Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, 55219-55243 [2020-19472]

Download as PDF Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules 55219 STANDARDS AFFECTED BY THE PROPOSED REVISIONS TO IMPLEMENT RECOMMENDATIONS FOLLOWING SANDIA’S SURETY ASSESSMENT ON CYBERSECURITY Standard Revisions WEQ–000–1 Deleted seven abbreviations/acronyms ................................................... Added one abbreviation/acronym ............................................................. DNS—Domain Name Service IPCP—Internet Protocol Control Protocol NTP—Network Time Protocol PPP—Point to Point Protocol SLIP—Serial Line Internet Protocol SNMP—Simple Network Management Protocol SSL—Secure Sockets Layer OWASP—Open Web Application Security Project WEQ–001 Revised one standard .............................................................................. WEQ–001–13.1.3.3 WEQ–002 Revised 14 standards ............................................................................... interpretation of ERISA with respect to the exercise of shareholder rights by fiduciaries of ERISA-covered plans, and notes that it will be removed from the Code of Federal Regulations when a final rule is adopted. DATES: Comments on the proposal must be submitted on or before October 5, 2020. [FR Doc. 2020–15866 Filed 9–3–20; 8:45 am] BILLING CODE 6717–01–P DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Parts 2509 and 2550 Fiduciary Duties Regarding Proxy Voting and Shareholder Rights Employee Benefits Security Administration, Department of Labor. ACTION: Proposed rule. AGENCY: The Department of Labor (Department) is proposing to amend the ‘‘Investment duties’’ regulation issued in 1979 to address the application of the prudence and exclusive purpose duties under the Employee Retirement Income Security Act of 1974 (ERISA) to the exercise of shareholder rights, including proxy voting, the use of written proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms. This document also states that Interpretive Bulletin 2016–01 no longer represents the view of the Department regarding the proper jbell on DSKJLSW7X2PROD with PROPOSALS VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 You may submit written comments, identified by RIN 1210– AB91, to either of the following addresses: D Federal eRulemaking Portal: www.regulations.gov. Follow the instructions for submitting comments. D Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N–5655, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attention: Proxy Voting and Shareholder Rights NPRM. Instructions: All submissions received must include the agency name and Regulatory Identifier Number (RIN) for this rulemaking. Persons submitting comments electronically are encouraged not to submit paper copies. Comments will be available to the public, without charge, online at www.regulations.gov and www.dol.gov/agencies/ebsa and at the Public Disclosure Room, Employee ADDRESSES: RIN 1210–AB91 SUMMARY: WEQ–002–2.3 WEQ–002–2.4 WEQ–002–4.2.1.1 WEQ–002–4.2.1.2 WEQ–002–4.2.1.3 WEQ–002–4.2.2 WEQ–002–5 WEQ–002–5.1.1 WEQ–002–5.1.2 WEQ–002–5.1.3 WEQ–002–5.6 WEQ–002–101.2.3.1 WEQ–002–101.3.3.2 WEQ–002–101.3.3.3 PO 00000 Frm 00022 Fmt 4702 Sfmt 4702 Benefits Security Administration, Suite N–1513, 200 Constitution Avenue NW, Washington, DC 20210. Warning: Do not include any personally identifiable or confidential business information that you do not want publicly disclosed. Comments are public records posted on the internet as received and can be retrieved by most internet search engines. FOR FURTHER INFORMATION CONTACT: Jason A. DeWitt, Office of Regulations and Interpretations, Employee Benefits Security Administration, (202) 693– 8500. This is not a toll-free number. Customer Service Information: Individuals interested in obtaining information from the Department of Labor concerning ERISA and employee benefit plans may call the Employee Benefits Security Administration (EBSA) Toll-Free Hotline, at 1–866– 444–EBSA (3272) or visit the Department of Labor’s website (www.dol.gov/ebsa). SUPPLEMENTARY INFORMATION: A. 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 E:\FR\FM\04SEP1.SGM 04SEP1 55220 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS responsibility rules governing the conduct of plan fiduciaries. In connection with proxy voting, the Department’s longstanding position is that the fiduciary act of managing plan assets includes the management of voting rights (as well as other shareholder rights) appurtenant to shares of stock, and that fiduciaries must carry out their duties relating to the exercise of such rights prudently and solely for the economic benefit of plan participants and beneficiaries.1 The Department has decided to propose a regulation regarding the application of ERISA’s fiduciary duties to the exercise of shareholder rights by ERISA-covered plans due to significant changes in the way ERISA plans invest and in the investment world more broadly since the Department first spoke formally on these topics, a persistent misunderstanding among some stakeholders that ERISA fiduciaries are required to vote all proxies, and in light of recent actions by the Securities and Exchange Commission (SEC) related to the proxy voting process. The Department first addressed this topic during a time of widespread shareholder activism and corporate takeovers that had placed an intense focus on shareholder voting by ERISA plans. For instance, a 1985 Senate hearing highlighted the ‘‘pivotal role’’ pension funds were being forced to play in takeover attempts,2 which according to a January 1985 Department report had reached ‘‘epidemic proportions.’’ 3 A significant factor viewed as contributing to the rise of takeovers was the ‘‘widespread conviction’’ that fund managers and other fiduciaries were obligated under ERISA to tender their shares to the highest cash bidder.4 On 1 Throughout this preamble, the Department’s discussion of plan fiduciaries includes named fiduciaries under the plan, along with any persons that named fiduciaries have designated to carry out fiduciary responsibilities as permitted under ERISA section 405(c)(1). 2 Testimony of Robert Monks, Department of Labor’s Enforcement of the Employee Retirement Income Security Act, Hearings before the S. Subcomm. on Oversight of Gov. Mgmt., S. Hrg. 99– 310 (June 25–26, 1985), at 5 (1985 ERISA Hearings). 3 Office of Pension and Welfare Benefit Programs, Summary of Conclusions from Public Hearings (Jan. 1985) (1985 DOL Report), included in 1985 ERISA Hearings, at 454, 498 (‘‘Projections are that ERISA plans will hold more than half of all the equity securities in the United States before the turn of the century. Perhaps not entirely by coincidence, takeover fever reached epidemic proportions in 1984.’’). 4 Testimony of Ian Lanoff, 1985 ERISA Hearings, at 26 (former administrator of Department’s benefits office testifying that ‘‘some representatives of corporate America have blamed the pension plans for always taking the short-term view in takeover situations, and always tendering. And they somehow construe this as being required by ERISA or their fiduciary responsibilities.’’); 1985 DOL Report, included in 1985 ERISA Hearings, at 498; VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 the other hand, investment managers were seen as reluctant to vote shares against anti-takeover proposals of a current or prospective client,5 potentially creating a conflict of interest with their fiduciary obligations to plan participants and beneficiaries.6 One proposed solution was to require the voting of shares to be directed by plan sponsors themselves rather than investment managers.7 The Department released one of its first official statements on proxy voting in 1988, in the form of an opinion letter to Avon Products, Inc. (the ‘‘Avon Letter’’). ‘‘In general,’’ the Department stated, ‘‘the fiduciary act of managing plan assets which are shares of corporate stock would include the voting of proxies appurtenant to those shares of stock.’’ 8 While ERISA allows named fiduciaries to designate investment managers to manage plan assets,9 ERISA also requires named fiduciaries ‘‘to periodically monitor the activities of the investment manager with respect to the management of plan assets,’’ 10 a duty that encompasses the monitoring of decisions made and actions taken by investment managers with regard to proxy voting.11 The Avon Letter and subsequent sub-regulatory guidance from the Department (outlined below) has resulted in a misplaced belief among some stakeholders that fiduciaries must always vote proxies, subject to limited exceptions, in order to fulfill their obligations under ERISA.12 Joint Department of Labor/Department of Treasury Statement of Pension Investments (Jan. 31, 1989), reprinted in 16 Pens. & Ben. Rep. (BNA) 215 (Feb. 6, 1989). 5 1985 DOL Report, included in 1985 ERISA Hearings, at 495 (citing written statement by Professor Roger F. Murray). 6 Testimony of Robert Monks, 1985 ERISA Hearings, at 10. 7 1985 DOL Report, included in 1985 ERISA Hearings, at 10, 494–95 (citing written statement by Professor Roger F. Murray). 8 Letter to Helmuth Fandl, Chairman of the Retirement Board, Avon Products, Inc. 1988 WL 897696 (Feb. 23, 1988). 9 ERISA sections 405(c)(1), 402(c)(3). 10 Avon Letter. 11 The Department also issued a second opinion letter on proxy voting in 1990, in which it reiterated—as it has consistently done in the years since—that fiduciaries must discharge their duties relating to proxy voting solely in the interest of participants and beneficiaries and for the exclusive purpose of providing plan benefits. See Letter to Robert Monks, 1990 WL 1085069 (Jan. 23, 1990). 12 See, e.g., Barbara Novick, Revised and Extended Remarks at Harvard Roundtable on Corporate Governance Keynote Address ‘‘The Goldilocks Dilemma’’ (Nov. 6, 2019), www.blackrock.com/corporate/literature/ publication/barbara-novick-remarks-harvardroundtable-corporate-governance-the-goldilocksdilemma-110619.pdf, at 15 (Avon Letter indicated ‘‘that asset managers should generally vote shares as part of their fiduciary duty’’); Daniel M. Gallagher, Outsized Power & Influence: The Role of PO 00000 Frm 00023 Fmt 4702 Sfmt 4702 In 1994, the Department issued its first interpretive bulletin on proxy voting, Interpretive Bulletin 94–2 (IB 94–2).13 IB 94–2 recognized that fiduciaries may engage in shareholder activities intended to monitor or influence corporate management in situations where the responsible fiduciary concludes that, after taking into account the costs involved, there is a reasonable expectation that such shareholder activities (by the plan alone or together with other shareholders) will enhance the value of the plan’s investment in the corporation. The Department expected that increased shareholder engagement by pension funds—encouraged by the new interpretive bulletin—would improve corporate performance and help ensure companies treated their employees well.14 However, the Department also reiterated its view that ERISA does not permit fiduciaries, in voting proxies or exercising other shareholder rights, to subordinate the economic interests of Proxy Advisers, Washington Legal Foundation (Aug. 2014), https://s3.us-east-2.amazonaws.com/ washlegal-uploads/upload/legalstudies/ workingpaper/GallagherWP8-14.pdf, at 3; Business Roundtable Comment Letter on SEC Proposed Amendments to Rule 14a–8 (Feb. 3, 2020), www.sec.gov/comments/s7-22-19/s72219-6742505207780.pdf, at 2–3 (‘‘many institutional investors historically interpreted SEC and Department of Labor rules and guidance as requiring institutional investors to vote every share on every matter on a proxy’’) (citing Gallagher); Manifest Information Services Ltd, Response to ESMA Discussion Paper ‘An Overview of the Proxy Advisory Industry: Considerations on Possible Policy Options’ (June 2012), www.esma.europa.eu/file/10536/ download?token=ou-vCUE0, at 37 (comment letter from European proxy voting agency describing DOL proxy guidance as concerning ‘‘duties of . . . fiduciaries . . . to vote the shares in companies held by their pension plans’’); Charles M. Nathan, Future of Institutional Share Voting Revisited: A Fourth Paradigm (Sep. 27, 2011), https:// corpgov.law.harvard.edu/2011/09/27/future-ofinstitutional-share-voting-revisited-a-fourthparadigm (‘‘the current system for voting portfolio securities by application of uniform voting policies . . . is perceived as successfully addressing the commonly understood fiduciary duty of institutional investors to vote all of their portfolio securities on all matters’’); see also U.S. Department of Labor, Transcript of Press Conference on Corporate Activist Role in Pension Planning (July 28, 1994), at 15–16 (then-Secretary Robert Reich stating that IB 94–2 ‘‘makes very clear that . . . pension fund managers, trustees, [and] fiduciaries have an obligation to vote proxies’’ unless the costs ‘‘substantially outweigh’’ the benefits) (1994 DOL Press Conference). 13 59 FR 38860 (July 29, 1994). 14 See 1994 DOL Press Conference, at 2–4, 10, 15– 16; see also Leslie Wayne, U.S. Prodding Companies to Activism on Portfolios, N.Y. Times (July 29, 1994), www.nytimes.com/1994/07/29/ business/us-prodding-companies-to-activism-onportfolios.html (quoting official stating that the Department is ‘‘trying to encourage corporations to be activist owners,’’ and that ‘‘such activism is consistent with your fiduciary duty and we expect it will improve your corporate performance’’). E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules participants and beneficiaries to unrelated objectives. In October 2008, the Department replaced IB 94–2 with Interpretive Bulletin 2008–02 (IB 2008–02).15 The Department’s intent was to update the guidance in IB 94–2 and to reflect interpretive positions issued by the Department after 1994 on shareholder engagement and socially-directed proxy voting initiatives. IB 2008–02 stated that fiduciaries’ responsibility for managing proxies includes both deciding to vote or not to vote.16 IB 2008–02 further stated that the fiduciary duties described at ERISA sections 404(a)(1)(A) and (B) require that in voting proxies the responsible fiduciary shall consider only those factors that relate to the economic value of the plan’s investment and shall not subordinate the interests of the participants and beneficiaries in their retirement income to unrelated objectives. In addition, IB 2008–02 stated that votes shall only be cast in accordance with a plan’s economic interests. IB 2008–02 explained that if the responsible fiduciary reasonably determines that the cost of voting (including the cost of research, if necessary, to determine how to vote) is likely to exceed the expected economic benefits of voting, the fiduciary has an obligation to refrain from voting.17 The Department also reiterated in IB 2008– 02 that any use of plan assets by a plan fiduciary to further political or social causes ‘‘that have no connection to enhancing the economic value of the plan’s investment’’ through proxy voting or shareholder activism is a violation of ERISA’s exclusive purpose and prudence requirements.18 In 2016, the Department issued Interpretive Bulletin 2016–01 (IB 2016– 01), which reinstated the language of IB 94–2 with certain modifications.19 IB 2016–01 reiterated and confirmed that, ‘‘in voting proxies, the responsible fiduciary [must] 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 to unrelated objectives.’’ 20 The Department has tried to convey in its sub-regulatory guidance that fiduciaries need not vote all proxies. A 15 73 jbell on DSKJLSW7X2PROD with PROPOSALS 16 Id. FR 61731 (Oct. 17, 2008). at 61732. 17 Id. 18 Id. at 61734. FR 95879 (Dec. 29, 2016). 20 Id. at 95882. In addition, the Department issued a Field Assistance Bulletin to provide guidance on IB 2016–01 on Apr. 23, 2018. See FAB 2018–01, www.dol.gov/sites/dolgov/files/ebsa/employersand-advisers/guidance/field-assistance-bulletins/ 2018-01.pdf. fiduciary’s duty is only to vote those proxies that are prudently determined to have an economic impact on the plan after the costs of research and voting are taken into account. Nevertheless, a misunderstanding that fiduciaries must research and vote all proxies continues to persist, causing some plans to expend their assets unnecessarily on matters not economically relevant to the plan. As discussed below, this problem has been exacerbated by the fact that since 1988 the amount and types of shareholder proposals have increased substantially.21 Therefore, the Department has decided to propose rule amendments that expressly state that fiduciaries must not vote in circumstances where plan assets would be expended on shareholder engagement activities that do not have an economic impact on the plan, whether by themselves or after the costs of engagement are taken into account. The designation of any final rule resulting from this notice of proposed rulemaking as regulatory or deregulatory will be informed by public comments received on the proposal. Details on the estimated costs of this proposed rule can be found in the rule’s economic analysis. B. Purpose of Regulatory Action For the reasons outlined above and the reasons that follow, the Department believes that it should address issues regarding the application of fiduciary obligations under sections 403(c) and 404(a) of ERISA with respect to exercises of shareholder rights, including proxy voting, through a proposed regulation that amends the ‘‘Investment duties’’ regulation at 29 CFR 2550.404a–1 and provides a public notice and comment process. In that regard, IB 2016–01 no longer represents the view of the Department regarding the proper interpretation of ERISA with respect to the exercise of shareholder rights by fiduciaries of ERISA-covered plans. Accordingly, the Department intends to remove it from the Code of Federal Regulations when a final rule is adopted. i. General Principles ERISA mandates that fiduciaries discharge their duties ‘‘solely in the interest’’ and ‘‘for the exclusive purpose’’ of providing benefits to participants and their beneficiaries.22 The Supreme Court has described this 19 81 VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 21 See infra at notes 79 to 85. section 404(a)(1). See also ERISA section 403(c)(1) (‘‘[T]he assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries’’). 22 ERISA PO 00000 Frm 00024 Fmt 4702 Sfmt 4702 55221 duty as requiring that fiduciaries act with an ‘‘eye single’’ to the interests of participants and beneficiaries,23 and appellate courts have described ERISA’s fiduciary duties as ‘‘the highest known to the law.’’ 24 The Department similarly has rejected a construction of ERISA that would render the statute’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, including through shareholder engagement activities, voting proxies, or other investment policies.25 ii. Changes in the Investment Landscape The financial marketplace and the world of shareholder engagement have changed considerably since the Department released the Avon Letter over thirty years ago. Several trends underlie the Department’s current action to clarify its previous guidance regarding an ERISA fiduciary’s obligations: • Increase in the percentage of corporate America’s stock held by, and plan assets managed by, institutional investors, diminishing the scope of proxy voting obligations attributable to ERISA fiduciaries: In 2007 institutional investors owned 76.4 percent of the 1,000 largest American companies, a 63 percent increase over their 47 percent ownership of America’s largest companies in 1987.26 This growth in institutional ownership has continued. By 2017, institutional investors owned 80.3 percent of the 500 largest American companies.27 Additionally, institutional investor ownership in U.S. corporate equities grew from $1.1 trillion in 1985 to $25.4 trillion in 2019.28 Contrary to the Department’s projections in 1985,29 the share of individual stock holdings in private pension funds decreased from 23 Pegram v. Herdrich, 530 U.S. 211, 235 (2000) (quoting Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982)). 24 See, e.g., Tibble v. Edison Int’l, 843 F.3d 1187, 1197 (9th Cir. 2016). 25 See IB 2016–01, 81 FR at 95881. 26 The Conference Board, Institutional Investment Report: Trends in Institutional Investor Assets and Equity Ownership of U.S. Corporations (Sept. 2008); see also Barry Burr, Institutional Investors Increase Ownership of U.S. Companies to All-Time High, Pensions & Investments, (Sept. 5, 2008). 27 Charles McGrath, 80% of Equity Market Cap Held by Institutions. Pensions & Investments, (April 25, 2017). 28 Department calculations based on U.S. Federal Reserve statistics. Institutional investors include retirement and pension funds, insurance companies, mutual funds, closed-end funds, exchange-traded funds, brokers and dealers, and nonfinancial corporate businesses. 29 See supra note 3 (quoting 1985 DOL Report estimating that ERISA plans will hold more than half of all equity securities before the turn of the century). E:\FR\FM\04SEP1.SGM 04SEP1 55222 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS almost 22 percent in 1985 to about 5 percent in 2019.30 ERISA plan assets were about 27 percent invested in corporate debt and equity instruments in 1993,31 but by 2017 this figure had declined to approximately 11 percent.32 This decrease in the share of ERISA plan assets invested in individual securities was accompanied by a corresponding increase in securities held through institutions such as mutual funds, reducing the volume of proxy voting rights that ERISA fiduciaries hold in individual securities of corporate issuers. • Broader diversification of ERISA plan assets: Since the 1980s, the scope and type of plan investments has changed, which has significantly reduced the volume of securities directly held by plans. The development and growth of financial vehicles such as exchange-traded funds, sector-based equity products, hedge funds, as well as an increased focus on passive investing, have altered the investment landscape in which ERISA fiduciaries now operate. ERISA plans have taken advantage of these new investment vehicles. For example, alternative investments like hedge funds, private equity, and venture capital firms have grown dramatically since 1990.33 The share of large private pension plan assets held in alternative investments, such as hedge funds and private equity, nearly quadrupled between 2008 and 2017.34 • Change in proxy voting behavior: In concert with a marked increase in the size of the investment marketplace controlled by institutional investors, there also has been a substantial change 30 Department calculations based on U.S. Federal Reserve statistics. 31 DOL calculation based on statistics from U.S. Department of Labor, Employee Benefits Security Administration, Private Pension Plan Bulletin: Abstract of 1993 Form 5500 Annual Reports, (Winter 1996), Table A3, www.dol.gov/agencies/ ebsa/researchers/statistics/retirement-bulletins/ private-pension-plan-bulletins-abstract-1993. 32 DOL calculation based on statistics from U.S. Department of Labor, Employee Benefits Security Administration, Private Pension Plan Bulletin: Abstract of 2017 Form 5500 Annual Reports, (Sept. 2019), Table C4, www.dol.gov/sites/dolgov/files/ EBSA/researchers/statistics/retirement-bulletins/ private-pension-plan-bulletins-abstract-2017.pdf. 33 World Economic Forum, Alternative Investments 2020: An Introduction to Alternative Investments, at 8 (July 2015), www3.weforum.org/ docs/WEF_Alternative_Investments_2020_An_ Introduction_to_AI.pdf. 34 Victoria Ivashina & Josh Lerner, Looking for Alternatives: Pension Investments around the World, 2008 to 2017 at Table 5 (Aug. 24, 2018). www.bostonfed.org/-/media/Images/researchconference-2018/papers/looking-for-alternativespension-investments-around-the-world-2008-to2017.pdf. These statistics are based on a balanced panel of 210 equally weighted large private pension plans. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 in investor voting behavior and proxy voting policies. ISS Analytics, a data analytics service of Institutional Shareholder Services—the largest proxy advisory firm, which controls approximately 60 percent of the market—has documented several changes in proxy voting trends, observing that ‘‘investor voting behavior among owners of U.S. companies has changed significantly—perhaps almost revolutionarily—over the past two decades.’’ 35 According to ISS Analytics, ‘‘for the overwhelming majority of share capital represented in the U.S., voting is certainly no longer a compliance exercise.’’ 36 Instead, ‘‘proxy voting policies are becoming more complex, as investors continue to add to the list of factors they consider in their review and analysis of governance practices, including board independence, board accountability, diversity, myriads of executive compensation factors, shareholder rights, and environmental and social factors.’’ 37 • Mixed evidence on effectiveness of shareholder voting: As discussed above, one factor prompting the rise in shareholder activities by ERISA fiduciaries was the belief that participating in such activities was likely to enhance the value of a plan’s investment in a particular security.38 Since that time, however, research regarding whether proxy voting has reliable positive effects on shareholder value and a plan’s investment in the corporation has yielded mixed results.39 35 Kosmas Papadopoulos, The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018, Harvard Law School Forum on Corp. Gov. & Fin. Reg. (Jan. 31, 2019), https:// corpgov.law.harvard.edu/2019/01/31/the-long-viewus-proxy-voting-trends-on-es-issues-from-2000-to2018 (2019 ISS Proxy Voting Trends). 36 Id. 37 Id. 38 See discussion, supra. 39 Regarding the mixed evidence on whether shareholder engagement improves firm value, see, e.g., Matthew R. Denes, Jonathan M. Karpoff & Victoria B. McWilliams, Thirty Years of Shareholder Activism: A Survey of Empirical Research, 44 J. Corp. Fin. 405, 407 (2017); Tracie Woidtke, Public Pension Fund Activism and Firm Value: An Empirical Analysis, Manhattan Institute (2015), https://media4.manhattan-institute.org/pdf/ lpr_20.pdf; Maria Goranova & Lori Verstegen Ryan, Shareholder Activism: A Multidisciplinary Review, 40 Journal of Management 1230, 1251–1253 (July 2014) (collecting research regarding the ‘‘equivocal results’’ of shareholder activism on corporate performance); James R. Copland, David F. Larcker & Brian Tayan, The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry (May 2018), www.gsb.stanford.edu/sites/gsb/files/ publication-pdf/cgri-closer-look-72-big-thumbproxy-advisory.pdf; see also Dorothy S. Lund, The Case Against Passive Shareholder Voting, 43 J. Corp. Law 493, 526 (2018) (‘‘In light of the fact that any investment in voting will likely generate higher costs than benefits for the fund, it is surprising that passive funds vote at all.’’); David Yermack, PO 00000 Frm 00025 Fmt 4702 Sfmt 4702 iii. The Avon Letter and Proxy Voting As the Department first stated in the Avon Letter, the fiduciary duty to manage plan assets that are shares of corporate stock encompasses responsibility over the voting of proxies appurtenant to those shares of stock. This responsibility is subject to ERISA’s core fiduciary duties of loyalty and care. A fiduciary’s exercise of voting rights (or other shareholder rights) must be performed solely for the plan’s economic interests, which under no circumstances may be subordinated to non-pecuniary goals. Accordingly, the use of plan assets for purposes other than enhancing the value of the plan’s investments—through proxy voting or otherwise—violates the fiduciary duties of loyalty and care under ERISA. The economic interests of participants and beneficiaries must be the basis of fiduciary decision-making. The Avon Letter has been read by some outside of its factual context as creating a general presumption that ERISA fiduciaries responsible for managing plan assets that are shares of corporate stock should always vote the proxies appurtenant to those shares.40 For fiduciaries with such an understanding, the letter presented them with an ambiguous duty that in practice was often very difficult to discharge without the assistance of third-party proxy advisory firms. The Department is now concerned that some fiduciaries and proxy advisory firms—in part relying on the Avon Letter—may be acting in ways that unwittingly allow plan assets to be used to support or pursue proxy proposals for environmental, social, or public policy agendas that have no connection to increasing the value of investments used for the payment of benefits or plan administrative expenses, and in fact may have unnecessarily increased plan expenses.41 In addition, informed by the changed circumstances over the past 30 years and the potential for continued fiduciary breaches that can result from a belief that such presumption applies as a legal matter, the Department Shareholder Voting and Corporate Governance, 2 Ann. Rev. Fin. Econ. 2.1, 2.15 (2010) (‘‘Activist institutions frequently state that their goal is not to improve the value of individual investment positions, but rather to create positive externalities by signaling optimal governance practices market wide’’). 40 See supra note 12. 41 See, e.g., U.S. Dep’t of Labor Office of Inspector General Report No. 09–11–001–12–121, ProxyVoting May Not be Solely for the Economic Benefit of Retirement Plans (Mar. 31, 2011), www.oig.dol.gov/public/reports/oa/2011/09-11-00112-121b.pdf, at 4 (‘‘EBSA does not have adequate assurances that fiduciaries or third parties voted proxies solely for the economic benefit of plans.’’). E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules believes that it is important to expressly reject the notion of such a presumption. In proposing this regulation, the Department wishes to be clear: There is no fiduciary mandate under ERISA always to vote proxies appurtenant to shares of stock. The Department’s longstanding position—that ‘‘the decision as to how proxies should be voted with regard to the issues that might affect the economic value of the underlying securities is a fiduciary act of plan asset management’’ 42—does not mean that ERISA requires fiduciaries to always vote such proxies.43 Instead, ERISA mandates that fiduciaries manage voting rights prudently and for the ‘‘exclusive purpose’’ of securing economic benefits for plan participants and beneficiaries—which may or may not require a proxy vote to be cast.44 In the Department’s view there is no presumption that abstaining from voting proxies appurtenant to shares of stock is a per se fiduciary breach. Rather, fiduciaries must vote proxies in a manner that is in the best interest of the plan. The proposed regulation is designed to reflect these principles while permitting fiduciaries to execute such duties in a cost-efficient manner. jbell on DSKJLSW7X2PROD with PROPOSALS iv. Recent SEC Actions Regarding Proxy Voting As part of its ongoing proxy reform initiative, the SEC has issued guidance and adopted rule amendments that, to the extent applicable to ERISA fiduciaries, address some of the Department’s concerns about ERISA fiduciaries properly discharging their duties with respect to proxy voting activities and appropriately selecting and overseeing proxy advisory firms. Although persons subject to SEC’s 42 Pension and Welfare Benefits Administration, Proxy Project Report (Mar. 2, 1989), at 2; see also Testimony of David Walker, Ass’t Sec’y for Pension and Welfare Benefits, Tax Policy Aspects of Mergers and Acquisitions, before the H. Ways and Means Comm., Serial 101–10 (Feb. 2, 1989), at 525 (‘‘[P]ension plan fiduciaries [have an obligation] to vote shares that could have an effect on the economic value of the stock in accordance with what is in interest of plan participants and beneficiaries, recognizing the plan as a separate legal entity designed for the purpose of providing retirement income.’’). 