring of proxy advisory firms, among other things).
---------------------------------------------------------------------------
The pervasiveness of US publicly-traded stock in ERISA plan
investment portfolios, both direct holdings and through pooled
investment funds, including index funds, is another factor that
contributes to the importance of proxy voting and shareholder
engagement practices. If there is a problem identified with a portfolio
company's management, selling the stock and finding a replacement
investment may not be a prudent solution for a plan fiduciary. As
Vanguard founder John Bogle put it in the context of index funds, ``the
only weapon [index funds] have, if we don't like the management, is to
get a new management or to force the management to reform.'' \6\
---------------------------------------------------------------------------
\6\ Interview by Christine Benz with John Bogle, Founder,
Vanguard (Oct. 10, 2010) (available at www.morningstar.com/videos/359002/bogle-index-funds-power-in-corporate-governance.aspx).
---------------------------------------------------------------------------
The Department is also concerned that despite the guidance on ESG
issues the Department recently provided in IB 2015-1, statements in IB
2008-2 may cause confusion as to whether or how a plan fiduciary may
consider ESG issues in connection with proxy voting or undertaking
other shareholder engagement activities. The Department has rejected a
construction of ERISA that would render ERISA's tight limits on the use
of plan assets illusory and that would permit plan fiduciaries to
expend trust assets to promote myriad public policy preferences.
Rather, plan fiduciaries may not increase expenses, sacrifice
investment returns, or reduce the security of plan benefits in order to
promote collateral goals. However, by focusing on a ``cost-benefit
analysis'' demonstrating a ``more likely than not'' enhancement in the
economic value of the investment, the Department believes that IB 2008-
2 may be read as discouraging fiduciaries from recognizing the long-
term financial benefits that, although difficult to quantify, can
result from thoughtful shareholder engagement when voting proxies,
establishing a proxy voting policy, or otherwise exercising rights as
shareholders.
The existence of financial benefits associated with shareholder
engagement is suggested by the fact that a growing number of
institutional investors are now engaging companies on ESG issues.
According to a 2014 survey by the US SIF Foundation, 202 institutional
investors or money managers representing $1.72 trillion in US-domiciled
assets filed or co-filed shareholder resolutions on ESG issues at
publicly traded companies from 2012 through 2014.\7\ The members of the
Investor Network on Climate Risk (INCR), a network of institutions
representing more than $14 trillion in assets, engage with companies in
their portfolios on climate and sustainability issues. Members include
BlackRock, California Public Employees' Retirement System, Deutsche
Asset & Wealth Management, Prudential Investment Management, State
Street Global Advisors and TIAA Global Asset Management.\8\ Globally,
over 1300 asset managers and asset owners have signed the Principles
for Responsible Investment, the second principle of which states that
the managers and owners will be active owners and incorporate ESG
issues into ownership policies and practices.\9\ Companies are also
being required to be more transparent in the way they address ESG
issues. For example, in 2010, the Dodd-Frank Act required publicly
traded companies to allow shareholders an advisory vote on executive
pay plans at least once every three years.\10\ Similarly, in 2009 the
SEC issued rules which required companies to disclose in proxy
statements relating to the election of directors, among other things,
their policy for consideration of diversity in the process by which
candidates for director are considered for nomination by a company's
nominating committee.\11\
---------------------------------------------------------------------------
\7\ US SIF FOUNDATION, Report on US Sustainable, Responsible and
Impact Investing Trends 2014.
\8\ See INCR membership list at www.ceres.org/investor-network/incr/member-directory.
\9\ The Principles for Responsible Investment (PRI) has been
supported by the United Nations since its launch. The PRI has two UN
partners, the United Nations Environment Programme Finance
Initiative and the United Nations Global Compact, which play an
important role in delivering the PRI's strategy. See ``About the
PRI'' for further explanation of PRI and their responsible
investment effort at www.unpri.org/about.