43 See also Comment Letter to SEC from Institutional Shareholder Services, Inc. (Nov. 7, 2018), www.sec.gov/comments/4-725/47254629940-176410.pdf, at 7 (‘‘[I]nvestment advisers have no absolute duty to vote every proxy relating to their clients’ portfolios’’). 44 The Supreme Court as recently as 2014 unanimously held in the context of ERISA retirement plans that benefits must be understood to refer to ‘‘financial’’ rather than ‘‘nonpecuniary’’ benefits. See Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014) (the ‘‘benefits’’ to be pursued by ERISA fiduciaries as their ‘‘exclusive purpose’’ do not include ‘‘nonpecuniary benefits’’) (emphasis in original). VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 jurisdiction would also be ERISA investment advice fiduciaries to the extent they meet the five-part test in the Department’s regulation at 29 CFR 2510.3–21, the SEC’s actions would not apply to ERISA fiduciaries that are outside of the SEC’s jurisdiction. The Department believes that it would be appropriate to consider updating its regulations to ensure more consistent conduct by all plan fiduciaries. On August 21, 2019, the SEC issued guidance regarding proxy voting responsibilities of investment advisers.45 The guidance described a number of steps investment advisers could take where the investment adviser has assumed the authority to vote proxies on behalf of a client to demonstrate that it is making voting determinations in a client’s best interest and in accordance with the investment adviser’s proxy voting policies and procedures. Among other things, the investment adviser must conduct a reasonable investigation into matters on which the adviser votes and vote in the best interest of each client for whom the adviser performs proxy voting services, and should consider reasonable measures to determine that it is casting proxy votes on behalf of its clients consistently with the adviser’s voting policies and procedures and in its client’s best interest.46 The SEC guidance also provides that before casting votes, investment advisers that retain proxy advisory firms to provide voting recommendations or voting services should consider additional steps to evaluate whether the voting determinations are consistent with the investment adviser’s voting policies and procedures and in the client’s best interest. The SEC guidance also provides that investment advisers should consider whether the proxy advisory firm has the capacity and competency to adequately analyze the matters for which the investment adviser is responsible for voting. The SEC guidance also explains that an investment adviser’s decision regarding whether to retain a proxy advisory firm should also include a reasonable review of the proxy advisory firm’s policies and procedures regarding how it identifies and addresses conflicts of interest.47 Further, as part of the investment adviser’s ongoing compliance program, the investment adviser must annually 45 See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, 84 FR 47420 (Sept. 10, 2019) (2019 SEC Guidance). 46 2019 SEC Guidance, 84 FR at 47423–47424. 47 Id. at 47424–47425. PO 00000 Frm 00026 Fmt 4702 Sfmt 4702 55223 review and document the adequacy of its voting policies and procedures.48 On July 22, 2020, the SEC adopted rule amendments that, among other things, require proxy advisory firms that are engaged in a solicitation to provide specified disclosures, adopt written policies and procedures designed to ensure that proxy voting advice is made available to securities issuers, and provide proxy advisory firm clients with a mechanism by which the clients can reasonably be expected to become aware of a securities issuer’s views about the proxy voting advice so that the clients can take such views into account as they vote proxies.49 At the same time, the SEC issued supplemental guidance to assist investment advisers in assessing how to consider the additional information that may become more readily available to them as a result of these amendments, including in circumstances where the investment adviser uses a proxy advisory firm’s electronic vote management system that ‘‘pre-populates’’ the adviser’s proxies with suggested voting recommendations and/or voting execution services.50 The Department believes that activities of proxy advisory firms have similar relevance for fiduciaries under ERISA. C. Provisions of the Rule This proposed rule would amend the current ‘‘Investment duties’’ regulation 29 CFR 2550.404a–1 and address the prudence and exclusive purpose duties under sections 404(a)(1)(A) and 404(a)(1)(B) of ERISA in the context of proxy voting and other exercises of shareholder rights by the responsible ERISA plan fiduciaries.51 Paragraph (e)(1) of the proposed rule provides that the fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights appurtenant to those plan assets, such as the right to vote proxies. Paragraph (e)(2)(i) provides that when deciding whether to exercise 48 Id. 49 SEC Release No. 34–89372 (July 22, 2020), Exemptions from the Proxy Rules for Proxy Voting Advice (2020 SEC Proxy Voting Advice Amendments). 50 SEC Release No. IA–5547 (July 22, 2020), Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers (2020 SEC Supplemental Guidance). 51 As explained in paragraph (e)(2)(ii)(B) and paragraph (e)(4)(i) of the proposal, the responsibility for exercising shareholder rights 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) or 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). E:\FR\FM\04SEP1.SGM 04SEP1 jbell on DSKJLSW7X2PROD with PROPOSALS 55224 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules shareholder rights and when exercising such rights, including the voting of proxies, fiduciaries must carry out their duties prudently and solely in the interests of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan pursuant to ERISA sections 403 and 404. Paragraph (e)(2)(ii) sets forth specific standards that fiduciaries must meet when deciding whether to exercise shareholder rights and when exercising shareholder rights. Specifically, the paragraph states that plan fiduciaries must (1) act solely in accordance with the economic interest of the plan considering only factors that they prudently determine will affect the economic value of the plan’s investment based on a determination of risk and return over an appropriate investment horizon consistent with the plan’s investment objectives and the funding policy of the plan; (2) consider the likely impact on the investment performance of the plan based on such factors as the size of the plan’s holdings in the issuer relative to the total investment assets of the plan, the plan’s percentage ownership of the issuer, and the costs involved; (3) not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or sacrifice investment return or take on additional investment risk to promote goals unrelated to these financial interests of the plan’s participants and beneficiaries or the purposes of the plan; (4) investigate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights (e.g., the fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm or other service provider without appropriate supervision and a determination that the service provider’s proxy voting guidelines are consistent with the economic interests of the plan and its participants and beneficiaries); (5) maintain records on proxy voting activities and other exercises of shareholder rights, including records that demonstrate the basis for particular proxy votes and exercises of shareholder rights; and (6) exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with exercises of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 voting proxies, and recordkeeping and reporting services. The proposed provisions confirm that when making their voting decisions, fiduciaries must perform reasonable investigations, understanding that certain proposals may require a more detailed or particularized voting analysis. Information that will better enable fiduciaries to determine whether or how to vote proxies on particular matters includes the cost of voting, including opportunity costs; the type of proposal (e.g., those relating to social or public policy agendas versus those dealing with issues that have a direct economic impact on the investment); voting recommendations of management; 52 and an analysis of the particular shareholder proponents. In the Department’s view, fiduciaries must be prepared to articulate the anticipated economic benefit of proxy-vote decisions in the event they decide to vote. As stated above, the Department recognizes that fiduciaries may reasonably delegate their proxy voting authority to investment managers. In such cases, ERISA requires fiduciaries to monitor proxy voting decisions made by their investment managers to ensure such entities are voting, or refraining from voting, in a manner that maximizes investment returns and does not sacrifice economic benefits for nonpecuniary objectives, as described above. Therefore, it is the view of the Department that, consistent with the duty to monitor, fiduciaries should require documentation of the rationale for proxy-voting decisions so that fiduciaries can periodically monitor proxy-voting decisions made by third parties. A plan fiduciary must also assess and monitor an investment manager’s use of any proxy advisory firm, including any review by the manager of the advisory firm’s policies and procedures for identifying and addressing conflicts of interest.53 52 Corporate directors owe their own fiduciary duties to their corporation, and can be subjected to shareholder lawsuits for breach of those duties. See, e.g., Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (citing Loft, Inc. v. Guth, 2 A.2d 225 (Del. Ch. 1938), aff’d, 5 A.2d 503 (Del. 1939)) (‘‘The existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders.’’). 53 Many investment managers are registered as investment advisers with the SEC. As such, they are required by an SEC rule to: (i) Adopt and implement written policies and procedures reasonably designed to ensure they vote securities in a client’s best interest, and which procedures must include how the adviser will address material conflicts of interest that may arise between the adviser’s interests and those of its client; (ii) disclose to clients about how they may obtain information about how the adviser voted with PO 00000 Frm 00027 Fmt 4702 Sfmt 4702 Similarly, any ERISA plan fiduciary that uses a proxy advisory firm is responsible for ensuring that the proxy advisory firm’s practices with respect its services to the ERISA plan are consistent with the prudence and loyalty obligations that govern the fiduciary’s proxy voting actions.54 In particular, fiduciaries must be aware that conflicts of interest can arise at proxy advisory firms that could affect vote recommendations. For example, in certain instances a proxy advisory firm may issue proxy voting recommendations while the company that is the subject of such recommendations is a client of the firm’s consulting business.55 When using a proxy advisory firm, ERISA fiduciaries must exercise prudence and diligence in selecting and monitoring the firm, as both are fiduciary acts. Such diligence should include assessing whether the proxy advisory firm is able to competently analyze proxy issues, identify and address potential conflicts of interest, and adhere to the plan’s proxy voting policy guidelines. Particular attention must be given to proxy advisory firms that provide both proxy advisory services to investors and consulting services to issuers on matters subject to proxy resolutions.56 In respect to their securities; and (iii) describe to clients the adviser’s proxy voting policies and procedures and, upon request, furnish a copy of the policies and procedures to the requesting client. See 17 CFR 275.206(4)–6; see also 2019 SEC Guidance, 84 FR at 47424 (addressing considerations that an investment adviser should take into account if it retains a proxy advisory firm to assist it in discharging its proxy voting duties). 54 For example, research has shown that a significant number of asset managers automatically vote in accordance with the recommendations of proxy advisory firms. See, e.g., Paul Rose, Robovoting and Proxy Vote Disclosure (Nov. 2019), https://corpgov.law.harvard.edu/2019/11/25/ robovoting-and-proxy-vote-disclosure (detailing the prevalence of such ‘‘robovoting’’ by firms that contract with proxy advisory firms and expressing concern regarding this lack of diligence). 55 See, e.g., GAO Report 07–765, Issues Relating to Firms That Advise Institutional Investors on Proxy Voting (June 2007), at 4, 9–10. By contrast, section 201 of the Sarbanes-Oxley Act of 2002, Public Law 107–204, mandates the independence of auditors in part by prohibiting a public accounting firm that performs an audit from simultaneously offering non-audit services. 56 The SEC has issued guidance on the elements an investment adviser should consider in retaining or continuing to retain a proxy advisory firm, including the process an investment adviser should take to review and assess a proxy advisory firm’s policies and procedures for identifying and addressing conflicts of interest. See 2019 SEC Guidance, 84 FR at 47425. The SEC issued supplementary guidance for investment advisers on how to consider additional information that may become more readily available to them as a result of the amendments to the proxy rule for proxy voting advice, including when an investment adviser utilizes a proxy advisor’s electronic vote management system that ‘‘pre-populates’’ with suggested voting recommendations and/or for E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS addition, the Department’s longestablished position is that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring. Consistent with these principles, paragraph (e)(2)(iii) of the proposal states that, where the authority to vote proxies or exercise shareholder rights has been delegated to an investment manager pursuant to ERISA section 403(a)(2) or a proxy voting firm or other person performs advisory services as to the voting of proxies, plan fiduciaries shall require such investment manager, proxy voting firm, or other advisor to document the rationale for proxy voting decisions or recommendations sufficient to demonstrate that the decision or recommendation was based on the expected economic benefit to the plan, and that the decision or recommendation was based solely on the interests of participants and beneficiaries in obtaining financial benefits under the plan. To facilitate transparency, the Department also reminds fiduciaries that proxy voting guidelines must be made available to plan participants, either as a separate document or by including them in the plan’s existing investment policy statement. When an investment manager’s rationale on a vote for recurring issues is to follow a uniform internal policy, the manager should document the reasons for any vote that goes against the policy, which would generally only require a brief explanation directly in the proxy-voting record. Paragraph (e)(3) sets forth certain proposed requirements and limitations pertaining to proxy voting. The proposed rule provides in paragraph (e)(3)(i) that a plan fiduciary must vote any proxy where the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan after considering those factors described in paragraph (e)(2)(ii) and taking into account the costs involved (including the cost of research, if necessary, to determine how to vote). As a corollary, paragraph (e)(3)(ii) provides that a plan fiduciary must not vote any proxy unless the fiduciary prudently determines that the matter being voted voting execution services. See 2020 SEC Supplemental Guidance. In the event fiduciaries believe the retention of a proxy advisory firm is appropriate, the Department likewise views the SEC’s guidance as reasonable direction for the diligence that ERISA plan fiduciaries should perform when reviewing and assessing a proxy advisory firm. The Department notes, however, that the SEC standards do not necessarily capture all the actions that ERISA may require as a result of that review and assessment. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 upon would have an economic impact on the plan after considering those factors described in paragraph (e)(2)(ii) and taking into account the costs involved. These provisions are intended to reflect the fact that there will be circumstances when fiduciaries are required to vote a proxy and there will be circumstances when a fiduciary is required not to vote a proxy. In those circumstances when a fiduciary prudently determines that the fiduciary’s duties to the plan require the fiduciary to vote, the fiduciary must exercise care, skill, prudence, diligence, and loyalty when making voting decisions on behalf of the plan.57 The Department recognizes that because the decision regarding whether a proxy vote will or will not affect the economic value of a plan’s investments is critical in triggering a fiduciary’s obligations under ERISA to vote or abstain from voting, fiduciaries may need to conduct an analytical process which could in some cases be resourceintensive (requiring, among other things, organizing proxy materials, diligently analyzing portfolio companies and the matters to be voted on, determining how the votes should be cast, and submitting proxy votes to be counted), and that these activities may often burden fiduciaries out of proportion to any potential benefit to the plan.58 Given that widely diversified plans significantly dilute the effect of a single holding, and the mixed evidence regarding whether proxy voting affects firm value,59 the Department is concerned that the costs for fiduciaries to prudently exercise proxy voting rights often will exceed any potential economic benefits to a plan. To address this concern, the Department has proposed potential options for fiduciaries that are intended to reduce the need for fiduciaries to consider proxy votes that are unlikely to have an economic impact on the plan, thereby allowing plans to focus resources on matters most likely to have an economic impact. These various options (labeled ‘‘permitted practices’’ in the proposed rule) will thus help fiduciaries more cost-effectively comply with the obligations under paragraphs (e)(3)(i) and (ii). Under the proposed 57 ERISA section 404(a)(1). SEC described a number of functions performed by proxy voting advice businesses and observed that in the absence of such services, investment advisers and other clients of these businesses may require considerable resources to independently conduct the work necessary to analyze and make voting determinations. See 2020 SEC Proxy Voting Advice Amendments, at 140–141. 59 See supra note 39. 58 The PO 00000 Frm 00028 Fmt 4702 Sfmt 4702 55225 provisions, a fiduciary may adopt proxy voting policies that encompass one or more of the permitted practices, and the fiduciary may then apply those proxy voting policies to proxy votes. The development and adoption of such policies is subject to the fiduciary’s duties of prudence and loyalty. However, paragraph (e)(3)(v) ensures that such proxy voting policies would not preclude a fiduciary from voting in any particular case in which a fiduciary subsequently determines that the proxy matter being voted upon would have an economic impact on the plan, or from refraining from voting based on a subsequent determination that the matter being voted upon would not have an economic impact. Accordingly, the Department proposes to assist plan fiduciaries by providing in paragraph (e)(3)(iii) that it is permissible to adopt general proxy voting policies or parameters for exercising voting rights that are prudently designed to serve the plan’s economic interest. Paragraphs (e)(3)(iii)(A), (B), and (C) provide examples of such policies. In paragraph (e)(3)(iii)(A), the Department proposes that a fiduciary may adopt a policy of voting proxies in accordance with the voting recommendations of a corporation’s management on proposals or types of proposals that the fiduciary has prudently determined are unlikely to have a significant impact on the value of the plan’s investment, subject to any conditions determined by the fiduciary as requiring additional analysis because the matter being voted upon concerns a matter that may present heightened management conflicts of interest or is likely to have a significant economic impact on the value of the plan’s investment. Under this permitted practice, a fiduciary may, consistent with its obligations set forth in ERISA section 404(a)(1)(A) and (B), maintain a proxy voting policy that relies on the fiduciary duties that officers and directors owe to a corporation based on state corporate laws.60 On that basis, the proxy voting policy may state that the responsible plan fiduciary, if it so determines, ordinarily will follow the recommendations of a corporation’s management. Furthermore, empirical observations indicate that nearly all management proposals are approved with little opposition.61 Fiduciaries retain the right to override this practice or any voting policy if they 60 See Aronson v. Lewis, supra note 51. The Conference Board, Proxy Voting Analytics (2015–2018), at 105, (2018), https:// law.rutgers.edu/sites/law/files/RR-1674-18-R.pdf. 61 See E:\FR\FM\04SEP1.SGM 04SEP1 jbell on DSKJLSW7X2PROD with PROPOSALS 55226 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules subsequently determine that prudence dictates a different voting decision pursuant to paragraphs (e)(3)(i) and (ii). The Department proposes in paragraph (e)(3)(iii)(B) that a fiduciary may determine in its proxy voting policy to focus its resources only on particular types of proposals that the fiduciary has prudently determined are likely to have a significant impact on the value of the plan’s investment, such as proposals relating to corporate events (mergers and acquisitions transactions, dissolutions, conversions, or consolidations), corporate repurchases of shares (buy-backs), issuances of additional securities with dilutive effects on shareholders, or contested/ elections for directors. Paragraph (e)(3)(iii)(C) proposes that a fiduciary may adopt a policy of refraining from voting on proposals or particular types of proposals when the plan’s holding of the issuer relative to the plan’s total investment assets is below quantitative thresholds that the fiduciary prudently determines, considering its percentage ownership of the issuer and other relevant factors, is sufficiently small that the matter being voted upon is unlikely to have a material impact on the investment performance of the plan’s portfolio (or investment performance of assets under management in the case of an investment manager). The Department believes that establishing a specific quantitative upper limit for the threshold (i.e., a cap) under paragraph (e)(3)(iii)(C) may help fiduciaries by reducing the circumstances when borderline cases might result in plans performing individual cost/benefit analyses to decide whether to vote proxy proposals, a likely inefficient use of plan resources. The Department also believes that determining materiality based on a percentage of plan assets could be a straightforward way for fiduciaries to apply such a cap, and specifically solicits comments on whether in setting this upper limit, the Department should look to financial practices and existing regulations regarding quantitative measures of materiality. The Department solicits comments on whether a maximum cap should be defined and, if so, what factors should be considered in setting a cap. In particular, the Department solicits comments on whether a fivepercent cap would be appropriate, or some other percent level of plan assets.62 The proposed permitted practices provisions in paragraph (e)(3)(iii) include conditions that are intended to require a fiduciary to make prudencebased judgments about the policies. The specified types of proposals are not intended to be limiting, and a fiduciary could prudently determine other criteria for determining in advance the types of proposals on which to focus. These proposed provisions are also intended to be applied flexibly rather than in a binary ‘‘all or none’’ manner, and may be used either independently or in conjunction with each other. A fiduciary should adopt proxy voting policies that are appropriate for a plan’s particular facts and circumstances. For example, a fiduciary declining to submit any proxy votes for holdings below a prudently determined quantitative materiality threshold may modify the policy in advance to allow proxy voting if needed for the portfolio holding to achieve a quorum for its shareholders’ meeting.63 As another example, a fiduciary could determine not to spend plan assets on proxy votes for nonbinding proposals, unless it is aware that such a proposal will somehow still have an economic impact on the value of the plan’s investment. A fiduciary could also utilize the permitted practices to create a proxy voting policy that votes in accordance with management’s recommendations for uncontested elections of directors and ratification of independent auditors and certain types of non-binding proposals, but primarily reserves its proxy voting resources for corporate events that are expected to have a significant economic impact on the value of the plan’s holding, such as share buy-backs, dilutive issuances of securities, and contested elections for directors of the board. Plans could also fashion policies or exceptions from policies to account for circumstances where a plan’s vote share is more likely to affect the outcome of a vote and the fiduciary believes changing the outcome would have an economic impact on the plan. Paragraph (e)(3)(iv) would require plan fiduciaries to review any proxy voting policies adopted pursuant to paragraph (e)(3)(iii) at least once every two years. Paragraph (e)(3)(iv) is intended to permit fiduciaries to prudently determine a review cycle for their proxy voting policies, but establishes a maximum interval of no more than two years, which the Department believes is an appropriate limit to ensure a plan’s proxy voting policies remain prudent given ongoing changes in financial markets and the investment world. The Department also understands that this provision is consistent with industry practices regarding periodic review and approval of investment policy statements.64 The Department solicits comments on whether some other maximum interval would be appropriate to better ensure that plan policies adopted pursuant to paragraph (e)(3)(iii) remain prudent without unnecessarily burdening plan fiduciaries. Finally, the Department’s proposed rule acknowledges in paragraph (e)(3)(v) that a fiduciary’s fundamental priority is to act in the best interest of participants and beneficiaries. In the view of the Department, no policies adopted under paragraph (e)(3)(iii) would interfere with, or impose liability for, submitting a proxy vote when the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan after taking into account the costs involved. Rather, in situations where a fiduciary has prudently determined it is in the economic interest of the plan to vote, a fiduciary responsible for proxy voting must carry out this responsibility ‘‘solely’’ and ‘‘for the exclusive purpose of’’ the participants’ and beneficiaries’ interest in the economic value of the plan assets. In addition to the solicitation of public comments on the particular proposed permitted practices, the Department requests comment on whether the proposed permitted practices should contain additional examples regarding when advance proxy voting directions may be exercised pursuant to specific parameters designed to serve the plan’s economic interest and, if so, what situations those examples should cover. For example, the Department requests comment on whether the permitted practice in paragraph (e)(3)(iii)(B) should have additional specified types of proposals and, if so, which types of proposals. The Department also requests comment on whether the permitted practices in paragraphs (e)(3)(iii)(A) and (B) should be subject to quantitative limitations on plan holdings like those referenced in paragraph (e)(3)(iii)(C). Paragraphs (e)(4)(i) and (ii) adopt provisions from the Department’s prior IBs and state that the responsibility for exercising shareholder rights lies 62 The proposal is not intended to suggest or express a view on whether in any particular case investing five percent of a plan’s portfolio in one holding would comply with ERISA’s diversification requirement, 29 U.S.C. 1104(a)(1)(C). 63 The direct and indirect costs incurred by the corporation related to delaying the shareholders’ meeting, such as additional proxy solicitation, legal, and administrative costs, would be an economic detriment to the plan’s holding. 64 See also PBGC regulations at 29 CFR 4002.1(a)(4) (stating that PBGC Board must review the Corporation’s Investment Policy Statement at least every two years and approve the Investment Policy Statement at least every four years). VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 PO 00000 Frm 00029 Fmt 4702 Sfmt 4702 E:\FR\FM\04SEP1.SGM 04SEP1 jbell on DSKJLSW7X2PROD with PROPOSALS Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules 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) or 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) of ERISA, the investment manager has exclusive authority to vote proxies or exercise other shareholder rights appurtenant to such plan assets, except to the extent the plan or trust document or investment management agreement expressly provides that the responsible 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 exercise or management of some or all of such shareholder rights. Paragraph (e)(4)(ii) provides proposed language concerning the obligations of an investment manager of a pooled investment vehicle that holds assets of more than one employee benefit plan that may be subject to an investment policy statement that conflicts with the policy of another plan. Compliance with ERISA section 404(a)(1)(D) requires 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)). In the case of proxy voting, to the extent permitted by applicable law, the investment manager must vote (or abstain from voting) the relevant proxies to reflect such policies in proportion to each plan’s economic interest in the pooled investment vehicle. Such an investment manager may, however, develop an investment policy statement consistent with Title I of ERISA and this section, and require participating plans to accept the investment manager’s investment policy, including any proxy voting policy, before they are allowed to invest. In such cases, a fiduciary must assess whether the investment manager’s investment policy statement and proxy voting policy are consistent with Title I of ERISA and this regulation before deciding to retain the investment manager. Paragraph (g) provides for the effective date for the proposed rule. Under paragraph (g), the proposed rule would be effective on a date thirty days after the date of the publication of the final rule. The Department notes that on June 30, 2020 (85 FR 39113), it published in the Federal Register a VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 proposed rule on Financial Factors in Selecting Plan Investments. Both this proposal and the Financial Factors in Selecting Plan Investments proposal are amendments to § 2550.404a–1. Both proposals include a proposed paragraph (g), but the Financial Factors in Selecting Plan Investments proposal proposes an effective date of 60 days after publication of a final rule. Depending on the publication date of the respective final rules, the Department may need to revise paragraph (g) to separately effectuate the final rules. For example, if a final rule on Financial Factors in Selecting Plan Investments is published exactly 30 days before a final rule on Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, and no changes were made to the proposed effective dates as part of the final rules, then no revision to paragraph (g) would be necessary. The Department requests comment on how to structure the effective date of this proposed rule, including whether it should be adjusted to ensure it matches the effective date of the rule on Financial Factors in Selecting Plan Investments, if finalized. The Department also requests comment on whether any transition or applicability date provisions should be added to for any of the provisions of the proposal. Paragraph (h) provides that should a court of competent jurisdiction hold any provision of the rule invalid, such action will not affect any other provision. Including a severability clause provides clear guidance that the Department’s intent is that any legal infirmity found with part of the proposed rule should not affect any other part of the proposed rule. The Department notes that it included the exact same paragraph in the proposed rule on Financial Factors in Selecting Plan Investments. D. Request for Public Comments The Department invites comments from interested persons on all facets of the proposed rule. Commenters are free to express their views not only on the specific provisions of the proposed regulation as set forth in this document, but on other issues germane to the subject matter of the proposal. Comments should be submitted in accordance with the instructions at the beginning of this document. Comments on the proposal must be submitted on or before October 5, 2020. The Department believes that this period of time will afford interested persons an adequate amount of time to analyze the proposed rule and submit comments. PO 00000 Frm 00030 Fmt 4702 Sfmt 4702 55227 E. Regulatory Impact Analysis Executive Orders The Department has examined the effects of this rule as required by Executive Order 12866,65 Executive Order 13563,66 Executive Order 13771,67 the Congressional Review Act,68 the Paperwork Reduction Act of 1995,69 the Regulatory Flexibility Act,70 Section 202 of the Unfunded Mandates Reform Act of 1995,71 and Executive Order 13132.72 Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects; distributive impacts; and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Under Executive Order 12866, ‘‘significant’’ regulatory actions are subject to review by the Office of Management and Budget (OMB). Section 3(f) of the Executive order defines a ‘‘significant regulatory action’’ as an action that is likely to result in a rule (1) having an annual effect on the economy of $100 million or more in any one year, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as ‘‘economically significant’’); (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive order. OMB has determined that this rule is economically significant within the meaning of section 3(f)(1) of the Executive Order 12866. Therefore, the 65 Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993). 66 Improving Regulation and Regulatory Review, 76 FR 3821 (Jan. 18, 2011). 67 Reducing Regulation and Controlling Regulatory Costs, 82 FR 9339 (Jan. 30, 2017). 68 5 U.S.C. 804(2) (1996). 69 44 U.S.C. 3506(c)(2)(A) (1995). 70 5 U.S.C. 601 et seq. (1980). 71 2 U.S.C. 1501 et seq. (1995). 72 Federalism, 64 FR 43255 (Aug. 10, 1999). E:\FR\FM\04SEP1.SGM 04SEP1 55228 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules Department has provided an assessment of the potential costs, benefits, and transfers associated with this proposed rule. OMB has reviewed the proposal pursuant to the Executive order. Pursuant to the Congressional Review Act, OMB has designated this proposed rule as a ‘‘major rule,’’ as defined by 5 U.S.C. 804(2). jbell on DSKJLSW7X2PROD with PROPOSALS 1. Introduction ERISA plan assets comprise a substantial stake of the shares of public companies. In 2017, plan assets contained stock holdings of $2.1 trillion, including 28 percent of defined benefit plan assets and 15 percent of defined contribution plan assets.73 However, ERISA pension holdings represent a decreasing share of all corporate equity. ERISA defined benefit and defined contribution plans held just 5.5 percent of total corporate equity in 2019, down from a high of 22 percent in 1985.74 Prior to its annual meeting, a publicly traded company sets a record date and sends out a list of proposals on which shareholders will vote. A shareholder must hold shares as of the record date in order to vote at a shareholder meeting. There are two types of proposals: Management proposals and shareholder proposals. Management proposals—including director elections, audit firm ratification proposals, and proposals regarding the company’s executive compensation program (also known as ‘‘say-on-pay’’ proposals)— account for 98 percent of proposals and are largely mandated by law or exchange listing requirements. Over the period 2011 to 2017, shareholder proposals accounted for about 2 percent of proposals but often were more controversial and thus received more attention than management proposals.75 Shareholder votes on some proposals, such as director elections, are binding. Votes on many other proposals, including shareholder proposals and say-on-pay proposals, are not binding and serve only as shareholder recommendations for the company’s board.76 As shareholders, ERISA-covered plans have the right to vote on proposals. Some of these proposals may have an economic impact on a plan’s 73 Department estimates are based on Form 5500 annual reports filed by plans with 100 or more participants. These estimates include only stocks held directly or through Direct Filing Entities, not through mutual funds. 74 Department calculations based on U.S. Federal Reserve statistics. 75 Morris Mitler, Dorothy Donohue & Sean Collins, Proxy Voting by Registered Investment Companies, 2017, ICI Research Perspective (July 2019), at 4 (hereinafter ‘‘ICI Proxy Voting Report’’). 76 Id. at 6; see also 15 U.S.C. 78n–1. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 investment, while others may not. The responsible plan fiduciary generally must decide whether (and how) to vote the plan’s shares on each proposal. As noted earlier in the preamble, the determination of whether or not the vote will affect the economic value of a plan’s investment portfolio is critical in triggering a fiduciary’s obligations under ERISA to vote or abstain from voting. For example, if a shareholder vote approves an economically beneficial transaction, the value of the plan’s investment could increase.77 Fiduciaries may need to conduct an analytical process that could in some cases be resource-intensive (requiring, among other things, organizing proxy materials, diligently analyzing portfolio companies and the matters to be voted on, determining how the votes should be cast, and submitting proxy votes to be counted), and these activities may often impose burdens on fiduciaries that are disproportional to any potential economic benefit to the plan. To address this concern, the Department proposes several potential options for fiduciaries to consider that are intended to reduce the need for them to consider proxy votes thereby freeing resources for fiduciaries to focus on activities most likely to have an economic impact on the plan’s investment. This proposed rule preserves fiduciaries’ role in casting such votes, and includes provisions to ensure that fiduciaries make proxy voting decisions for the exclusive purpose of securing net economic benefits for plans and their participants as ERISA requires. 1.1. Need for Regulation The cost of determining whether or how a responsible fiduciary should vote a plan’s shares on a proposal is generally borne by the plan. If the proposal has no or negligible implications for the value of the plan’s investment, it would be better for the plan to simply refrain from voting than to incur even small costs making this determination. Even if the proposal has substantial implications for the company, the cost of voting still may be higher than the potential benefit to the plan, especially if each fiduciary separately must collect and analyze the information necessary to reach an appropriate conclusion. The cost may be lower if the fiduciary can rely on an impartial, expert third-party adviser who specializes in such matters and 77 See Art Durnev & E. Han Kim, To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation, 60 Journal of Finance 1461–1493 (2005); see also Gerald F. Davis & E. Han Kim, Business Ties and Proxy Voting by Mutual Funds, 85 Journal of Financial Economics 552–570 (2007). PO 00000 Frm 00031 Fmt 4702 Sfmt 4702 provides similar services to many shareholders. Likewise, the cost may be lower if the fiduciary can rely on recommendations from the company’s management on proposals where the interests of the plan and management are aligned.78 The Department has two main concerns. First, the Department is concerned that responsible plan fiduciaries, in their efforts to decide whether or how to vote plan shares— and where applicable, to vote them— and exercise other shareholder rights, may impose costs on plans that exceed the consequent economic benefits to them. Some stakeholders believe that fiduciaries must always vote proxies, subject to limited exceptions, in order to fulfill their obligations under ERISA.79 Second, the Department has reason to believe that responsible fiduciaries may sometimes rely on third-party advice without taking sufficient steps to ensure that the advice is impartial and rigorous. Such action would fall short of ERISA’s standards of fiduciary care and loyalty in the exercise of plans’ shareholder rights. Both of these concerns point to the risk that a plan’s proxy voting activity sometimes will impair rather than benefit participants’ economic interests. The Department’s objective in issuing this proposed rule is to ensure that plan fiduciaries only incur costs to vote proxies and exercise other shareholder rights that are economically justified. The Department further seeks to ensure that plans’ shareholder rights are exercised by responsible fiduciaries consistent with ERISA’s fiduciary requirements. Large ERISA plans and certain financial intermediaries holding ERISAcovered assets file annual reports with the Department that include some information on certain fees paid directly to specific service providers. The 78 In 2010, TIAA–CREF senior vice president Jonathan Feigelson noted: ‘‘Though we dedicate a significant amount of resources to corporate governance research and the voting of proxies, we still would have difficulty processing the 80,000 plus unique agenda items voted by our staff annually without utilizing [proxy advisory firm] research.’’ See letter to Elizabeth Murphy, Secretary, Securities and Exchange Commission, Re: Concept Release on the U.S. Proxy System, File No. S7–14–10 (Nov. 8, 2010), www.sec.gov/ comments/s7-14-10/s71410-263.pdf. In 2017, the average mutual fund voted on 1,500 separate proposals. See ICI Proxy Voting Report, at 5. Furthermore, institutional investors’ incentives to remain informed and hold specific voting positions varies according to how much the fund benefits from voting. The more the fund is invested in a company, the more likely it is to perform independent research on the proposal. See Peter Iliev & Michelle Lowry, Are Mutual Funds Active Voters?, 28 Review of Financial Studies.446–85 (2014). 79 See supra note 12. E:\FR\FM\04SEP1.SGM 04SEP1 jbell on DSKJLSW7X2PROD with PROPOSALS Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules reported information sheds little light on the costs attendant to voting proxies or exercising other shareholder rights. The information omits very small direct payments, direct payments by small plans, and essentially all indirect payments. The last omission may be particularly important because plans may delegate asset management, including proxy voting, to third-party asset managers, who then may hire proxy advisory firms. In that case, plans’ reports would bundle proxy voting costs, including any proxy advisory fees, into asset management fees. A preliminary examination of all ERISA plan and intermediary fee reports identifies just 18 direct payments to one of the two leading proxy advisory firms, and none to the other. Measured against the reporting plans’ total assets, the 18 reported payments averaged 0.2 basis points. The reports additionally identify 46 payments to a second service provider known to provide proxy advice, which averaged 0.2 basis points, and 363 payments to a third, which averaged 6.3 basis points. It is unclear whether all of these payments relate to proxy voting, as the service providers may provide other services as well. Many reported payments to the third service provider in particular appear likely to be for other types of services in addition to, or rather than, proxy voting services, because a majority of the plans reporting such payments also reported having no direct stock holdings. This may help explain why reported payments to the third provider are higher than payments to the first two service providers. While these reported costs might generally seem small, actual total proxy voting costs could be substantially higher for some or many plans, and even small costs may not be justified. As noted above, not all plan payments to proxy advisory firms are reported. Nearly all of the reported payments came from multiemployer plans. A large majority of multiemployer plans and nearly all single-employer plans reported no payment to any known proxy advisory firm. The magnitude of unreported costs is unknown. Other costs that are not reported separately are likely included as part of the fees paid to third-party asset managers who hire proxy advisory firms and/or do their own research on proposals. In addition, even small voting costs may somewhat impair participants’ financial interest in their benefits if the votes pertain to issues that have little or no bearing on share value or are otherwise immaterial to the plan’s financial interest. As stated earlier, research regarding whether VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 proxy voting has reliable positive effects on shareholder value generally has yielded mixed results.80 The Department invites comments on whether, to what extent, and under what circumstances plans’ proxy votes are likely or unlikely to increase the value of their shares or otherwise advance their participants’ economic interest. The Department’s concerns about plans’ voting costs sometimes exceeding attendant benefits has been amplified by the recent increase in the number of environmental and social shareholder proposals introduced. It is likely that many of these proposals have little bearing on share value or other relation to plan interests.81 From 2011 through 2017, shareholders submitted 462 environmental proposals and 841 social shareholder proposals, and resubmitted at least once 41 percent of environmental and 51 percent of social proposals.82 These proposals increasingly call for disclosure, risk assessment, and oversight, rather than for specific policies or actions, such as phasing out products or activities.83 Support for environmental and social proposals grew between 2004 and 2018.84 Few received majority support, but the number of environmental proposals winning majority support ticked up sharply in 2018.85 By one count, the number of such proposals submitted or resubmitted grew from approximately 130 in 2000 to more than 240 by 2016, before falling to approximately 180 in 2018.86 The Department is aware, however, that in 2019, the SEC proposed a rule amendment that could have the effect of reducing the overall number of shareholder proposals that appear on issuer proxy statements.87 Beyond voting costs, the Department is also concerned that plans may incur 80 See supra note 39. John G. Matsusaka, Oguzhan Ozbas, & Irene Yi, Can Shareholder Proposals Hurt Shareholders? Evidence from SEC No-Action Letter Decisions, U.S.C. CLASS Research Paper No. CLASS17–4 (2019), https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2881408, at 25; Joseph P. Kalt, L. Adel Turki, Kenneth W. Grant, Todd D. Kendall & David Molin, Political, Social, and Environmental Shareholder Resolutions: Do They Create or Destroy Shareholder Value?, National Association of Manufacturers (June 2018), www.shopfloor.org/wp-content/uploads/2018/06/ nam_shareholder_resolutions_survey.pdf. 82 Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, 84 FR 66458, 66491 (Dec. 4, 2019) (2019 SEC Rule 14a– 8 Proposal). 83 2019 ISS Proxy Voting Trends. 84 2019 SEC Rule 14a–8 Proposal, 84 FR at 66484; see also 2019 ISS Proxy Voting Trends. 85 2019 SEC Rule 14a–8 Proposal, 84 FR at 66486. 86 2019 ISS Proxy Voting Trends. 87 2019 SEC Rule 14a–8 Proposal. 81 See PO 00000 Frm 00032 Fmt 4702 Sfmt 4702 55229 substantially larger costs to exercise shareholder rights more vigorously, such as by sponsoring or campaigning for shareholder proposals. Such activities may deliver little or no benefit to plans because they concern issues that have little bearing on share value or other plan interests. The Department invites comments on the degree to which plans are incurring costs to vote on proposals or exercise other shareholder rights and how they have balanced those costs against any perceived duty or requirement to vote proxies. The Department requests comments on the relative size of the regulatory and deregulatory provisions that would be associated with this rule. A number of stakeholders have questioned whether third-party proxy advice is impartial, sufficiently rigorous, and consistent with ERISA’s fiduciary duties, as would be necessary to reliably advance ERISA investors’ interests. Some question whether proxy advisory firms’ practices are sufficiently transparent for investors to be able to determine whether their interests are being advanced. Some stakeholders also question whether the market for proxy advice is too concentrated and insufficiently competitive, which could impair investors’ access to quality, affordable advice.88 Proxy advice that is not rigorous or not aligned with a plan’s interest could lead to a responsible plan fiduciary voting shares when voting costs exceed any benefit, or when voting would otherwise run counter to the plan’s interest. The Department notes that the SEC recently amended its rules governing proxy solicitations to help ensure that investors who use proxy voting advice receive more accurate, transparent, and complete information on which to make their voting decisions.’’ 89 In its economic analysis of its proposal, the SEC stated that proxy advisory firms can capture economies of scale for several of the services they provide, including voting advice.90 The SEC noted that the proxy voting advice industry in the United States consists of three major firms,91 and is 88 See, e.g., Proxy Season 2018: Examining Developments & Looking Forward, presented by the Center for Capital Markets Competitiveness and NASDAQ, https:// www.centerforcapitalmarkets.com/wp-content/ uploads/2018/10/ProxySeasonSurvey_v3_ Digital.pdf. 89 2019 SEC Proxy Voting Advice Amendments, at 1. 90 Id. at 141, 201. 91 Id. at 150. In the proposal, the SEC identified two additional firms which claimed a large number of pension and profit sharing clients as providing proxy advice, but the SEC subsequently stated in E:\FR\FM\04SEP1.SGM Continued 04SEP1 55230 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules highly concentrated among the two leading proxy advisory firms, Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co., LLC (Glass Lewis). Clients of proxy advisory firms include investment advisers, banks, and insurers that may be voting ERISA plan shares. In proposing its amendments, the SEC described concerns regarding proxy advisory firms, including the adequacy of disclosure of any actual or potential conflicts of interest, the accuracy and material completeness of the information underlying proxy advice, and the inability of proxy advice clients to receive information and views from the registrant, potentially contrary to that presented in the advice, in a manner that is consistently timely and efficient.92 Moreover, with respect to a small fraction of proposals, some commenters have asserted that proxy advisory firms have made factual and/ or analytic errors in additional definitive proxy materials.93 Such shortcomings make it more difficult for a responsible ERISA fiduciary to rely on a proxy advisory firm’s recommendations. A fiduciary who does so rely could risk violating ERISA’s fiduciary requirements. Critics additionally complain that proxy advisory firms sometimes inappropriately provide the same recommendations to investors with different duties or obligations. Uniform voting policies for clients with different investment strategies and objectives have also been noted as a problem. Such a concern recently led the SEC to state that ‘‘where an investment adviser undertakes proxy voting responsibilities on behalf of multiple funds, pooled investment vehicles, or other clients, it should consider whether it should have different voting policies for some or all of these different funds, vehicles, or other clients, depending on the investment strategy and objectives of each.’’ 94 The Department has tried to convey in its prior sub-regulatory guidance that fiduciaries need not vote all proxies. A fiduciary’s duty is to vote those proxies that are prudently determined to have an economic impact on the plan after the costs of research and voting are taken into account. Nevertheless, a misunderstanding that fiduciaries must research and vote all proxies continues to persist, causing some plans to expend their assets unnecessarily on matters not economically relevant to the plan. Accordingly, this proposed rule is necessary to interpret ERISA and expressly state that fiduciaries must not vote in circumstances where plan assets would be expended on shareholder engagement activities that do not have an economic impact on the plan, whether by themselves or after the costs of engagement are taken into account. The Department believes that addressing these issues in the form of a notice and comment regulation will help safeguard the interests of participants and beneficiaries in their plan benefits. 1.2. Affected Entities This proposal would affect ERISAcovered pension, health, and other welfare plans that hold shares of corporate stock. It would affect plans with respect to stocks they hold directly, as well as with respect to stocks they hold through ERISA-covered intermediaries, such as common trusts, master trusts, pooled separate accounts, and 103–12 investment entities. The proposal would not affect plans with respect to stock held through registered investment companies, because the proposal does not apply to such funds’ internal management of such underlying investments. ERISA-covered plans with 100 or more participants (large plans) annually report data on their stock holdings on Form 5500 Schedule H (see Table 1). Approximately 29,000 defined contribution plans and 5,500 defined benefit plans, with approximately 86 million participants, hold either common stocks or employer stocks, totaling approximately $2.1 trillion. Common stocks constitute about 20 percent of total assets of those plans holding common stock but not employer securities. Out of the 29,000 plans that hold common stock, but not employer securities, about 24,000 plans hold common stock through an ERISAcovered intermediary and approximately 3,700 plans hold common stock directly. A smaller number of plans hold stock both directly and indirectly.95 In addition to the large pension plans, approximately 619,000 small pension plans hold assets and may invest in stock.96 Additionally 597 health and other welfare plans file the schedule H and report holding either common stocks or employer stocks. The Department solicits comments regarding the number of plans that exercise shareholder rights and thus would be affected by this proposal. TABLE 1—NUMBER OF PENSION PLANS HOLDING COMMON STOCKS OR EMPLOYER STOCKS BY TYPE OF PLAN, 2017 a Defined benefit Total plans Common Stock Direct Holdings ..................................................................................................................... Indirect Holdings ................................................................................................................... Direct and Indirect Holdings ................................................................................................. 1,460 3,035 982 2,241 20,701 664 3,701 23,736 1,646 Total ............................................................................................................................... Employer Securities ..................................................................................................................... Common Stock and Employer Securities .................................................................................... 5,476 ........................ ........................ 23,606 6,457 634 29,082 6,457 634 Total Plans Holding Stocks .................................................................................................. 5,476 29,430 34,906 a DOL jbell on DSKJLSW7X2PROD with PROPOSALS Defined contribution calculations from the 2017 Form 5500 Pension Research Files. the final amendments that, based on commenters, these two additional firms did not advise investment advisers and institutional investors on their voting determinations and would therefore not be affected by the amendments. Id. at 150 n. 502. The SEC indicated that was because they vote on behalf of their clients rather than providing them VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 with research reports and voting recommendations. Id. at 30. 92 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, 84 FR 66518, 66525 (Dec. 4, 2019). Id. at 66525. 93 Id. at 66545–46. PO 00000 Frm 00033 Fmt 4702 Sfmt 4702 94 2019 SEC Guidance, 84 FR at 47423. estimates from the 2017 Form 5500 Pension Research Files. 96 The Form 5500 does not require these plans to categorize the assets as common stock, so the Department does not know if they hold stock. 95 DOL E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS While this proposal would directly affect ERISA-covered plans that possess the relevant shareholder rights, the activities covered under the proposal would be carried out by responsible fiduciaries on plans’ behalf. Many plans hire asset managers to carry out fiduciary asset management functions, including proxy voting. In 2017, large ERISA plans reportedly used approximately 18,000 different service providers, some of whom provide services related to the exercise of plans’ shareholder rights. Such service providers include trustees, trust companies, banks, investment advisers, and investment managers.97 In addition, this proposal would indirectly affect proxy advisory firms. ERISA plans’ demand for proxy advice might decline if fiduciaries refrain from voting shares under the provisions of this proposal or under proxy voting policies adopted pursuant to paragraph (e)(3)(iii). Plan fiduciaries may want customized recommendations about which particular proxy proposals would have an economic impact on their particular plan and how they should cast their vote. Plans’ preferences for proxy advice services could shift to prioritize services offering more rigorous and impartial recommendations. These effects may be more muted, however, if the SEC rule amendments enhance the transparency, accuracy, and completeness of the information provided to clients of proxy voting firms in connection with proxy voting decisions. 