\10\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law No. 111-203, 124 Stat. 1376 (2010), for section 951
requirements. See also SEC Final Rule, Shareholder Approval of
Executive Compensation and Golden Parachute Compensation, Release
Nos. 33-9178; 34-63768 (Jan. 25, 2011).
\11\ SEC Final Rule, Proxy Disclosure Enhancements, Release Nos.
33-9089; 34-61175 (Dec. 16, 2009).
---------------------------------------------------------------------------
Other market developments further substantiate the financial
benefits from shareholder engagement. Companies themselves are seeking
more engagement as a way of understanding and responding to their
shareholders'
[[Page 95882]]
views.\12\ There have also been market events that were catalysts for
the growth of shareholder engagement. The financial crisis of 2008
exposed some of the pitfalls of shareholder inattention to corporate
governance and highlighted the merits of shareholders taking a more
engaged role with the companies.
---------------------------------------------------------------------------
\12\ Blackrock and Ceres, 21st Century Engagement: Investor
Strategies for Incorporating ESG Considerations into Corporate
Interactions (2015). See also Joseph McCahery, Zacharias Sautner &
Laura T. Starks, Behind the Scenes The Corporate Governance
Preferences of Institutional Investors, 71 The Journal of Finance
2905-2932 (Dec. 2016).
---------------------------------------------------------------------------
This is not a trend unique to the United States. Other countries
have recognized these developments and taken steps to provide guidance
on proxy voting and shareholder engagement in the form of ``stewardship
codes.'' The first stewardship code was published in 2010 by the UK's
Financial Reporting Council, which traces its origins to principles
published by the UK's Institutional Shareholders Committee in 2002 and
later the International Corporate Governance Network Principles on
Institutional Investor Responsibilities in 2007.\13\ Other such codes
have followed, including in Canada, Italy, Japan, Singapore, South
Africa, Switzerland, the Netherlands, and Malaysia.\14\
---------------------------------------------------------------------------
\13\ BLACKROCK AND CERES, supra footnote 12, at 34.
\14\ Id.
---------------------------------------------------------------------------
For all the above reasons, the Department is concerned that the
changes to IB 94-2 in IB 2008-2 are out of step with important domestic
and international trends in investment management and have the
potential to dissuade ERISA fiduciaries from exercising shareholder
rights, including the voting of proxies, in areas that are increasingly
being recognized as important to long-term shareholder value. In fact,
the Department believes the principles originally articulated in IB 94-
2, with certain updates to reflect the trends on shareholder engagement
discussed above, are a better expression of a fiduciary's obligations
under sections 402(c)(3), 403(a) and 404(a)(1)(A) of ERISA on these
issues. The Department therefore has decided to withdraw IB 2008-2 and
replace it with Interpretive Bulletin 2016-1 which reinstates the
language of IB 94-2 with minor updates.
The following Interpretive Bulletin deals solely with the
applicability of the prudence and exclusive purpose requirements of
ERISA as applied to fiduciary decisions with respect to voting of
proxies on securities held in employee benefit plan investment
portfolios, the maintenance of and compliance with statements of
investment policy, including proxy voting policy, and the
appropriateness under ERISA of shareholder engagement with corporate
management by plan fiduciaries. The bulletin does not supersede the
regulatory standard contained at 29 CFR 2550.404a-1, nor does it
address any issues which may arise in connection with the prohibited
transaction provisions under ERISA section 406 or the statutory
exemptions under ERISA section 408 from those provisions. This
Interpretative Bulletin is a restatement of IB 94-2 with certain
updates to the examples of areas where monitoring or communication with
management is likely to enhance the value of the plan's investment in
the corporation.
List of Subjects in 29 CFR Part 2509
Employee benefit plans, Pensions.