1.3. Benefits This proposed rule would benefit plans by providing improved guidance regarding how ERISA’s fiduciary duties apply to proxy voting. As discussed above, sub-regulatory guidance that the Department has issued over the years may have led to a misunderstanding among some that fiduciaries are required to vote on all proxies presented to them. This misunderstanding may lead some plans to expend plan assets unnecessarily to research and vote on proxy proposals not likely to have a material impact on the value of the plan’s investments. The proposed rule is intended to eliminate that confusion and ensure ERISA fiduciaries execute shareholder rights in an appropriate and cost-efficient manner. The proposal clarifies the duties of fiduciaries in regard to proxy voting and the monitoring of proxy advisory firms. Plan fiduciaries would be better able to conserve plan assets by having clear 97 DOL estimates from the 2017 Form 5500 Schedule C. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 direction and permitted practices to refrain from researching and voting on proposals that they prudently determine have no economic impact on the value of the plan’s investment. When votes are cast on behalf of plans, they would more frequently advance plans’ economic interests. Cost savings and other benefits to plans would flow to plan participants and beneficiaries and plan sponsors. The proposed rule would replace existing guidance on fiduciary responsibilities for exercising shareholders’ rights. The proposed rule provides more certainty than subregulatory guidance and is subject to public notice and comment. And unlike guidance, a substantive regulation sets forth binding requirements. The proposed regulation could increase the investment return on plan assets by specifying when plan fiduciaries should or should not exercise their shareholder rights to vote proxies. The proposal also requires fiduciaries to maintain records on proxy voting activities and other exercises of shareholder rights, including records demonstrating the basis for particular proxy votes and other exercises of shareholder rights. Plan fiduciaries are responsible for maximizing the economic benefits to the plan, including in their management of proxy voting rights, which may require voting proxies or declining to vote them. If the cost of obtaining information that informs the vote exceeds the likely economic benefits to the plan of voting, then fiduciaries should not vote. This course of action will save resources and increase societal benefits. Another benefit of the rule is it allows plan fiduciaries and asset managers to focus on where they can add value the most. The rule allows plan fiduciaries to determine if diverting resources away from proxy voting and into researching new investment opportunities presents a better use of time and resources to increase value. They can then act on this decision and bring added value to the plan and its participants and beneficiaries. To the extent that the proposed regulation increases the investment return on plan assets, it would broaden participants’ and beneficiaries’ retirement security, thereby strengthening a central purpose of ERISA. For the plans and participants that would be affected by the proposed rule, the benefits they would experience from higher investment returns, compounded over many years, could be considerable. The Department seeks information that could be used to quantify the increase in investment returns. PO 00000 Frm 00034 Fmt 4702 Sfmt 4702 55231 The societal resources freed for other uses due to voting fewer proxies (minus potential upfront transition costs) would represent benefits of the rule; in other words, the increased returns would be associated with investments generating higher pre-fee returns, which means the higher returns qualify as benefits of the rule. However, to the extent that there are any externalities, public goods, or other market failures, those might generate costs to society on an ongoing basis. For example, a fiduciary may vote for a proposal on a corporate merger or acquisition transaction to maximize shareholder value even though implementation of the proposal would bring about impacts in an affected geographic area that would be adverse for local businesses or residents. Finally, some portion of the increased returns would be associated with transactions in which there is an opposite party experiencing a decreased return of equal magnitude. This portion of the rule’s impact would, from a society-wide perspective, be appropriately categorized as a transfer, and is discussed further below (though it should be noted that, if there is evidence of wealth differing across the transaction parties, it would have implications for marginal utility of the assets). The proposal’s provisions establish certain ‘‘permitted practices’’ that allow plans to prudently adopt proxy voting policies to guide their proxy voting decisions. These permitted practices would assist plan fiduciaries in carrying out their duties under paragraphs (e)(3)(i) and (ii) in a cost-effective manner that preserves plan resources. The Department anticipates that plans would derive savings from the proposal’s ‘‘permitted practices’’ provisions. The proposed permitted practices are designed to provide clear examples of proxy voting policies that a fiduciary may determine are prudent. The expenditure of plan resources is generally warranted only when proposals have a meaningful bearing on share value or when plan fiduciaries have determined that the interests of the plan are unlikely to be aligned with the positions of a company’s management. In general, such proposals include those that are substantially related to the company’s business activities or that relate to corporate events (mergers and acquisitions transactions, dissolutions, conversions, or consolidations), corporate repurchases of shares (buybacks), issuances of additional securities with dilutive effects on shareholders, and contested elections for directors, where plans’ exposure to the stock is E:\FR\FM\04SEP1.SGM 04SEP1 55232 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS sufficiently large to justify the expenditure. The proposal also emphasizes that plan resources may not be expended in circumstances where the fiduciary prudently determines that a proxy vote would not affect the economic value of the plan’s investment. The Department also believes that the expenditure of plan resources to decide whether and how to vote on other proposals that are unlikely to have an impact on a plan’s economic value may be unwarranted and, given the particular facts and circumstances, could constitute a fiduciary breach. The Department invites comments on this view, including any examples of proposals that could fall under the proposed permitted practices but for which such expenditures to vote would be justified and consistent with ERISA’s fiduciary requirements. The Department also invites comments on whether the proposed rule, if finalized, would enable plans to retain proxy advisory firms at lower cost or with more attractive fee arrangements, since a much narrower range of responsibilities might be encompassed, and on whether the proposed rule would lead to new, narrower advisory engagements or new services. 1.4. Costs The proposal includes requirements that a responsible fiduciary must satisfy when exercising a plan’s shareholder rights appurtenant to specific security holdings or monitoring third parties providing proxy advice. It requires a responsible fiduciary to determine that the exercise of shareholder rights advances the plan’s economic interest, investigate the basis for voting on proposals, and maintain records showing the basis of their decisions. The proposal also requires a fiduciary to require an investment manager and proxy adviser to document their decisions and recommendations. The Department believes that the incremental costs of these provisions will be small on a per plan basis because the Department anticipates that most, if not all plans, will adopt policies that utilize the permitted practices and the activities described in the proposal already are reflected in common practice and are best practices. If plan fiduciaries choose not to use any of the permitted practices, the costs of the proposed rule, including determining whether each proxy vote will have an economic impact, may be significantly greater While the Department believes responsible plan fiduciaries would spend some time familiarizing VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 themselves with the rule, it expects that these costs would be minimal. The Department requests comments and data it could use to quantify such costs. The Department’s IB 2008–02 guidance addressed ‘‘the exercise of shareholder rights’’ explaining that ‘‘the duty to monitor necessitates proper documentation.’’ 98 Its 2008 guidance on economically targeted investing likewise explained that a written record of the basis for economically targeted investment decisions may be necessary to demonstrate compliance with ERISA.99 The Department acknowledges, however, that such practices are not universal. In the course of its enforcement activity, the Department sometimes encounters instances where documentation is absent or does not meet the requirements of this proposal. Accordingly, the Department invites comments addressing to what degree existing practices already satisfy these proposed requirements and what the cost would be to fully satisfy them. The Department additionally believes that the availability of economies of scale limit the costs of this proposal. The Department understands that under the proposal, most of the relevant fiduciary duties will reside with, and most of the required activities will be performed by, third-party asset managers, as is already common practice. Such asset managers are often large and provide the relevant fiduciary services for a large number of plans. The Department invites comments on the assignment of the responsibilities under this proposal and the degree to which economies of scale might limit the proposal’s costs. Costs for maintaining the required documentation are discussed in the Paperwork Reduction Act section of this document. As noted earlier, this proposal’s permitted practices and other provisions would eliminate or reduce plans’ costs for voting on many proposals, because plans would not vote on proposals the responsible plan fiduciary has determined are not economically relevant to the plan. The Department generally does not expect this proposal to change the costs associated with plans’ remaining voting activity. Provisions requiring responsible fiduciaries to monitor and document voting policies and activities would generally be satisfied by current best practices that satisfy earlier Department guidance. Neither does the Department expect plans to incur substantial costs from proxy advisory firms’ potential 98 29 99 29 PO 00000 CFR 2509.08–2 (2010). CFR 2509.08–1 (2010). Frm 00035 Fmt 4702 Sfmt 4702 efforts to help fiduciaries meet this proposal’s requirements. If they do not already meet the standards detailed in the proposed regulation, plans that currently exercise shareholder rights, including proxy voting activities, would now incur the costs associated with deciding whether to exercise shareholder rights pursuant to this proposal. It is possible that proxy advisory firms would take steps to avoid or mitigate conflicts of interest, strengthen factual and analytic rigor, better match their research and recommendations with ERISA plans’ interests, or increase transparency. The Department notes, however, that proxy advisory firms are likely to take at least some of these steps in response to recent SEC policy initiatives and spread their related costs across all of their clients, not just ERISA plans.100 At the same time, the proposed rule may reduce plans’ demand for proxy advice. However, this reduction in demand is beneficial to plans as they previously were purchasing more advice than they would have chosen to, due to their misinterpretation that they were required to vote all proxies. This reduced demand will lower the market price and the amount of advice purchased. Consequently, any compliance costs passed on from proxy advisory firms to ERISA plans are likely to be at least partially offset by plans’ cost savings from purchasing a smaller amount of advice. It should be noted that proxy advisory firms will see a reduction in revenues as a result of the decreased demand for their services. In addition, proxy advisory firms’ efforts to satisfy any SEC requirements might ease responsible fiduciaries’ efforts to comply with this proposal. For example, it may be easier to monitor proxy advisory firms if those firms provide additional disclosure about their conflicts of interest and their policies and procedures to address such conflicts. 100 The SEC’s rule amendments require proxy advisory firms engaged in a solicitation to provide conflicts of interest disclosure, to adopt and publicly disclose policies and procedures designed to ensure that the company subject of the proxy voting advice has such advice made available to it at or prior to the time the advice is disseminated, and to provide a mechanism by which its clients can become aware of any written statements by the company in response to the proxy advice. The SEC also modified its proxy solicitation antifraud rule to specifically include material information about the proxy advisor’s methodology, sources of information, or conflicts of interest, as examples of when the failure to disclose could, depending upon the particular facts and circumstances, be considered misleading. See 2020 SEC Proxy Voting Advice Amendments, at 242–246. E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules 1.5. Transfers Proxy advisory firms that respond best to this proposal will likely gain a relative competitive advantage. Firms that limit or eliminate conflicts of interest and modify their services to better align with the guidance of these proposed regulations could gain market share relative to firms that do not. Firms that are willing to tailor their voting guidelines, strategies, and costs according to each plan’s investment guidelines could gain market share relative to firms that do not. Moreover, as noted previously, if some portion of rule-induced increases in returns would be associated with transactions in which the opposite party experiences decreased returns of equal magnitude, then this portion of the proposed rule’s impact would, from a society-wide perspective, be appropriately categorized as a transfer. jbell on DSKJLSW7X2PROD with PROPOSALS 1.6. Regulatory Alternatives The Department considered a purely principles-based approach that would not have included the permitted practices in paragraph (e)(3)(iii). However, for the reasons described above, the Department believes that clearly articulating examples of permitted proxy voting policies would be helpful to plan fiduciaries and ultimately beneficial to plan participants and beneficiaries. A purely principles-based approach could result in a responsible fiduciary, for each individual proxy proposal, having to determine whether to vote. This determination process could consume significant plan resources, even where the potential economic benefit to the plan is small or difficult to determine. A responsible fiduciary might arrive at his or her own policies for simply not voting, or voting in a specific manner on certain types of proposals, based on the plan’s limited exposure to a stock or the economic immateriality of the matter being voted upon. However, under a principles-based approach fiduciaries would likely be cautious about adopting such policies, and might believe it prudent to be able to demonstrate in each case why a decision was made not to vote, and therefore err on the side of devoting excessive resources to voting decisions. The Department invites comment on the inclusion of permitted practices and their usefulness in aiding a fiduciary’s determination of whether to vote. The Department also considered including a specific numeric cap for the materiality permitted practice in paragraph (e)(3)(iii)(C), but opted not to do so until it has the opportunity to VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 review the comments solicited earlier in this preamble on this question. The Department similarly invites comments here on those issues for purposes of this regulatory impact analysis. The Department also invites comments generally on its choice of permitted practices, including whether any should not be retained and whether any other practices should be added. 1.7. Uncertainty The Department’s economic assessment of this proposal’s effects is subject to uncertainty. The Department invites comments that can more fully inform its assessment. Cost Savings—As noted earlier, the Department currently lacks complete data on plans’ exercise of their shareholder rights appurtenant to their stock holdings, including proxy voting activities, and on the attendant costs and benefits. The Department invites comments that illuminate these activities, including their costs and benefits, as well as comments regarding how this proposal would change these activities. In light of the uncertainty regarding the proxy voting activities of ERISA plans, and the attendant costs and benefits of this proposal, the Department presents an illustration below of an analytical approach to evaluating the possible impacts of this notice of proposed rulemaking (NPRM). Details on the estimated impacts of this proposed rule are presented in a supplemental illustrative analysis in Appendix A. This illustration is a part of the Department’s solicitation of comments on an appropriate methodology and assumptions for evaluating the costs and savings that could result from the rule. The analytical model assumes that proxies are primarily voted by asset managers or other service providers. The Department also assumes that the proposed rule may require some plans or service providers to expend more effort researching whether a proxy vote will have a relevant economic impact on the plan and how the plan should vote in cases in which the proposal has such an economic impact. Service providers, plans, or both, may also need to provide more documentation of their decisions than they already produce. Additionally, plans may take advantage of the permitted practices described in the proposal that allow them to conserve plan assets, because they may not need to conduct as extensive an amount of research or expend as much time on documenting decisions. In this illustration, the Department estimates that each service provider will vote 9.3 PO 00000 Frm 00036 Fmt 4702 Sfmt 4702 55233 times, on average, per stock.101 If there are 1,988 service providers impacted by the rule’s requirements,102 and 8,020 stocks voted annually per service provider, then the Department estimates that those entities take a cumulative total of 148,276,968 annual stock votes.103 As discussed previously, some stocks may fall within the permitted practice provisions of the rule and would be less burdensome to research and document. The Department assumes that 5.6 percent of all proxy votes could fall outside the permitted practices and would still need to be researched, voted, and documented under the proposal.104 For votes falling within the permitted practices, on average the Department estimates that responsible plan fiduciaries would take 30 minutes to conduct research and 10 minutes to document each vote at a total cost of $435,042,756.105 For votes falling outside the permitted practices, the Department estimates two hours of research and 20 minutes to document each vote at a total cost of $100,175,208. Under this illustrative analysis, the total costs of a hypothetical alternative to the proposed rule, for increases in research and documentation costs, excluding cost savings that could occur if the permitted practices are used, could reach $535,217,964. The cost savings from the permitted practices are discussed later. However, the Department fully expects that most of these potential costs will not be realized, because plans will use the permitted practices to avoid incurring them. The Department requests comments on the assumptions and underlying data used to reach this illustrative estimate. As discussed elsewhere in this preamble, while the Department believes that the common practices of most plans related to proxy voting are generally consistent with the standards in the proposal, we lack data for the 101 Investment Company Institute. ‘‘Proxy Voting by Registered Investment Companies, 2017.’’ Vol 25, No. 5. July 2019. See endnote 15. https:// www.ici.org/pdf/per25-05.pdf. 102 Estimate based on the number of clients for the three largest proxy advisory firms. 103 Based on 4,684 domestic stocks and 3,336 foreign stocks, 1,988 service providers, and an estimate of 9.3 votes per stock for each service provider. 104 Investment Company Institute. ‘‘Proxy Voting by Registered Investment Companies, 2017.’’ Vol 25, No. 5. July 2019. See Figures 2 and 3. https:// www.ici.org/pdf/per25-05.pdf. We developed this assumption by looking at the ICI data from 2011 to 2017 on the percentage of total proxy proposals that related to mergers, acquisitions n, dissolution, conversions, consolidation, corporate repurchase of shares, issuance of additional securities, and contested elections for directors. 105 Research labor rate of $116.96/hr and documentation rate of $110.39/hr. E:\FR\FM\04SEP1.SGM 04SEP1 55234 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS share of plans that do not currently meet such standards. To illustrate the potential burden for firms whose practices are inconsistent with the proposed standards, DOL assumes that research costs will increase by 5% and that documentation costs will increase by 1%. The Department requests data that could be used to estimate the share of plans that do not currently meet such standards. To illustrate potential cost savings from responsible plan fiduciaries using the permitted practices, the Department notes that responsible plan fiduciaries do not have to vote proxies that fall within the permitted practices, which could save at least some of the costs associated with research and documentation. The Department intends that the permitted practices will impact a large share of all proxy votes and the burden associated with these votes when using the permitted practices will likely be very low. By way of illustration, if under permitted practices 10 percent of proxy votes are no longer voted and responsible plan fiduciaries therefore did not incur research and documentation costs, the total cost savings could exceed $1 billion.106 Demand for New Services—The Department also invites comments regarding whether this proposal, if finalized, would create a demand for new services, and if so, what alternate services or relationships with service providers might result and how overall plan expenses could be impacted. Other Securities—This proposal generally would govern plans’ exercise of shareholder rights appurtenant to their stock holdings of individual companies, but not to their holdings of other securities. The Department cannot determine whether some plans nonetheless would modify their practices with respect to other securities because of this proposal. As noted earlier, ERISA pensions held just 5.5 percent of total corporate equity in 2019, down from a high of 22 percent in 1985. Mutual funds, in contrast, held 22 percent of all corporate equity in 106 $800m in cost savings due to a reduction in research costs (10 percent permitted practice cost savings × 0.5 hours × 139,973,458 votes × $116.96 per hour = $818,582,278) and $250m in cost savings due to a reduction in documentation costs (10 percent permitted practice cost savings × 0.167 hours × 139,973,458 votes × $110.39 per hour = $257,516,169). Instead of thinking about this as a reduction in actual votes, it can also be viewed as a 10 percent reduction in costs if votes are still cast pursuant to the permitted practices that allow voting but reduce burden, such as paragraph (e)(3)(iii)(A) of the proposal, which would allow fiduciaries to adopt a policy to vote proxies in accordance with the voting recommendations of corporate management. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 2019, up from 6 percent in 1985.107 As ERISA-covered pensions have shifted from defined benefit to defined contribution plans, both the proportion of pension assets invested in mutual funds and the proportion of all mutual fund shares owned by pensions have increased dramatically. In 2019, ERISAcovered pensions held 25 percent of all mutual fund shares, up from 8 percent in 1985. ERISA would apply to any proxy votes for mutual fund shares and shares of other funds registered with the SEC for which the plan fiduciary is responsible. ERISA does not govern the management of the portfolio internal to a fund registered with the SEC, including such fund’s exercise of its shareholder rights appurtenant to the portfolio of stocks it holds, though ERISA would apply to similar funds organized as collective investment trusts. The Department invites comments as to whether or how this proposal might influence plans’ exercise of shareholder rights for SEC-registered funds, or their selection of such funds as plan investments, as well as comments on the costs and benefits associated with any such influence, such as impacts on the ability to achieve a quorum at shareholder meetings of such funds. Operation of Permitted Practices— The permitted practices provisions in paragraph (e)(3)(iii) would deliver benefits by relieving plans from much of the cost of deciding whether and how to vote proxies. Responsible fiduciaries might be inclined to use the permitted practices as expansively as possible, to conserve plan assets or even in some cases in an effort to reduce possible exposure to fiduciary liability when exercising shareholder rights. However, a responsible fiduciary may use them less expansively if for practical reasons it is operationally more efficient to do so, or if the fiduciary identifies an opportunity to advance the plan’s economic interest by voting on a proposal that falls within the permitted practices. Accordingly, the Department invites comments on the optimal operation of the permitted practices provisions. Fiduciaries would still be required to vote shares in situations not encompassed by proxy voting policies adopted pursuant to the permitted practices provisions of paragraph (e)(3)(iii) if they prudently determine that the matter being voted upon would have an economic impact on the plan. For instance, the Department believes that voting the shares of plan holdings 107 Department calculations based on U.S. Federal Reserve statistics. PO 00000 Frm 00037 Fmt 4702 Sfmt 4702 that comprise a small portion of total plan assets rarely advances plans’ economic interests, but invites comments on whether or under what circumstances such voting might do so. For example, might this sometimes be the case for large plans and asset managers for whom even a small threshold of total plan assets would represent a large financial stake in dollar terms that might justify the cost of deciding whether and how to vote? As an illustration, a five-percent threshold for a pension plan with more than $1 billion in assets would be more than $50 million. In 2017, there were 1,391 plans with more than $1 billion in assets each. These plans together represented just 0.2 percent of all pension plans, but held $5.3 trillion in assets, representing more than one-half of ERISA-covered pension assets. More generally, the Department solicits comments on whether the permitted practices included in this proposal might produce unintended costs by discouraging responsible fiduciaries from voting shares when voting may be economically beneficial. Non-ERISA Investors—Many asset managers serve both ERISA plans and other investors. The Department invites comments as to whether any such asset managers currently follow uniform proxy policies for both, and vote shares uniformly for both. The Department believes such uniform voting for ERISA and non-ERISA clients may sometimes jeopardize responsible fiduciaries’ satisfaction of their duties under ERISA. However, as noted earlier in the preamble, this concern may be mitigated in the case of investment managers subject to the SEC’s jurisdiction by the fact that federal securities law requires investment advisers to make the determination in their client’s best interest and not to place the investment adviser’s own interests ahead of their client’s.108 Where an SEC registered 108 See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 84 FR 33669, 33673 (July 12, 2019) (discussing an adviser’s obligation to make a reasonable inquiry into its client’s financial situation, level of financial sophistication, investment experience and financial goals and have a reasonable belief that the advice it provides is in the best interest of the client based on the client’s objectives); Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA–5325 (Aug. 21, 2019) (82 FR 47420 (Sep. 10, 2019) (clarifying investment advisers’ duties when voting shareholder proxies). See also Rule 206(4)–6 under the Investment Advisers Act of 1940, 17 CFR 275.206(4)–6 (Under rule 206(4)–6, it is a fraudulent, deceptive, or manipulative act, practice or course of business within the meaning of section 206(4) of the Investment Advisers Act for an investment adviser to exercise voting authority with respect to client securities, unless the adviser (i) has adopted and implemented written policies and E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS investment adviser has assumed the authority to vote on behalf of its client, the SEC would require the investment adviser, among other things, must have a reasonable understanding of the client’s objectives and must make voting determinations that are in their best interest. Under this proposed rule, responsible fiduciaries might increase their demands for asset managers to implement separate policies customized for particular ERISA plans or for ERISA plans generally, such as policies that align with the proposed permitted practices in paragraph (e)(3)(iii). The Department invites comments on the degree to which such customized policies by asset managers could benefit ERISA plans or increase plan costs. Asset Allocation—This proposal could exert influence on a plan’s asset allocation. For example, the quantitative threshold provision in paragraph (e)(3)(iii)(C) would permit responsible fiduciaries, after prudently considering the relevant factors, to adopt proxy voting policies allowing them to refrain from voting shares when the plan’s holding in a single issuer is sufficiently small relative to the plan’s total investment that the outcome of the vote is unlikely to have a material impact on the investment performance of the plan’s portfolio. This provision might produce additional economic benefits by promoting fuller and more optimal diversification where it may otherwise have been lacking. That is, the quantitative threshold could prompt a fiduciary to diversify what otherwise would have been a concentration of more than the specified threshold amount of a plan’s portfolio in a single stock. The Department invites comments on this possibility. Vote Categories — Proxy votes can be tallied in four ways: For, against/ withhold, abstain, and not voted. The vast majority of outstanding shares are held in ‘‘street name’’ by intermediaries, such as broker-dealers. Broker-dealers may have discretionary authority to vote proxies without receiving voting instructions from the owner of the shares for routine and noncontroversial matters, such as the ratification of a company’s independent auditors. For procedures that are reasonably designed to ensure that the adviser votes proxies in the best interest of its clients, which procedures must include how the investment adviser addresses material conflicts that may arise between the adviser’s interests and interests of their clients; (ii) discloses to clients how they may obtain information from the investment adviser about how the adviser voted with respect to their securities; and (iii) describes to clients the investment adviser’s proxy voting policies and procedures and, upon request, furnishes a copy of the policies and procedures to the requesting client. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 matters in which a broker-dealer does not have discretionary authority to vote, a broker non-vote is required. For matters that require approval of a majority of shares present and voting, abstentions (which are cast neither for nor against a proposal) and broker nonvotes are not counted in the final tally. For matters that require approval of a majority of the shares issued and outstanding, abstentions or broker-non votes are treated as votes against the proposal. If an investor is unsure about a matter or unsure whether her interests and management’s interests are aligned, the investor arguably should abstain. The Department requests comments on how often this alignment of interests might occur, and on whether additional direction on voting, such as on the distinction between not voting and abstaining, would be beneficial to fiduciaries. 1.8. Conclusion The proposed rule would benefit ERISA-covered plans, as it provides guidance regarding how ERISA’s fiduciary duties apply to proxy voting and in particular when fiduciaries should refrain from voting. Plan fiduciaries will be able to conserve plan assets as they refrain from researching and voting on proposals that are unlikely to economically impact the plan, and thereby increase the return on plan assets. The Department believes that the benefits of the proposal would justify its costs, but also invites comments on this question. 2. Paperwork Reduction Act As part of its continuing effort to reduce paperwork and respondent burden, the Department conducts a preclearance consultation program to allow the general public and federal agencies to comment on proposed and continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA).109 This helps to ensure that the public understands the Department’s collection instructions, respondents can provide the requested data in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the Department can properly assess the impact of collection requirements on respondents. Currently, the Department is soliciting comments concerning the proposed information collection request (ICR) included in the Fiduciary Duties Regarding Proxy Voting and Shareholder Rights ICR. To obtain a 109 44 PO 00000 U.S.C. 3506(c)(2)(A) (1995). Frm 00038 Fmt 4702 Sfmt 4702 55235 copy of the ICR, contact the PRA addressee shown below or go to www.RegInfo.gov. The Department has submitted a copy of the proposed rule to the Office of Management and Budget (OMB) in accordance with 44 U.S.C. 3507(d) for review of its information collections. The Department and OMB are particularly interested in comments that: • Evaluate whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; • Evaluate the accuracy of the agency’s estimate of the burden of the collection of information, including the validity of the methodology and assumptions used; • Enhance the quality, utility, and clarity of the information to be collected; and • Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology (e.g., permitting electronic submission of responses). Comments should be sent to the Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503 and marked ‘‘Attention: Desk Officer for the Employee Benefits Security Administration.’’ Comments can also be submitted by fax at (202) 395–5806 (this is not a toll-free number), or by email: OIRA_submission@omb.eop.gov. OMB requests that comments are received within 30 days of publication of the proposed rule to ensure their consideration. PRA Addresses: Address requests for copies of the ICR to G. Christopher Cosby, Office of Policy and Research, U.S. Department of Labor, Employee Benefits Security Administration, 200 Constitution Avenue NW, Room N– 5718, Washington, DC 20210. The PRA Addressee may be reached by telephone at (202) 693–8410 or by fax at (202) 219– 5333. These are not toll-free numbers. ICRs also are available at www.RegInfo.gov (www.RegInfo.gov/ public/do/PRAMain). It has long been the view of the Department that the duty to monitor necessitates proper documentation of the activities that are subject to monitoring.110 Accordingly, the 110 29 E:\FR\FM\04SEP1.SGM CFR 2509.08–2 (2010). 04SEP1 55236 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS Department’s proposal requires that plan fiduciaries maintain records on proxy voting activities and other exercises of shareholder rights, including records that demonstrate the basis for particular proxy votes and exercises of shareholder rights. This requirement applies to all pension plans with investments, including those that have shareholder rights and proxy votes that may need to be exercised. Fiduciaries’ proxy voting decisions may only involve consideration of those factors economically relevant to the plan. Plan fiduciaries that have followed prior guidance, or good business practices, are already performing much if not all of the recordkeeping actions the proposal would require. While the incremental burden of the proposal is generally small, perhaps even de minimis, the full burden of the requirements will be included below to allow for full evaluation of the requirements in the information collection. According to the most recent Form 5500 data there are 709,527 pension plans (90,604 large plans and 618,923 small plans) and 8,475 health or welfare plans (5,626 large plans filing a schedule H, and 2,849 small plans filing a schedule I).111 While the Schedule H collects information on a plan’s stock holdings, Schedule I lacks the specificity to determine if small plans hold stocks. As shown in Table 1, 34,906 pension plans hold stocks and would have shareholder rights they may need to exercise. Additionally, 597 health and other welfare plans file the schedule H and report holding either common stocks or employer stocks. The Department lacks information on the number of small plans that hold stock. Small plans are significantly less likely to hold stock than larger plans. For purposes of estimating the burden, five percent of small plans are presumed to hold stock resulting in 30,946 small plans needing to comply with the information collection. Therefore, a total of 66,649 plans will need to comply with this information collection. 2.1. Maintain Documentation The proposed rule requires that the named plan fiduciary must maintain records on proxy voting activities and other exercises of shareholder rights, including records that demonstrate the basis for particular proxy votes and exercises of shareholder rights. Where the authority to vote proxies or exercise shareholder rights has been delegated to 111 EBSA estimates using 2017 Form 5500 filing data. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 an investment manager pursuant to ERISA section 403(a)(2), or a proxy voting firm or another person performs advisory services as to the voting of proxies, plan fiduciaries must require such investment manager, proxy voting firm or other person to document the rationale for proxy voting decisions or recommendations. This is required of all plans with investments and includes plans that may exercise shareholder rights. Much of the information needed to fulfill this requirement is generated in the normal course of business. Plans may need additional time to maintain the proper documentation, but this burden is likely to be reduced by the adoption of policies by plan fiduciaries that incorporate one or more of the proposed rule’s permitted practices. The Department estimates that plan fiduciaries or investment managers will require a half hour annually and a half hour of help from clerical staff to maintain or document the required information. This is likely an overestimate, because many, if not most, plans use investment managers. These investment managers provide similar services for many plans. This results in an annual cost burden estimate of $6,291,078.112 As a note, included in the uncertainty section of the regulatory impact analysis above is a model that seeks to quantify the costs and cost savings of the rule. It provides an alternative estimate of the documentation costs. Depending on comments received on the model, the Department could revise the burden associated with this ICR to reflect the estimates derived by using the model. These paperwork burden estimates are summarized as follows: Type of Review: New collection. Agency: Employee Benefits Security Administration, Department of Labor. Title: Fiduciary Duties Regarding Proxy Voting and Shareholder Rights. OMB Control Number: 1210–NEW. Affected Public: Businesses or other for-profits. Estimated Number of Respondents: 66,499. Estimated Number of Annual Responses: 66,499. Frequency of Response: Occasionally. Estimated Total Annual Burden Hours: N/A. Estimated Total Annual Burden Cost: $6,291,078. 112 The burden is estimated as follows: 66,449 plans * 0.5 hours = 33,224.6 hours for both a plan fiduciary and clerical staff. A labor rate of $134.21 is used for a plan fiduciary and a labor rate of $55.14 for clerical staff (33,224.6 * $134.21 = $4,459,074 and 33,224.6 * $55.14 = $1,832,004). PO 00000 Frm 00039 Fmt 4702 Sfmt 4702 3. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) 113 imposes certain requirements with respect to federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act 114 and are likely to have a significant economic impact on a substantial number of small entities. The Department has determined that this proposal is likely to have a significant economic impact on a substantial number of small entities, and therefore presents this initial regulatory flexibility analysis of the proposed rule pursuant to section 603 of the RFA. For purposes of analysis under the RFA, the Employee Benefits Security Administration (EBSA) considers employee benefit plans with fewer than 100 participants to be small entities.115 The basis of this definition is found in section 104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe simplified annual reports for plans that cover fewer than 100 participants. Under section 104(a)(3) of ERISA, the Secretary may also provide for exemptions or simplified annual reporting and disclosure for welfare benefit plans. Pursuant to the authority of section 104(a)(3), the Department has previously issued (see 29 CFR 2520.104–20, 2520.104–21, 2520.104– 41, 2520.104–46, and 2520.104b–10) simplified reporting provisions and limited exemptions from reporting and disclosure requirements for small plans, including unfunded or insured welfare plans, that cover fewer than 100 participants and satisfy certain requirements. While some large employers have small plans, small plans are generally maintained by small employers. Thus, the Department believes that assessing the impact of this proposed rule on small plans is an appropriate substitute for evaluating the effect on small entities. The definition of small entity considered appropriate for this purpose differs, however, from a definition of small business based on size standards promulgated by the Small Business Administration 116 pursuant to the Small Business Act.117 Therefore, EBSA requests comments on the appropriateness of the size standard 113 5 U.S.C. 601 et seq. (1980). U.S.C. 551 et seq. (1946). 115 The Department consulted with the Small Business Administration Office of Advocacy in making this determination, as required by 5 U.S.C. 603(c) and 13 CFR 121.903(c) in a memo dated June 4, 2020. 116 13 CFR 121.201 (2011). 117 15 U.S.C. 631 et seq. (2011). 114 5 E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules used in evaluating the impact of this proposed rule on small entities. jbell on DSKJLSW7X2PROD with PROPOSALS 3.1. Need for and Objectives of the Rule As detailed above, the Department is concerned that responsible plan fiduciaries, in their efforts to decide whether or how to vote plan shares— and where applicable, to vote them— and exercise other shareholder rights, may sometimes impose on plans costs that exceed the consequent economic benefits to the plans. Moreover, the Department has reason to believe that responsible fiduciaries may sometimes rely on third-party advice without taking sufficient steps to ensure that the advice is impartial and rigorous, potentially violating ERISA’s standards of fiduciary care and loyalty in their exercise of plans’ shareholder rights. Both of these concerns point to the risk that a plan’s proxy voting activity will sometimes impair rather than advance participants’ economic interest in their benefits. This proposed rule aims to ensure that the costs plans incur to vote proxies and exercise other shareholder rights are economically justified, and that responsible fiduciaries’ use of thirdparty advice supports rather than jeopardizes their adherence to ERISA’s fiduciary requirements. Small plans may be especially likely to rely on third-party service providers, such as asset managers, to act as responsible fiduciaries or otherwise assist with the exercise of plans’ shareholder rights. Many small plan sponsors are likely to lack the expertise to perform this function themselves. Small plans additionally stand to benefit most from the economies of scale that specialized service providers, such as asset managers and proxy advisory firms, can provide. Consequently, small plans may be especially vulnerable to any deficiencies in the services such entities provide, and to costs incurred to select and monitor service providers so as to minimize such deficiencies. 3.2. Affected Small Entities The proposal would affect ERISAcovered pension, health, and welfare plans that hold stock either through common stock or employer securities. This includes plans that indirectly hold stocks through Direct Filing Entities (DFE) such as common trusts, master trusts, pooled separate accounts, and 103–12 investment entities. Plans that only hold their assets in registered investment companies, such as mutual funds, will be unaffected by the proposed rule. There is minimal data available about small plans’ stock holdings. The VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 primary source of information on assets held by pension plans is the Form 5500. Schedule H, which reports data on stock holdings, is filed almost exclusively by large plans. While the majority of participants and assets are in large plans, most plans are small plans (plans with fewer than 100 participants). It is likely that many small defined benefit plans hold stock. Many small defined contribution plans hold stock only through mutual funds, and consequently would not be affected by this proposal. In 2017, there were 39,000 small defined benefit plans and 580,000 small defined contribution plans. The Department lacks information on the number of small plans that hold stock; however, believes small plans are significantly less likely to hold stock than larger plans. For purposes of estimating the burden, five percent of small plans are presumed to hold stock resulting in approximately 30,950 small plans needing to comply with the proposed regulation. Small service providers like asset managers could also be impacted by this rule. To the extent that service providers, and not plans, are the ones that primarily vote proxies, as discussed in section 3.3, below, they would incur costs, which they would likely pass on to their plan clients. An approach discussed in the alternative section suggests that 1,988 service providers could be providing services to plans. According to data from the 2012 Economic Census, 97 percent of firms reporting an NAICS code for portfolio management meet the SBA’s definition of a small business. Accordingly, the Department estimates that approximately 1,930 small service providers would be affected by the proposed regulation. Thus, together with the approximately 30,950 small plans described above that we estimate would need to comply with the proposed regulation, overall, the Department estimates that approximately 32,880 small entities would be affected. The Department requests comments on the number of small entities the rule will affect. 3.3. Impact of the Rule This proposed rule would benefit small plans, by providing guidance regarding how ERISA’s fiduciary duties apply to proxy voting and the monitoring of proxy advisory firms, and in particular when fiduciaries should refrain from voting. Plan fiduciaries would be able to better conserve plan assets by having clear direction to refrain from researching and voting on proposals that they prudently determine have no economic impact on the plan. PO 00000 Frm 00040 Fmt 4702 Sfmt 4702 55237 The proposal also would benefit plans by improving the frequency with which voting resources are expended on matters that have an economic impact on the plan. Cost savings and other benefits to small plans would flow to plan participants and beneficiaries in the form of more secure retirement income. As discussed under the Cost section above, while the Department assumes that small affected entities would spend some time familiarizing themselves with the rule, it expects that these familiarization costs would be minimal, because the activities that would be required by the proposed rule are reflected in common practice. The Department estimates it would take an hour for an in-house attorney to review the rule, at an hourly labor cost of $138.41. The Department requests comments or data to inform the Department’s estimate of the costs associated with familiarization. Fiduciaries of plans must ensure that all investments are prudently monitored. The proposed rule provides that fiduciaries responsible for the exercise of shareholder rights must maintain records in order to demonstrate compliance with ERISA’s fiduciary provisions. The Department assumes that, because the documentation of fiduciary decisionmaking is a common practice, responsible fiduciaries are likely already recording and maintaining documentation related to their own and investment managers’ actions, including their exercise of shareholder rights. For plans that are not currently in full compliance, the rule will have a small impact to maintain records or document decisions related to voting proxies or exercising other shareholder rights. Much of the information required to comply with this requirement is generated by affected entities in the normal course of business; however, additional time may be required to maintain the proper documentation. The Department estimates that compliance with this proposed regulation would require 30 minutes of a plan fiduciary’s time and 30 minutes of a clerical worker’s time. The Department assumes an hourly rate of $134.21 for a plan fiduciary and an hourly rate of $55.14 for a clerical worker, resulting in an estimated perentity annual cost of $94.68.118 Under these assumptions, the Department believes that these requirements will not significantly increase costs for small plans. For service providers, the 118 0.5 hours * $134.21 + 0.5 hours * $55.14 = $94.68. E:\FR\FM\04SEP1.SGM 04SEP1 55238 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules Department developed a model that illustrates the impact of the proposed rule by assuming that service providers, like asset managers, provide the required research and documentation that would be required to vote by proxy. The model is included for illustrative purposes as some of the assumption used are speculative. The following analysis should be viewed with the understanding of the high degree of uncertainty and the assumptions used. The model’s costs estimates suggest an average cost per service provider of approximately $50,400 (for more information on the assumptions, see the Uncertainty section in the regulatory impact analysis). The Department does not have data on how the number of proxy votes a service provider would need to prepare differs by service provider size. Based on data supplied by SBA from the 2012 Census, the Department estimates that the estimated average cost of $50,400 would account for 0.8 percent of average annual revenue for all service providers.119 Considering fixed costs and economies of scale, the costs of complying with the proposed regulation would likely account for a higher proportion of revenue for small service providers. If it were assumed that the costs of complying with the proposed regulation would be the same, regardless of firm size, the Department assumes it would account for 4.1 percent of revenues on average for small entities.120 The estimated proportions of costs are broken down by firm size for small firms in the Revenue Test column in the table below. These estimates likely overestimate the costs for small service providers. The cost estimate assumes that these service providers are researching and documenting proxy votes for over 8,000 stocks. While the Department does not have data on how the number of proxy votes prepared by service providers would vary by firm size, the Department believes that small entities are less likely to oversee investments over the investment universe considered here. Accordingly, the Department assumes smaller entities would need to research and document fewer proxy votes, resulting in reduced demand on time resources and overall lower cost. Additionally, the data presented in the table below considers all firms for the respective industries. A majority of firms in these industries will not be providing services that are affected by these proposed rules. The table illustrates the impact on affected firms and the dispersion of firms by revenue. For example, the Department believes that the smallest firms are not likely to be providing proxy-voting services to ERISA plans. Therefore, the Department believes that what appears to be the most serious cost impact for firms with less than $100,000 in receipts would not occur. The Department believes it is reasonable to assume that costs for small entities account for between 0.8 percent and 4.1 percent of revenues. A weighted average of these two approaches by firm size, results in an estimate that costs account for an average of 2.4 percent of revenues for small entities. The estimated proportions of costs are broken down by firm size for small firms in the Adjusted Revenue Test column in the table below. The Department requests comments on the model and its assumptions, particularly with regard to business size. PORTFOLIO MANAGEMENT (NAICS 523920), INVESTMENT ADVICE (NAICS 523930), AND TRUST, FIDUCIARY, AND CUSTODY ACTIVITIES (NAICS 523991)—$41.5 MILLION SIZE STANDARD Average annual revenue Firm size (by receipts) All firms ................................................................................ Small Firms .......................................................................... <100,000 .............................................................................. 100,000–499,999 ................................................................. 500,000–999,999 ................................................................. 1M–2,49M ............................................................................ 2.5M–4.99M ......................................................................... 5M–7.49M ............................................................................ 7.5M–9.99M ......................................................................... 10M–14.99M ........................................................................ 15M–19.99M ........................................................................ 20M–24.99M ........................................................................ 25M–29.99M ........................................................................ 30M–34.99M ........................................................................ 35M–39.99M ........................................................................ 40M–41.5M .......................................................................... Annualized cost per firm $ 6,345,828 1,220,890 46,505 251,618 696,025 1,531,804 3,390,789 5,779,106 7,854,990 10,752,200 14,201,734 18,062,969 17,501,113 22,451,441 28,100,088 30,715,982 Percent of small firms $ 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 50,390 N/A 100 22 41 14 12 5 2 1 1 <1 <1 <1 <1 <1 <1 Revenue test (%) <1% 4 108 20 7 3 1 <1 <1 <1 <1 <1 <1 <1 <1 <1 Adjusted revenue test ** (%) <1% 2 55 10 4 2 1 <1 <1 <1 <1 <1 <1 <1 <1 <1 jbell on DSKJLSW7X2PROD with PROPOSALS * Annualized compliance costs as a percentage of revenue. ** The Adjusted Revenue Test considers a weighted averages of the low estimate—assuming the proportion of costs for all firms is equal to the proportion of costs for the average of 0.8—and the high estimate of assuming all firms incur a cost of $50,390 by firm size. It is likely that service providers will pass most, if not all, of these costs onto their clients, which is estimated to be about $1,500 per plan holding stock. This initial regulatory flexibility analysis (IRFA) only considers the incremental cost the proposed regulation would impose on small entities. It, however, does not take into account the cost savings small entities would realize from the proposed regulation’s permitted practices. As discussed in Appendix A, below, the Department intends that the permitted practices will impact a large share of all 119 Based on data supplied by SBA from the 2012 Census, the Department calculated the average revenue of entities for relevant NAICS codes as $6.4 million. In its calculation, the Department included the following industries; portfolio management (NAICS 523920); investment advice (523930); and trust, fiduciary, and custody activities (NAICS 523991). 120 Based on data supplied by SBA from the 2012 Census, the Department calculated the average revenue of small entities for relevant NAICS codes as $1.2 million. In its calculation, the Department included the following industries; portfolio management (NAICS 523920); investment advice (523930); and trust, fiduciary, and custody activities (NAICS 523991). In accordance with SBA guidelines, entities with receipts less than $41.5 million were considered small. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 PO 00000 Frm 00041 Fmt 4702 Sfmt 4702 E:\FR\FM\04SEP1.SGM 04SEP1 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules jbell on DSKJLSW7X2PROD with PROPOSALS proxy votes, and the burden associated with these votes when using the permitted practices will likely be very low. Therefore, taking the permitted practices into account, the net burden on small entities would be smaller than the Department illustrates in the table above, and in some cases, small entities could even realize cost savings. 3.4. Alternatives As discussed above, the Department’s longstanding position is that the fiduciary duties of prudence and loyalty under ERISA sections 404(a)(1)(A) and 404(a)(1)(B) apply to the exercise of shareholder rights, including proxy voting, proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms. These duties apply to all affected entities—large and small. The Department carefully considered the proposed rule’s impact on small entities in deliberating alternatives for the proposal. For example, the Department considered a purely principles-based approach that would not have included the permitted practices in paragraph (e)(3)(iii) of the proposal. However, the Department was concerned that small entities would not sufficiently benefit for this approach. The Department believes that clearly articulating examples of permitted proxy voting policies would be helpful to small plan fiduciaries and ultimately beneficial to small plan participants and beneficiaries because it will reduce the frequency with which voting resources are expended on matters that do not have an economic impact on small plans compared to a purely principlesbased approach paired with the permitted practices. The Department thus concluded that a purely principlesbased approach would not have preserved plan assets or enhanced the retirement income security of participants and beneficiaries of small plans as much as the Department’s chosen alternative. Moreover, a purely principles-based approach could result in a responsible fiduciary, having to determine whether to vote each individual proxy proposal. This determination process could consume significant plan resources, even where the potential economic benefit to the plan is small or difficult to determine. A responsible fiduciary might arrive at his or her own policies for simply not voting, or voting in a specific manner on certain types of proposals, based on the plan’s limited exposure to a stock or the economic immateriality of the matter being voted upon. However, under a principlesbased approach fiduciaries would likely VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 be cautious about adopting such policies, and might believe it prudent to be able to demonstrate in each case why a decision was made not to vote, and therefore err on the side of devoting excessive resources to voting decisions. By creating such uncertainty and caution in adopting such policies, this result would provide limited benefits on small entities and lead to unnecessary expenditure of plan assets. The Department invites comments on the impact of the inclusion of permitted practices on small entities and their usefulness in aiding a small plan fiduciary’s determination of whether to vote. The Department also considered including a specific numeric cap for the materiality permitted practice in paragraph (e)(3)(iii)(C), but opted not to do so until it has the opportunity to review the comments solicited earlier in this preamble on this question. The Department similarly invites comments regarding the impact on those issues on small entities for purposes of this IRFA. The Department also invites comments generally on its choice of permitted practices, including whether any should not be retained and whether any other practices should be added or additional alternatives considered to address specific circumstances affecting small entities. 