For the reasons set forth in the preamble, the Department is
amending part 2509 of title 29 of the Code of Federal Regulations as
follows:
PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974
0
1. The authority citation for part 2509 continues to read as follows:
Authority: 29 U.S.C. 1135. Secretary of Labor's Order 1-2003, 68
FR 5374 (Feb. 3, 2003). Sections 2509.75-10 and 2509.75-2 issued
under 29 U.S.C. 1052, 1053, 1054. Sec. 2509.75-5 also issued under
29 U.S.C. 1002. Sec. 2509.95-1 also issued under sec. 625, Public
Law 109-280, 120 Stat. 780.
Sec. 2509.08-2 [Removed]
0
2. Remove Sec. 2509.08-2.
0
3. Add Sec. 2509.2016-01 to read as follows:
Sec. 2509.2016-01 Interpretive Bulletin relating to the exercise of
shareholder rights and written statements of investment policy,
including proxy voting policies or guidelines.
This interpretive bulletin sets forth the Department of Labor's
(the Department) interpretation of sections 402, 403 and 404 of the
Employee Retirement Income Security Act of 1974 (ERISA) as those
sections apply to voting of proxies on securities held in employee
benefit plan investment portfolios and the maintenance of and
compliance with statements of investment policy, including proxy voting
policy. In addition, this interpretive bulletin provides guidance on
the appropriateness under ERISA of active engagement with corporate
management by plan fiduciaries.
(1) Proxy Voting
The fiduciary act of managing plan assets that are shares of
corporate stock includes the voting of proxies appurtenant to those
shares of stock. As a result, the responsibility for voting proxies
lies exclusively with the plan trustee except to the extent that either
(1) the trustee is subject to the directions of a named fiduciary
pursuant to ERISA section 403(a)(1), or (2) the power to manage,
acquire or dispose of the relevant assets has been delegated by a named
fiduciary to one or more investment managers pursuant to ERISA section
403(a)(2). Where the authority to manage plan assets has been delegated
to an investment manager pursuant to section 403(a)(2), no person other
than the investment manager has authority to vote proxies appurtenant
to such plan assets except to the extent that the named fiduciary has
reserved to itself (or to another named fiduciary so authorized by the
plan document) the right to direct a plan trustee regarding the voting
of proxies. In this regard, a named fiduciary, in delegating investment
management authority to an investment manager, could reserve to itself
the right to direct a trustee with respect to the voting of all proxies
or reserve to itself the right to direct a trustee as to the voting of
only those proxies relating to specified assets or issues.
If the plan document or investment management agreement provides
that the investment manager is not required to vote proxies, but does
not expressly preclude the investment manager from voting proxies, the
investment manager would have exclusive responsibility for voting
proxies. Moreover, an investment manager would not be relieved of its
own fiduciary responsibilities by following directions of some other
person regarding the voting of proxies, or by delegating such
responsibility to another person. If, however, the plan document or the
investment management contract expressly precludes the investment
manager from voting proxies, the responsibility for voting proxies
would lie exclusively with the trustee. The trustee, however,
consistent with the requirements of ERISA section 403(a)(1), may be
subject to the directions of a named fiduciary if the plan so provides.
The fiduciary duties described at ERISA section 404(a)(1)(A)
and(B), require that, in voting proxies, the responsible fiduciary
consider those factors that may affect the value of the plan's
investment and not subordinate the interests of the participants and
beneficiaries in their retirement income
[[Page 95883]]
to unrelated objectives. These duties also require that the named
fiduciary appointing an investment manager periodically monitor the
activities of the investment manager with respect to the management of
plan assets, including decisions made and actions taken by the
investment manager with regard to proxy voting decisions. The named
fiduciary must carry out this responsibility solely in the interest of
the participants and beneficiaries and without regard to its
relationship to the plan sponsor.
It is the view of the Department that compliance with the duty to
monitor necessitates proper documentation of the activities that are
subject to monitoring. Thus, the investment manager or other
responsible fiduciary would be required to maintain accurate records as
to proxy voting. Moreover, if the named fiduciary is to be able to
carry out its responsibilities under ERISA section 404(a) in
determining whether the investment manager is fulfilling its fiduciary
obligations in investing plans assets in a manner that justifies the
continuation of the management appointment, the proxy voting records
must enable the named fiduciary to review not only the investment
manager's voting procedure with respect to plan-owned stock, but also
to review the actions taken in individual proxy voting situations.
The fiduciary obligations of prudence and loyalty to plan
participants and beneficiaries require the responsible fiduciary to
vote proxies on issues that may affect the value of the plan's
investment. This principle applies broadly. However, the Department
recognizes that in some special cases voting proxies may involve out of
the ordinary costs or unusual requirements, for example in the case of
voting proxies on shares of certain foreign corporations. Thus, in such
cases, a fiduciary should consider whether the plan's vote, either by
itself or together with the votes of other shareholders, is expected to
have an effect on the value of the plan's investment that warrants the
additional cost of voting. Moreover, a fiduciary, in deciding whether
to purchase shares for which this may be the case, should consider
whether the difficulty and expense in voting the shares is reflected in
their market price.
(2) Statements of Investment Policy
The maintenance by an employee benefit plan of a statement of
investment policy designed to further the purposes of the plan and its
funding policy is consistent with the fiduciary obligations set forth
in ERISA section 404(a)(1)(A) and (B). Since the fiduciary act of
managing plan assets that are shares of corporate stock includes the
voting of 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. For purposes of this document, the term
``statement of investment policy'' means a written statement that
provides the fiduciaries who are responsible for plan investments with
guidelines or general instructions concerning various types or
categories of investment management decisions, which may include proxy
voting decisions as well as policies concerning economically targeted
investments or incorporating environmental, social or governance (ESG)
factors in investment policy statements or integrating ESG-related
tools, metrics and analyses to evaluate an investment's risk or return
or choose among equivalent investments. A statement of investment
policy is distinguished from directions as to the purchase or sale of a
specific investment at a specific time or as to voting specific plan
proxies.
In plans where investment management responsibility is delegated to
one or more investment managers appointed by the named fiduciary
pursuant to ERISA section 402(c)(3), the named fiduciary responsible
for appointment of investment managers has the authority to condition
the appointment on acceptance of a statement of investment policy.
Thus, such a named fiduciary may expressly require, as a condition of
the investment management agreement, that an investment manager comply
with the terms of a statement of investment policy which sets forth
guidelines concerning investments and investment courses of action
which the investment manager is authorized or is not authorized to
make. Such investment policy may include a policy or guidelines on the
voting of proxies on shares of stock for which the investment manager
is responsible. In the absence of such an express requirement to comply
with an investment policy, the authority to manage the plan assets
placed under the control of the investment manager would lie
exclusively with the investment manager. Although a trustee may be
subject to the directions of a named fiduciary pursuant to ERISA
section 403(a)(1), an investment manager who has authority to make
investment decisions, including proxy voting decisions, would never be
relieved of its fiduciary responsibility if it followed directions as
to specific investment decisions from the named fiduciary or any other
person.
Statements of investment policy issued by a named fiduciary
authorized to appoint investment managers would be part of the
``documents and instruments governing the plan'' within the meaning of
ERISA section 404(a)(1)(D). An investment manager to whom such
investment policy applies would be required to comply with such policy,
pursuant to ERISA section 404(a)(1)(D) insofar as the policy directives
or guidelines are consistent with titles I and IV of ERISA. Therefore,
if, for example, compliance with the guidelines in a given instance
would be imprudent, then the investment manager's failure to follow the
guidelines would not violate ERISA section 404(a)(1)(D). Moreover,
ERISA section 404(a)(1)(D) does not shield the investment manager from
liability for imprudent actions taken in compliance with a statement of
investment policy.
The plan document or trust agreement may expressly provide a
statement of investment policy to guide the trustee or may authorize a
named fiduciary to issue a statement of investment policy applicable to
a trustee. Where a plan trustee is subject to an investment policy, the
trustee's duty to comply with such investment policy would also be
analyzed under ERISA section 404(a)(1)(D). Thus, the trustee would be
required to comply with the statement of investment policy unless, for
example, it would be imprudent to do so in a given instance.