3.5. Duplicate, Overlapping, or Relevant Federal Rules The proposed rule would not conflict with any relevant federal rules. As discussed above, the proposal would merely clarify the application of ERISA’s fiduciary duties to conform to significant changes in shareholder voting practices. The Department is monitoring other federal agencies whose statutory and regulatory requirements overlap with ERISA. In particular, the Department is monitoring SEC rules and guidance to avoid creating duplicate or overlapping requirements with respect to proxy voting. 4. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 121 requires each Federal agency to prepare a written statement assessing the effects of any federal mandate in a proposed or final agency rule that may result in an expenditure of $100 million or more (adjusted annually for inflation with the base year 1995) in any one year by state, local, and tribal governments, in the aggregate, or by the private sector. For purposes of the Unfunded Mandates Reform Act, as well as Executive Order 121 2 PO 00000 U.S.C. 1501 et seq. (1995). Frm 00042 Fmt 4702 Sfmt 4702 55239 12875, this proposal would not include any federal mandate that the Department expects would result in such expenditures by state, local, or tribal governments, or the private sector. This proposed rule would not result in an expenditure of $100 million or more in any one year, because the Department is simply restating and modernizing fiduciary practices related to voting rights and aligning its regulations to the extent possible with guidance issued by the SEC. 5. Federalism Statement Executive Order 13132 outlines fundamental principles of federalism and requires Federal agencies to adhere to specific criteria when formulating and implementing policies that have ‘‘substantial direct effects’’ on the states, the relationship between the National Government and states, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have federalism implications must consult with state and local officials and describe the extent of their consultation and the nature of the concerns of state and local officials in the preamble to the rule. In the Department’s view, these proposed regulations do not have federalism implications because they do not have direct effects on the states, the relationship between the National Government and the states, or the distribution of power and responsibilities among various levels of government. The proposed regulations describe requirements and permitted practices related to the exercise of shareholder rights under ERISA. While ERISA generally preempts state laws that relate to ERISA plans, and preemption typically requires an examination of the individual law involved, it appears highly unlikely that the provisions in this proposed regulation would have preemptive effect on general state corporate laws. The Department welcomes input from affected states regarding this assessment. 6. Appendix A In light of the uncertainty regarding the proxy voting activities of ERISA plans, and the attendant costs and benefits of this proposal, the Department is presenting an illustration below of an analytical approach to evaluating the possible impacts of this NPRM. This is part of the Department’s solicitation of comments on an appropriate methodology and assumptions for evaluating the costs and E:\FR\FM\04SEP1.SGM 04SEP1 55240 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules savings that could result from the rule. The analytical model assumes that proxies are primarily voted by asset managers or other service providers. The Department also assumes that the proposed rule may require some plans or service providers to expend more effort researching whether a proxy vote will have a relevant economic impact on the plan and how the plan should vote in cases in which the proposal has such an economic impact. Service providers, plans, or both, may also need to provide more documentation of their decisions than they already produce. Additionally, plans may take advantage of the permitted practices described in the proposal that allow them to conserve plan assets, because they may not need to conduct as extensive an amount of research or expend as much time on documenting decisions. The analysis used in the illustration is based on a number of assumptions and estimates. Some of those assumptions and estimates are based on available data, but the Department does not have supporting data for some key assumptions and estimates. Specifically, the model portrays the following as described below and shown in tables 2– 4 which are also found below. An estimated 1,988 service providers may be impacted by the rule’s requirements, shown in column A. This estimate is obtained by looking at the number of clients of three of the largest proxy advisory firms.122 While service providers that are affected by this rule may not use the services of these proxy advisory firms, it is also likely that not all of these firms provide services to ERISA-covered plans. To obtain the number of proxy votes that need to be evaluated, the estimate of the number of domestic stock (4,684) was obtained by looking at the number of shareholder meetings held, and 123 the estimate for the number of foreign stock (3,336) was obtained by the number of stock in a foreign stock jbell on DSKJLSW7X2PROD with PROPOSALS 122 SEC Proxy Proposed Rule: Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice Table 1 Page 84. The estimate includes those categories of clients viewed most-likely to be impacted by the rule: Banking or thrift institutions, investment companies, pooled investment vehicles, pension and profit sharing plans, other investment advisers, and insurance companies. 123 One service provider said that in 2019 they processed 4,216 shareholder meetings. Also, in 2019 this service provider held about 90 percent of the market for processing proxy votes. These statistics would lead to about 4,684 shareholder meetings (4,216/0.9). https://www.broadridge.com/_ assets/pdf/broadridge-proxy-season-stats-final.pdf and (https://www.sec.gov/spotlight/investoradvisory-committee-2012/recommendation-of-theinvestor-as-owner-subcommittee-on-the-us-proxysystem-090519.pdf). VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 index.124 These estimates were used to arrive at an estimate of 8,020 total stocks voted annually. Each stock can have multiple related proxy votes. Therefore, the Department estimates that there are 9.3 votes per stock.125 These assumptions lead to an estimate of 148,276,968 proxy votes that could be impacted by this rule as shown in column C of Table 2.126 As discussed previously, some stocks may fall within the permitted practice provisions of the rule. The illustration assumes that proposals that are within the permitted practices would be less burdensome to research and document even if the permitted practices provisions did not exist. The Department estimates that 5.6 percent of all proxy votes will fall outside the permitted practices; therefore, they still would be required to be researched, voted, and documented under the proposal.127 The following assumptions were made to estimate the burden of such researching, voting, and fulfilling documentation requirements. For votes falling within the permitted practices, on average the Department estimates that 30 minutes would be needed for responsible plan fiduciaries to conduct research and 10 minutes would be required to document each vote. For votes falling outside the permitted practices, the Department estimates that on average two hours would be needed for responsible plan fiduciaries to conduct research and 20 minutes would be required to document each vote. Using these assumptions, and other assumptions about the proposal’s impact discussed below, the Department estimated the total hours required for responsible plan fiduciaries to research and document proxy votes. The costs of the research and documentation requirements were calculated by multiplying the total research hours by a labor rate of $116.96 and the total documentation hours by a labor rate of $110.39.128 Column H 124 FTSE All-World ex US Index Fact Sheet, July 31, 2020. https://www.ftserussell.com/analytics/ factsheets/home/search. 125 Investment Company Institute. ‘‘Proxy Voting by Registered Investment Companies, 2017.’’ Vol 25, No. 5. July 2019. See endnote 15. https:// www.ici.org/pdf/per25-05.pdf. 126 1,988 * (4,684 + 3,336) * 9.3 127 Investment Company Institute. ‘‘Proxy Voting by Registered Investment Companies, 2017.’’ Vol 25, No. 5. July 2019. See Figures 2 and 3. https:// www.ici.org/pdf/per25-05.pdf. We developed this assumption by looking at the ICI data from 2011 to 2017 on the percentage of total proxy proposals that related to mergers, acquisitions, dissolutions, conversions consolidations, corporate repurchase of shares, issuance of additional securities, and contested elections for directors. 128 These labor rates are a composite labor rate. For, research, it is for a financial manager and a PO 00000 Frm 00043 Fmt 4702 Sfmt 4702 shows the total costs of the rule for increases in research and documenting costs, but excludes cost savings that could occur if the permitted practices are used. The cost savings from the permitted practices are discussed later. It should be noted that although the Department calculated costs in column H, most of these costs will not be realized, because plans will use the permitted practices to avoid incurring them. As discussed elsewhere in this preamble, while the Department believes that the common practices of most plans related to proxy voting are generally consistent with the standards in the proposal, we do not know with any level of precision the percent of plans that are not currently meeting such standards. For purposes of illustrating possible impacts of this rule, the Department assumes that five percent of total research costs will be new as some responsible plan fiduciaries will improve their research conducted to determine whether they should or should not vote proxies and then how to vote. The Department modeled one percent of the total research costs as new, because some responsible plan fiduciaries will need to increase the quality of their documentation for some affected votes. The hours shown in columns D and E reflect that only some of the votes will necessitate new burden. To illustrate, the 3,499,336 hours in the first row of column D is obtained by the following: 1,988 service providers * 8,020 stocks * 9.3 proxy votes per stock * (1–0.056 for share of votes effected by permitted practices) * 0.5 hours of new research * 5 percent increase in research costs.129 An illustration of potential cost savings that could be derived from responsible plan fiduciaries using the permitted practices was arrived at using the same model. As depicted in table 3, responsible plan fiduciaries do not have to vote proxies that fall within the permitted practices, which could save at least some of the costs associated with research and documentation. Columns A, B, and C of table 3 are obtained in financial professional with a quarter of the time provided by a financial manager and three-quarters of the time provided by a financial professional. For the documentation labor rate, it is for a financial manager and a clerical professional with each providing half the time. The wage rate for a financial manager (11–3031), financial professional (13–2011), and a clerical professional (43–6014) is respectively $165.63, $100.74, and $55.14. https:// www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/technicalappendices/labor-cost-inputs-used-in-ebsa-opr-riaand-pra-burden-calculations-june-2019.pdf. 129 In the second row of Table 2, a one percent increase is reflected, rather than a five percent increase. E:\FR\FM\04SEP1.SGM 04SEP1 55241 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules the same manner as columns A, B, and C of table 2. Columns D and E are obtained in the same manner as in table 2 except replacing the assumption that five percent of the costs are new with an assumption about the number of proxy votes that will not be voted due to the permitted practices. For this illustration, the Department assumed that 10 percent of the proxy votes will not be voted and responsible plan fiduciaries will not incur research and documentation costs. Instead of thinking about this as a reduction in actual votes, it can also be viewed as a 10 percent reduction in costs if votes are still cast pursuant to the permitted practices that allow voting but reduce burden, such as paragraph (e)(3)(iii)(A) of the proposal, which would allow fiduciaries to adopt vote proxies in accordance with the voting recommendations of corporate management. The Department intends that the permitted practices will impact a large share of all proxy votes and the burden associated with these votes when using the permitted practices will likely be very low. Column H of table 3 is an illustration of the potential cost reduction from the use of the permitted practices. TABLE 2—ILLUSTRATION OF POSSIBLE NEW COSTS DUE TO RULE OF VOTING PROXIES Number of firms providing proxy voting for ERISA plans Number of stock to vote (A) (B) Number of proxy votes New due to rule: hours to research (C) New due to rule: hours to document (D) Cost equivalent new due to rule: research (E) Cost equivalent new due to rule: documentation (F) Total new cost of policy alternative without permitted practices (G) Total new cost to plans incurring cost if using permitted practices (H) (I) Providers: PP .............................................................. Providers: Non-PP ...................................................... 1,988 1,988 8,020 8,020 139,973,458 8,303,510 3,499,336 830,351 233,289 27,678 $409,291,139 97,119,931 $25,751,617 3,055,277 $435,042,756 100,175,208 ...................... 100,175,208 Total ..................................................................... 1,988 .................... 148,276,968 4,329,687 260,967 506,411,070 28,806,893 535,217,964 100,175,208 TABLE 3—ILLUSTRATION OF POSSIBLE COST SAVINGS FROM PERMITTED PRACTICES OF VOTING PROXIES Number of firms providing proxy voting for ERISA plans Number of stock to vote Number of proxy votes New due to rule: hours to research saved New due to rule: hours to document saved Cost savings due to rule: research Cost savings due to rule: document Total cost savings due to permitted practices (A) (B) (C) (D) (E) (F) (G) (H) Provider: PP .......................................... 1,988 8,020 139,973,458 6,998,673 2,332,891 $818,582,278 $257,516,169 $1,076,098,447 Total ............................................... 1,988 .................... 139,973,458 6,998,673 2,332,891 818,582,278 257,516,169 1,076,098,447 TABLE 4—COST SAVINGS FROM RULE Total costs of policy alternative without permitted practices Cost savings due to permitted practices Net cost savings (A) (B) (B¥A) $535,217,964 $1,076,098,447 $540,880,483 Statutory Authority This regulation is proposed pursuant to the authority in section 505 of ERISA (Pub. L. 93–406, 88 Stat. 894; 29 U.S.C. 1135) and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), effective December 31, 1978 (44 FR 1065, January 3, 1979), 3 CFR 1978 Comp. 332, and under Secretary of Labor’s Order No. 1–2011, 77 FR 1088 (Jan. 9, 2012). jbell on DSKJLSW7X2PROD with PROPOSALS List of Subjects in 29 CFR Parts 2509 and 2550 Employee benefit plans, Employee Retirement Income Security Act, Exemptions, Fiduciaries, investments, Pensions, Prohibited transactions, Reporting and recordkeeping requirements, Securities. For the reasons set forth in the preamble, the Department is proposing to amend parts 2509 and 2550 of VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 subchapters A and F of chapter XXV of title 29 of the Code of Federal Regulations as follows: SUBCHAPTER F—FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 SUBCHAPTER A—GENERAL 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, Pub. L. 109–280, 120 Stat. 780. § 2509.2016–01 ■ [Removed] 2. Remove § 2509.2016–01. PO 00000 Frm 00044 Fmt 4702 Sfmt 4702 PART 2550—RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY 3. The authority citation for part 2550 continues to read as follows: ■ Authority: 29 U.S.C. 1135 and Secretary of Labor’s Order No. 1–2011, 77 FR 1088 (January 9, 2012). Sec. 102, Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at 727 (2012). Sec. 2550.401c–1 also issued under 29 U.S.C. 1101. Sec. 2550.404a–1 also issued under sec. 657, Pub. L. 107–16, 115 Stat 38. Sec. 2550.404a–2 also issued under sec. 657 of Pub. L. 107–16, 115 Stat. 38. Sections 2550.404c–1 and 2550.404c–5 also issued under 29 U.S.C. 1104. Sec. 2550.408b–1 also issued under 29 U.S.C. 1108(b)(1). Sec. 2550.408b–19 also issued under sec. 611, Pub. L. 109–280, 120 Stat. 780, 972. Sec. 2550.412–1 also issued under 29 U.S.C. 1112. E:\FR\FM\04SEP1.SGM 04SEP1 55242 Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules 4. Section 2550.404a–1, as proposed to be revised at 85 FR 39113 (June 30, 2020), is further amended by adding paragraph (e), revising paragraph (g), and republishing paragraph (h) to read as follows: ■ § 2550.404a–1 Investment duties. jbell on DSKJLSW7X2PROD with PROPOSALS * * * * * (e) Proxy voting and exercise of shareholder rights. (1) The fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights appurtenant to those shares, such as the right to vote proxies. (2)(i) When deciding whether to exercise shareholder rights and when exercising such rights, including the voting of proxies, fiduciaries must carry out their duties prudently and solely in the interests of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan pursuant to ERISA sections 403 and 404. (ii) In order to fulfill the fiduciary obligations under paragraph (e)(2)(i) of this section, when deciding whether to exercise shareholder rights and when exercising shareholder rights, a plan fiduciary must: (A) Act solely in accordance with the economic interest of the plan and its participants and beneficiaries considering only factors that they prudently determine will affect the economic value of the plan’s investment based on a determination of risk and return over an appropriate investment horizon consistent with the plan’s investment objectives and the funding policy of the plan; (B) Consider the likely impact on the investment performance of the plan based on such factors as the size of the plan’s holdings in the issuer relative to the total investment assets of the plan, the plan’s percentage ownership of the issuer, and the costs involved; (C) Not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any nonpecuniary objective, or sacrifice investment return or take on additional investment risk to promote goals unrelated to those financial interests of the plan’s participants and beneficiaries or the purposes of the plan; (D) Investigate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights. The fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm or other service provider without appropriate VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 supervision and a determination that the service provider’s proxy voting guidelines are consistent with the economic interests of the plan and its participants and beneficiaries as defined in paragraph (e)(2)(ii)(A) of this section; (E) Maintain records on proxy voting activities and other exercises of shareholder rights, including records that demonstrate the basis for particular proxy votes and exercises of shareholder rights; and (F) Exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with exercises of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies, and recordkeeping and reporting services. (iii) Where the authority to vote proxies or exercise shareholder rights has been delegated to an investment manager pursuant to ERISA section 403(a)(2), or a proxy voting firm or other person performs advisory services as to the voting of proxies, a responsible plan fiduciary shall require such investment manager or proxy advisory firm to document the rationale for proxy voting decisions or recommendations sufficient to demonstrate that the decision or recommendation was based on the expected economic benefit to the plan, and that the decision or recommendation was based solely on the interests of participants and beneficiaries in obtaining financial benefits under the plan. (3)(i) A plan fiduciary must vote any proxy where the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan after considering those factors described in paragraph (e)(2)(ii) of this section and taking into account the costs involved (including the cost of research, if necessary, to determine how to vote). (ii) A plan fiduciary must not vote any proxy unless the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan after considering those factors described in paragraph (e)(2)(ii) of this section and taking into account the costs involved (including the cost of research, if necessary, to determine how to vote). (iii) In deciding whether to vote a proxy pursuant to paragraphs (e)(3)(i) and (ii) of this section, plans may adopt proxy voting policies that voting authority shall be exercised pursuant to specific parameters reasonably designed to serve the plan’s economic interest. Such policies may include, for example: PO 00000 Frm 00045 Fmt 4702 Sfmt 4702 (A) A policy of voting proxies in accordance with the voting recommendations of management of the issuer on proposals or particular types of proposals that the fiduciary has prudently determined are unlikely to have a significant impact on the value of the plan’s investment, subject to any conditions determined by the fiduciary as requiring additional analysis because the matter being voted upon may present heightened management conflicts of interest or is likely to have a significant economic impact on the value of the plan’s investment; (B) A policy that voting resources will focus only on particular types of proposals that the fiduciary has prudently determined are substantially related to the corporation’s business activities or likely to have a significant impact on the value of the plan’s investment, such as proposals relating to corporate events (mergers and acquisitions transactions, dissolutions, conversions, or consolidations), corporate repurchases of shares (buybacks), issuances of additional securities with dilutive effects on shareholders, or contested elections for directors; and (C) A policy of refraining from voting on proposals or particular types of proposals when the plan’s holding in a single issuer relative to the plan’s total investment assets is below a quantitative threshold that the fiduciary prudently determines, considering its percentage ownership of the issuer and other relevant factors, is sufficiently small that the outcome of the vote is unlikely to have a material impact on the investment performance of the plan’s portfolio (or investment performance of assets under management in the case of an investment manager). (iv) Plan fiduciaries shall review proxy voting policies adopted pursuant to paragraph (e)(3)(iii) of this section at least once every two years. (v) No policies adopted under paragraph (e)(3)(iii) of this section shall preclude, or impose liability for, submitting a proxy vote when the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan after taking into account the costs involved, or for refraining from voting when the fiduciary prudently determines that the matter being voted upon would not have an economic impact on the plan after taking into account the costs involved. (4)(i)(A) The responsibility for exercising shareholder rights lies exclusively with the plan trustee except to the extent that either: E:\FR\FM\04SEP1.SGM 04SEP1 jbell on DSKJLSW7X2PROD with PROPOSALS Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Proposed Rules (1) The trustee is subject to the directions of a named fiduciary pursuant to ERISA section 403(a)(1); or (2) Or 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). (B) Where the authority to manage plan assets has been delegated to an investment manager pursuant to section 403(a)(2), the investment manager has exclusive authority to vote proxies or exercise other shareholder rights appurtenant to such plan assets in accordance with this section, except to the extent the plan, trust document, or investment management agreement expressly provides that the responsible 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 exercise or management of some or all of such shareholder rights. (ii) An investment manager of a pooled investment vehicle that holds assets of more than one employee benefit plan may be subject to an investment policy statement that conflicts with the policy of another plan. Compliance with ERISA section 404(a)(1)(D) requires 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)). In the case of proxy voting, to the extent permitted by applicable law, the investment manager must vote (or abstain from voting) the relevant proxies to reflect such policies in proportion to each plan’s economic interest in the pooled investment vehicle. Such an investment manager may, however, develop an investment policy statement consistent with Title I of ERISA and this section, and require participating plans to accept the investment manager’s investment policy, including any proxy voting policy, before they are allowed to invest. In such cases, a fiduciary must assess whether the investment manager’s investment policy statement and proxy voting policy are consistent with Title I of ERISA and this section before deciding to retain the investment manager. * * * * * (g) Effective date. This section shall be effective on [30 days after date of publication of final rule]. (h) Severability. Should a court of competent jurisdiction hold any provision(s) of this subpart to be invalid, such action will not affect any other provision of this subpart. VerDate Sep<11>2014 15:57 Sep 03, 2020 Jkt 250001 Signed at Washington, DC. Jeanne Klinefelter Wilson, Acting Assistant Secretary, Employee Benefits Security Administration, Department of Labor. [FR Doc. 2020–19472 Filed 9–3–20; 8:45 am] BILLING CODE 4510–29–P DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Parts 679 and 680 [Docket No.: 200811–0214] RIN 0648–BJ73 Fisheries of the Exclusive Economic Zone Off Alaska; Central Gulf of Alaska Rockfish Program; Amendment 111 National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Proposed rule; request for comments. AGENCY: NMFS issues a proposed rule to implement Amendment 111 to the Fishery Management Plan for Groundfish of the Gulf of Alaska Management Area (GOA FMP) and a regulatory amendment to reauthorize the Central Gulf of Alaska (CGOA) Rockfish Program. This proposed rule would retain the conservation, management, safety, and economic gains realized under the existing Rockfish Program and make minor revisions to improve administration of the Rockfish Program. This proposed rule is necessary to continue the conservation benefits, improve efficiency, and provide economic benefits of the Rockfish Program that will expire on December 31, 2021 without this proposed rule. This proposed rule is intended to promote the goals and objectives of the Magnuson-Stevens Fishery Conservation and Management Act, the GOA FMP, and other applicable laws. DATES: Submit comments on or before October 5, 2020. ADDRESSES: You may submit comments, identified by NOAA–NMFS–2020–0086, by any of the following methods: • Electronic Submission: Submit all electronic public comments via the Federal eRulemaking Portal. Go to www.regulations.gov/ #!docketDetail;D=NOAA-NMFS-20200086, click the ‘‘Comment Now!’’ icon, complete the required fields, and enter or attach your comments. SUMMARY: PO 00000 Frm 00046 Fmt 4702 Sfmt 4702 55243 • Mail: Submit written comments to Glenn Merrill, Assistant Regional Administrator, Sustainable Fisheries Division, Alaska Region NMFS. Mail comments to P.O. Box 21668, Juneau, AK 99802–1668. Instructions: Comments sent by any other method, to any other address or individual, or received after the end of the comment period, may not be considered by NMFS. All comments received are a part of the public record and will generally be posted for public viewing on www.regulations.gov without change. All personal identifying information (e.g., name, address), confidential business information, or otherwise sensitive information submitted voluntarily by the sender will be publicly accessible. NMFS will accept anonymous comments (enter ‘‘N/ A’’ in the required fields if you wish to remain anonymous). Electronic copies of the Environmental Assessment and the Regulatory Impact Review (collectively referred to as the ‘‘Analysis’’), the Social Impact Analysis, and the Finding of No Significant Impact prepared for this proposed rule may be obtained from https://www.regulations.gov or from the NMFS Alaska Region website at https:// www.fisheries.noaa.gov/region/alaska. Written comments regarding the burden-hour estimates or other aspects of the collection-of-information requirements contained in this proposed rule may be submitted via mail to NMFS Alaska Region, P.O. Box 21668, Juneau, AK 99802–1668, Attn: Glenn Merrill; in person at NMFS Alaska Region, 709 West 9th Street, Room 401, Juneau, AK; via internet on www.reginfo.gov/public/ do/PRAMain. Find this particular information collection by selecting ‘‘Currently under Review—Open for Public Comments’’ or by using the search function. FOR FURTHER INFORMATION CONTACT: Stephanie Warpinski, 907–586–7228 or Stephanie.warpinski@noaa.gov. SUPPLEMENTARY INFORMATION: Authority for Action NMFS manages U.S. groundfish fisheries of the Gulf of Alaska (GOA) under the GOA FMP. NMFS manages vessels and License Limitation Program (LLP) licenses subject to sideboard limits under the Crab Rationalization Program under the Fishery Management Plan for Bering Sea/Aleutian Islands King and Tanner Crabs (Crab FMP). The North Pacific Fishery Management Council (Council) prepared, and the Secretary of Commerce (Secretary) approved, these FMPs under the authority of the Magnuson-Stevens E:\FR\FM\04SEP1.SGM 04SEP1