Maintenance of a statement of investment policy by a named
fiduciary does not relieve the named fiduciary of its obligations under
ERISA section 404(a) with respect to the appointment and monitoring of
an investment manager or trustee. In this regard, the named fiduciary
appointing an investment manager must periodically monitor the
investment manager's activities with respect to management of the plan
assets. Moreover, compliance with ERISA section 404(a)(1)(B) would
require maintenance of proper documentation of the activities of the
investment manager and of the named fiduciary of the plan in monitoring
the activities of the investment manager. In addition, in the view of
the Department, a named fiduciary's determination of the terms of a
statement of investment policy is an exercise of fiduciary
responsibility and, as such, statements may need to take into account
factors such as the plan's funding policy and its liquidity needs as
well as issues of prudence, diversification and other fiduciary
requirements of ERISA.
[[Page 95884]]
An investment manager of a pooled investment vehicle that holds
assets of more than one employee benefit plan may be subject to a proxy
voting policy of one plan that conflicts with the proxy voting policy
of another plan. Compliance with ERISA section 404(a)(1)(D) would
require the investment manager to reconcile, insofar as possible, the
conflicting policies (assuming compliance with each policy would be
consistent with ERISA section 404(a)(1)(D)) and, if necessary and to
the extent permitted by applicable law, vote the relevant proxies to
reflect such policies in proportion to each plan's interest in the
pooled investment vehicle. If, however, the investment manager
determines that compliance with conflicting voting policies would
violate ERISA section 404(a)(1)(D) in a particular instance, for
example, by being imprudent or not solely in the interest of plan
participants, the investment manager would be required to ignore the
voting policy that would violate ERISA section 404(a)(1)(D) in that
instance. Such an investment manager may, however, require
participating investors to accept the investment manager's own
investment policy statement, including any statement of proxy voting
policy, before they are allowed to invest. As with investment policies
originating from named fiduciaries, a policy initiated by an investment
manager and adopted by the participating plans would be regarded as an
instrument governing the participating plans, and the investment
manager's compliance with such a policy would be governed by ERISA
section 404(a)(1)(D).
(3) Shareholder Engagement
An investment policy that contemplates activities intended to
monitor or influence the management of corporations in which the plan
owns stock is consistent with a fiduciary's obligations under ERISA
where the responsible fiduciary concludes that there is a reasonable
expectation that such monitoring or communication with management, by
the plan alone or together with other shareholders, is likely to
enhance the value of the plan's investment in the corporation, after
taking into account the costs involved. Such a reasonable expectation
may exist in various circumstances, for example, where plan investments
in corporate stock are held as long-term investments, where a plan may
not be able to easily dispose of such an investment, or where the same
shareholder engagement issue is likely to exist in the case of
available alternative investments. Active monitoring and communication
activities would generally concern such issues as the independence and
expertise of candidates for the corporation's board of directors and
assuring that the board has sufficient information to carry out its
responsibility to monitor management. Other issues may include such
matters as governance structures and practices, particularly those
involving board composition, executive compensation, transparency and
accountability in corporate decision-making, responsiveness to
shareholders, the corporation's policy regarding mergers and
acquisitions, the extent of debt financing and capitalization, the
nature of long-term business plans including plans on climate change
preparedness and sustainability, governance and compliance policies and
practices for avoiding criminal liability and ensuring employees comply
with applicable laws and regulations, the corporation's workforce
practices (e.g., investment in training to develop its work force,
diversity, equal employment opportunity), policies and practices to
address environmental or social factors that have an impact on
shareholder value, and other financial and non-financial measures of
corporate performance. Active monitoring and communication may be
carried out through a variety of methods including by means of
correspondence and meetings with corporate management as well as by
exercising the legal rights of a shareholder.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2016-31515 Filed 12-28-16; 8:45 am]
BILLING CODE 4510-29-P