Agencies

[Federal Register Volume 85, Number 173 (Friday, September 4, 2020)]
[Proposed Rules]
[Pages 55219-55243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19472]

=======================================================================
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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2509 and 2550

RIN 1210-AB91

Fiduciary Duties Regarding Proxy Voting and Shareholder Rights

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Department of Labor (Department) is proposing to amend the
``Investment duties'' regulation issued in 1979 to address the
application of the prudence and exclusive purpose duties under the
Employee Retirement Income Security Act of 1974 (ERISA) to the exercise
of shareholder rights, including proxy voting, the use of written proxy
voting policies and guidelines, and the selection and monitoring of
proxy advisory firms. This document also states that Interpretive
Bulletin 2016-01 no longer represents the view of the Department
regarding the proper interpretation of ERISA with respect to the
exercise of shareholder rights by fiduciaries of ERISA-covered plans,
and notes that it will be removed from the Code of Federal Regulations
when a final rule is adopted.

DATES: Comments on the proposal must be submitted on or before October
5, 2020.

ADDRESSES: You may submit written comments, identified by RIN 1210-
AB91, to either of the following addresses:
[ssquf] Federal eRulemaking Portal: www.regulations.gov. Follow the
instructions for submitting comments.
[ssquf] Mail: Office of Regulations and Interpretations, Employee
Benefits Security Administration, Room N-5655, U.S. Department of
Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attention:
Proxy Voting and Shareholder Rights NPRM.
Instructions: All submissions received must include the agency name
and Regulatory Identifier Number (RIN) for this rulemaking. Persons
submitting comments electronically are encouraged not to submit paper
copies. Comments will be available to the public, without charge,
online at www.regulations.gov and www.dol.gov/agencies/ebsa and at the
Public Disclosure Room, Employee Benefits Security Administration,
Suite N-1513, 200 Constitution Avenue NW, Washington, DC 20210.
Warning: Do not include any personally identifiable or confidential
business information that you do not want publicly disclosed. Comments
are public records posted on the internet as received and can be
retrieved by most internet search engines.

FOR FURTHER INFORMATION CONTACT: Jason A. DeWitt, Office of Regulations
and Interpretations, Employee Benefits Security Administration, (202)
693-8500. This is not a toll-free number.
Customer Service Information: Individuals interested in obtaining
information from the Department of Labor concerning ERISA and employee
benefit plans may call the Employee Benefits Security Administration
(EBSA) Toll-Free Hotline, at 1-866- 444-EBSA (3272) or visit the
Department of Labor's website (www.dol.gov/ebsa).

SUPPLEMENTARY INFORMATION:

A. 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

[[Page 55220]]

responsibility rules governing the conduct of plan fiduciaries. In
connection with proxy voting, the Department's longstanding position is
that the fiduciary act of managing plan assets includes the management
of voting rights (as well as other shareholder rights) appurtenant to
shares of stock, and that fiduciaries must carry out their duties
relating to the exercise of such rights prudently and solely for the
economic benefit of plan participants and beneficiaries.\1\
---------------------------------------------------------------------------

\1\ Throughout this preamble, the Department's discussion of
plan fiduciaries includes named fiduciaries under the plan, along
with any persons that named fiduciaries have designated to carry out
fiduciary responsibilities as permitted under ERISA section
405(c)(1).
---------------------------------------------------------------------------

The Department has decided to propose a regulation regarding the
application of ERISA's fiduciary duties to the exercise of shareholder
rights by ERISA-covered plans due to significant changes in the way
ERISA plans invest and in the investment world more broadly since the
Department first spoke formally on these topics, a persistent
misunderstanding among some stakeholders that ERISA fiduciaries are
required to vote all proxies, and in light of recent actions by the
Securities and Exchange Commission (SEC) related to the proxy voting
process.
The Department first addressed this topic during a time of
widespread shareholder activism and corporate takeovers that had placed
an intense focus on shareholder voting by ERISA plans. For instance, a
1985 Senate hearing highlighted the ``pivotal role'' pension funds were
being forced to play in takeover attempts,\2\ which according to a
January 1985 Department report had reached ``epidemic proportions.''
\3\ A significant factor viewed as contributing to the rise of
takeovers was the ``widespread conviction'' that fund managers and
other fiduciaries were obligated under ERISA to tender their shares to
the highest cash bidder.\4\ On the other hand, investment managers were
seen as reluctant to vote shares against anti-takeover proposals of a
current or prospective client,\5\ potentially creating a conflict of
interest with their fiduciary obligations to plan participants and
beneficiaries.\6\ One proposed solution was to require the voting of
shares to be directed by plan sponsors themselves rather than
investment managers.\7\
---------------------------------------------------------------------------

\2\ Testimony of Robert Monks, Department of Labor's Enforcement
of the Employee Retirement Income Security Act, Hearings before the
S. Subcomm. on Oversight of Gov. Mgmt., S. Hrg. 99-310 (June 25-26,
1985), at 5 (1985 ERISA Hearings).
\3\ Office of Pension and Welfare Benefit Programs, Summary of
Conclusions from Public Hearings (Jan. 1985) (1985 DOL Report),
included in 1985 ERISA Hearings, at 454, 498 (``Projections are that
ERISA plans will hold more than half of all the equity securities in
the United States before the turn of the century. Perhaps not
entirely by coincidence, take-over fever reached epidemic
proportions in 1984.'').
\4\ Testimony of Ian Lanoff, 1985 ERISA Hearings, at 26 (former
administrator of Department's benefits office testifying that ``some
representatives of corporate America have blamed the pension plans
for always taking the short-term view in takeover situations, and
always tendering. And they somehow construe this as being required
by ERISA or their fiduciary responsibilities.''); 1985 DOL Report,
included in 1985 ERISA Hearings, at 498; Joint Department of Labor/
Department of Treasury Statement of Pension Investments (Jan. 31,
1989), reprinted in 16 Pens. & Ben. Rep. (BNA) 215 (Feb. 6, 1989).
\5\ 1985 DOL Report, included in 1985 ERISA Hearings, at 495
(citing written statement by Professor Roger F. Murray).
\6\ Testimony of Robert Monks, 1985 ERISA Hearings, at 10.
\7\ 1985 DOL Report, included in 1985 ERISA Hearings, at 10,
494-95 (citing written statement by Professor Roger F. Murray).
---------------------------------------------------------------------------

The Department released one of its first official statements on
proxy voting in 1988, in the form of an opinion letter to Avon
Products, Inc. (the ``Avon Letter''). ``In general,'' the Department
stated, ``the fiduciary act of managing plan assets which are shares of
corporate stock would include the voting of proxies appurtenant to
those shares of stock.'' \8\ While ERISA allows named fiduciaries to
designate investment managers to manage plan assets,\9\ ERISA also
requires named fiduciaries ``to periodically monitor the activities of
the investment manager with respect to the management of plan assets,''
\10\ a duty that encompasses the monitoring of decisions made and
actions taken by investment managers with regard to proxy voting.\11\
The Avon Letter and subsequent sub-regulatory guidance from the
Department (outlined below) has resulted in a misplaced belief among
some stakeholders that fiduciaries must always vote proxies, subject to
limited exceptions, in order to fulfill their obligations under
ERISA.\12\
---------------------------------------------------------------------------

\8\ Letter to Helmuth Fandl, Chairman of the Retirement Board,
Avon Products, Inc. 1988 WL 897696 (Feb. 23, 1988).
\9\ ERISA sections 405(c)(1), 402(c)(3).
\10\ Avon Letter.
\11\ The Department also issued a second opinion letter on proxy
voting in 1990, in which it reiterated--as it has consistently done
in the years since--that fiduciaries must discharge their duties
relating to proxy voting solely in the interest of participants and
beneficiaries and for the exclusive purpose of providing plan
benefits. See Letter to Robert Monks, 1990 WL 1085069 (Jan. 23,
1990).
\12\ See, e.g., Barbara Novick, Revised and Extended Remarks at
Harvard Roundtable on Corporate Governance Keynote Address ``The
Goldilocks Dilemma'' (Nov. 6, 2019), www.blackrock.com/corporate/literature/publication/barbara-novick-remarks-harvard-roundtable-corporate-governance-the-goldilocks-dilemma-110619.pdf, at 15 (Avon
Letter indicated ``that asset managers should generally vote shares
as part of their fiduciary duty''); Daniel M. Gallagher, Outsized
Power & Influence: The Role of Proxy Advisers, Washington Legal
Foundation (Aug. 2014), https://s3.us-east-2.amazonaws.com/washlegal-uploads/upload/legalstudies/workingpaper/GallagherWP8-14.pdf, at 3; Business Roundtable Comment Letter on SEC Proposed
Amendments to Rule 14a-8 (Feb. 3, 2020), www.sec.gov/comments/s7-22-19/s72219-6742505-207780.pdf, at 2-3 (``many institutional investors
historically interpreted SEC and Department of Labor rules and
guidance as requiring institutional investors to vote every share on
every matter on a proxy'') (citing Gallagher); Manifest Information
Services Ltd, Response to ESMA Discussion Paper `An Overview of the
Proxy Advisory Industry: Considerations on Possible Policy Options'
(June 2012), www.esma.europa.eu/file/10536/download?token=ou-vCUE0,
at 37 (comment letter from European proxy voting agency describing
DOL proxy guidance as concerning ``duties of . . . fiduciaries . . .
to vote the shares in companies held by their pension plans'');
Charles M. Nathan, Future of Institutional Share Voting Revisited: A
Fourth Paradigm (Sep. 27, 2011), https://corpgov.law.harvard.edu/2011/09/27/future-of-institutional-share-voting-revisited-a-fourth-paradigm (``the current system for voting portfolio securities by
application of uniform voting policies . . . is perceived as
successfully addressing the commonly understood fiduciary duty of
institutional investors to vote all of their portfolio securities on
all matters''); see also U.S. Department of Labor, Transcript of
Press Conference on Corporate Activist Role in Pension Planning
(July 28, 1994), at 15-16 (then-Secretary Robert Reich stating that
IB 94-2 ``makes very clear that . . . pension fund managers,
trustees, [and] fiduciaries have an obligation to vote proxies''
unless the costs ``substantially outweigh'' the benefits) (1994 DOL
Press Conference).
---------------------------------------------------------------------------

In 1994, the Department issued its first interpretive bulletin on
proxy voting, Interpretive Bulletin 94-2 (IB 94-2).\13\ IB 94-2
recognized that fiduciaries may engage in shareholder activities
intended to monitor or influence corporate management in situations
where the responsible fiduciary concludes that, after taking into
account the costs involved, there is a reasonable expectation that such
shareholder activities (by the plan alone or together with other
shareholders) will enhance the value of the plan's investment in the
corporation. The Department expected that increased shareholder
engagement by pension funds--encouraged by the new interpretive
bulletin--would improve corporate performance and help ensure companies
treated their employees well.\14\ However, the Department also
reiterated its view that ERISA does not permit fiduciaries, in voting
proxies or exercising other shareholder rights, to subordinate the
economic interests of

[[Page 55221]]

participants and beneficiaries to unrelated objectives.
---------------------------------------------------------------------------

\13\ 59 FR 38860 (July 29, 1994).
\14\ See 1994 DOL Press Conference, at 2-4, 10, 15-16; see also
Leslie Wayne, U.S. Prodding Companies to Activism on Portfolios,
N.Y. Times (July 29, 1994), www.nytimes.com/1994/07/29/business/us-prodding-companies-to-activism-on-portfolios.html (quoting official
stating that the Department is ``trying to encourage corporations to
be activist owners,'' and that ``such activism is consistent with
your fiduciary duty and we expect it will improve your corporate
performance'').
---------------------------------------------------------------------------

In October 2008, the Department replaced IB 94-2 with Interpretive
Bulletin 2008-02 (IB 2008-02).\15\ The Department's intent was to
update the guidance in IB 94-2 and to reflect interpretive positions
issued by the Department after 1994 on shareholder engagement and
socially-directed proxy voting initiatives. IB 2008-02 stated that
fiduciaries' responsibility for managing proxies includes both deciding
to vote or not to vote.\16\ IB 2008-02 further stated that the
fiduciary duties described at ERISA sections 404(a)(1)(A) and (B)
require that in voting proxies the responsible fiduciary shall consider
only those factors that relate to the economic value of the plan's
investment and shall not subordinate the interests of the participants
and beneficiaries in their retirement income to unrelated objectives.
In addition, IB 2008-02 stated that votes shall only be cast in
accordance with a plan's economic interests. IB 2008-02 explained that
if the responsible fiduciary reasonably determines that the cost of
voting (including the cost of research, if necessary, to determine how
to vote) is likely to exceed the expected economic benefits of voting,
the fiduciary has an obligation to refrain from voting.\17\ The
Department also reiterated in IB 2008-02 that any use of plan assets by
a plan fiduciary to further political or social causes ``that have no
connection to enhancing the economic value of the plan's investment''
through proxy voting or shareholder activism is a violation of ERISA's
exclusive purpose and prudence requirements.\18\
---------------------------------------------------------------------------

\15\ 73 FR 61731 (Oct. 17, 2008).
\16\ Id. at 61732.
\17\ Id.
\18\ Id. at 61734.
---------------------------------------------------------------------------

In 2016, the Department issued Interpretive Bulletin 2016-01 (IB
2016-01), which reinstated the language of IB 94-2 with certain
modifications.\19\ IB 2016-01 reiterated and confirmed that, ``in
voting proxies, the responsible fiduciary [must] 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 to unrelated objectives.'' \20\
---------------------------------------------------------------------------

\19\ 81 FR 95879 (Dec. 29, 2016).
\20\ Id. at 95882. In addition, the Department issued a Field
Assistance Bulletin to provide guidance on IB 2016-01 on Apr. 23,
2018. See FAB 2018-01, www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-01.pdf.
---------------------------------------------------------------------------

The Department has tried to convey in its sub-regulatory guidance
that fiduciaries need not vote all proxies. A fiduciary's duty is only
to vote those proxies that are prudently determined to have an economic
impact on the plan after the costs of research and voting are taken
into account. Nevertheless, a misunderstanding that fiduciaries must
research and vote all proxies continues to persist, causing some plans
to expend their assets unnecessarily on matters not economically
relevant to the plan. As discussed below, this problem has been
exacerbated by the fact that since 1988 the amount and types of
shareholder proposals have increased substantially.\21\ Therefore, the
Department has decided to propose rule amendments that expressly state
that fiduciaries must not vote in circumstances where plan assets would
be expended on shareholder engagement activities that do not have an
economic impact on the plan, whether by themselves or after the costs
of engagement are taken into account. The designation of any final rule
resulting from this notice of proposed rulemaking as regulatory or
deregulatory will be informed by public comments received on the
proposal. Details on the estimated costs of this proposed rule can be
found in the rule's economic analysis.
---------------------------------------------------------------------------

\21\ See infra at notes 79 to 85.
---------------------------------------------------------------------------

B. Purpose of Regulatory Action

For the reasons outlined above and the reasons that follow, the
Department believes that it should address issues regarding the
application of fiduciary obligations under sections 403(c) and 404(a)
of ERISA with respect to exercises of shareholder rights, including
proxy voting, through a proposed regulation that amends the
``Investment duties'' regulation at 29 CFR 2550.404a-1 and provides a
public notice and comment process. In that regard, IB 2016-01 no longer
represents the view of the Department regarding the proper
interpretation of ERISA with respect to the exercise of shareholder
rights by fiduciaries of ERISA-covered plans. Accordingly, the
Department intends to remove it from the Code of Federal Regulations
when a final rule is adopted.

i. General Principles

ERISA mandates that fiduciaries discharge their duties ``solely in
the interest'' and ``for the exclusive purpose'' of providing benefits
to participants and their beneficiaries.\22\ The Supreme Court has
described this duty as requiring that fiduciaries act with an ``eye
single'' to the interests of participants and beneficiaries,\23\ and
appellate courts have described ERISA's fiduciary duties as ``the
highest known to the law.'' \24\ The Department similarly has rejected
a construction of ERISA that would render the statute'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,
including through shareholder engagement activities, voting proxies, or
other investment policies.\25\
---------------------------------------------------------------------------

\22\ ERISA section 404(a)(1). See also ERISA section 403(c)(1)
(``[T]he assets of a plan shall never inure to the benefit of any
employer and shall be held for the exclusive purposes of providing
benefits to participants in the plan and their beneficiaries'').
\23\ Pegram v. Herdrich, 530 U.S. 211, 235 (2000) (quoting
Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982)).
\24\ See, e.g., Tibble v. Edison Int'l, 843 F.3d 1187, 1197 (9th
Cir. 2016).
\25\ See IB 2016-01, 81 FR at 95881.
---------------------------------------------------------------------------

ii. Changes in the Investment Landscape

The financial marketplace and the world of shareholder engagement
have changed considerably since the Department released the Avon Letter
over thirty years ago. Several trends underlie the Department's current
action to clarify its previous guidance regarding an ERISA fiduciary's
obligations:
Increase in the percentage of corporate America's stock
held by, and plan assets managed by, institutional investors,
diminishing the scope of proxy voting obligations attributable to ERISA
fiduciaries: In 2007 institutional investors owned 76.4 percent of the
1,000 largest American companies, a 63 percent increase over their 47
percent ownership of America's largest companies in 1987.\26\ This
growth in institutional ownership has continued. By 2017, institutional
investors owned 80.3 percent of the 500 largest American companies.\27\
Additionally, institutional investor ownership in U.S. corporate
equities grew from $1.1 trillion in 1985 to $25.4 trillion in 2019.\28\
Contrary to the Department's projections in 1985,\29\ the share of
individual stock holdings in private pension funds decreased from

[[Page 55222]]

almost 22 percent in 1985 to about 5 percent in 2019.\30\ ERISA plan
assets were about 27 percent invested in corporate debt and equity
instruments in 1993,\31\ but by 2017 this figure had declined to
approximately 11 percent.\32\ This decrease in the share of ERISA plan
assets invested in individual securities was accompanied by a
corresponding increase in securities held through institutions such as
mutual funds, reducing the volume of proxy voting rights that ERISA
fiduciaries hold in individual securities of corporate issuers.
---------------------------------------------------------------------------

\26\ The Conference Board, Institutional Investment Report:
Trends in Institutional Investor Assets and Equity Ownership of U.S.
Corporations (Sept. 2008); see also Barry Burr, Institutional
Investors Increase Ownership of U.S. Companies to All-Time High,
Pensions & Investments, (Sept. 5, 2008).
\27\ Charles McGrath, 80% of Equity Market Cap Held by
Institutions. Pensions & Investments, (April 25, 2017).
\28\ Department calculations based on U.S. Federal Reserve
statistics. Institutional investors include retirement and pension
funds, insurance companies, mutual funds, closed-end funds,
exchange-traded funds, brokers and dealers, and nonfinancial
corporate businesses.
\29\ See supra note 3 (quoting 1985 DOL Report estimating that
ERISA plans will hold more than half of all equity securities before
the turn of the century).
\30\ Department calculations based on U.S. Federal Reserve
statistics.
\31\ DOL calculation based on statistics from U.S. Department of
Labor, Employee Benefits Security Administration, Private Pension
Plan Bulletin: Abstract of 1993 Form 5500 Annual Reports, (Winter
1996), Table A3, www.dol.gov/agencies/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletins-abstract-1993.
\32\ DOL calculation based on statistics from U.S. Department of
Labor, Employee Benefits Security Administration, Private Pension
Plan Bulletin: Abstract of 2017 Form 5500 Annual Reports, (Sept.
2019), Table C4, www.dol.gov/sites/dolgov/files/EBSA/researchers/statistics/retirement-bulletins/private-pension-plan-bulletins-abstract-2017.pdf.
---------------------------------------------------------------------------

Broader diversification of ERISA plan assets: Since the
1980s, the scope and type of plan investments has changed, which has
significantly reduced the volume of securities directly held by plans.
The development and growth of financial vehicles such as exchange-
traded funds, sector-based equity products, hedge funds, as well as an
increased focus on passive investing, have altered the investment
landscape in which ERISA fiduciaries now operate. ERISA plans have
taken advantage of these new investment vehicles. For example,
alternative investments like hedge funds, private equity, and venture
capital firms have grown dramatically since 1990.\33\ The share of
large private pension plan assets held in alternative investments, such
as hedge funds and private equity, nearly quadrupled between 2008 and
2017.\34\
---------------------------------------------------------------------------

\33\ World Economic Forum, Alternative Investments 2020: An
Introduction to Alternative Investments, at 8 (July 2015),
www3.weforum.org/docs/WEF_Alternative_Investments_2020_An_Introduction_to_AI.pdf.
\34\ Victoria Ivashina & Josh Lerner, Looking for Alternatives:
Pension Investments around the World, 2008 to 2017 at Table 5 (Aug.
24, 2018). www.bostonfed.org/-/media/Images/research-conference-2018/papers/looking-for-alternatives-pension-investments-around-the-world-2008-to-2017.pdf. These statistics are based on a balanced
panel of 210 equally weighted large private pension plans.
---------------------------------------------------------------------------

Change in proxy voting behavior: In concert with a marked
increase in the size of the investment marketplace controlled by
institutional investors, there also has been a substantial change in
investor voting behavior and proxy voting policies. ISS Analytics, a
data analytics service of Institutional Shareholder Services--the
largest proxy advisory firm, which controls approximately 60 percent of
the market--has documented several changes in proxy voting trends,
observing that ``investor voting behavior among owners of U.S.
companies has changed significantly--perhaps almost revolutionarily--
over the past two decades.'' \35\ According to ISS Analytics, ``for the
overwhelming majority of share capital represented in the U.S., voting
is certainly no longer a compliance exercise.'' \36\ Instead, ``proxy
voting policies are becoming more complex, as investors continue to add
to the list of factors they consider in their review and analysis of
governance practices, including board independence, board
accountability, diversity, myriads of executive compensation factors,
shareholder rights, and environmental and social factors.'' \37\
---------------------------------------------------------------------------

\35\ Kosmas Papadopoulos, The Long View: US Proxy Voting Trends
on E&S Issues from 2000 to 2018, Harvard Law School Forum on Corp.
Gov. & Fin. Reg. (Jan. 31, 2019), https://corpgov.law.harvard.edu/2019/01/31/the-long-view-us-proxy-voting-trends-on-es-issues-from-2000-to-2018 (2019 ISS Proxy Voting Trends).
\36\ Id.
\37\ Id.
---------------------------------------------------------------------------

Mixed evidence on effectiveness of shareholder voting: As
discussed above, one factor prompting the rise in shareholder
activities by ERISA fiduciaries was the belief that participating in
such activities was likely to enhance the value of a plan's investment
in a particular security.\38\ Since that time, however, research
regarding whether proxy voting has reliable positive effects on
shareholder value and a plan's investment in the corporation has
yielded mixed results.\39\
---------------------------------------------------------------------------

\38\ See discussion, supra.
\39\ Regarding the mixed evidence on whether shareholder
engagement improves firm value, see, e.g., Matthew R. Denes,
Jonathan M. Karpoff & Victoria B. McWilliams, Thirty Years of
Shareholder Activism: A Survey of Empirical Research, 44 J. Corp.
Fin. 405, 407 (2017); Tracie Woidtke, Public Pension Fund Activism
and Firm Value: An Empirical Analysis, Manhattan Institute (2015),
https://media4.manhattan-institute.org/pdf/lpr_20.pdf; Maria
Goranova & Lori Verstegen Ryan, Shareholder Activism: A
Multidisciplinary Review, 40 Journal of Management 1230, 1251-1253
(July 2014) (collecting research regarding the ``equivocal results''
of shareholder activism on corporate performance); James R. Copland,
David F. Larcker & Brian Tayan, The Big Thumb on the Scale: An
Overview of the Proxy Advisory Industry (May 2018),
www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-72-big-thumb-proxy-advisory.pdf; see also Dorothy S. Lund, The
Case Against Passive Shareholder Voting, 43 J. Corp. Law 493, 526
(2018) (``In light of the fact that any investment in voting will
likely generate higher costs than benefits for the fund, it is
surprising that passive funds vote at all.''); David Yermack,
Shareholder Voting and Corporate Governance, 2 Ann. Rev. Fin. Econ.
2.1, 2.15 (2010) (``Activist institutions frequently state that
their goal is not to improve the value of individual investment
positions, but rather to create positive externalities by signaling
optimal governance practices market wide'').
---------------------------------------------------------------------------

iii. The Avon Letter and Proxy Voting

As the Department first stated in the Avon Letter, the fiduciary
duty to manage plan assets that are shares of corporate stock
encompasses responsibility over the voting of proxies appurtenant to
those shares of stock. This responsibility is subject to ERISA's core
fiduciary duties of loyalty and care. A fiduciary's exercise of voting
rights (or other shareholder rights) must be performed solely for the
plan's economic interests, which under no circumstances may be
subordinated to non-pecuniary goals. Accordingly, the use of plan
assets for purposes other than enhancing the value of the plan's
investments--through proxy voting or otherwise--violates the fiduciary
duties of loyalty and care under ERISA. The economic interests of
participants and beneficiaries must be the basis of fiduciary decision-
making.
The Avon Letter has been read by some outside of its factual
context as creating a general presumption that ERISA fiduciaries
responsible for managing plan assets that are shares of corporate stock
should always vote the proxies appurtenant to those shares.\40\ For
fiduciaries with such an understanding, the letter presented them with
an ambiguous duty that in practice was often very difficult to
discharge without the assistance of third-party proxy advisory firms.
The Department is now concerned that some fiduciaries and proxy
advisory firms--in part relying on the Avon Letter--may be acting in
ways that unwittingly allow plan assets to be used to support or pursue
proxy proposals for environmental, social, or public policy agendas
that have no connection to increasing the value of investments used for
the payment of benefits or plan administrative expenses, and in fact
may have unnecessarily increased plan expenses.\41\ In addition,
informed by the changed circumstances over the past 30 years and the
potential for continued fiduciary breaches that can result from a
belief that such presumption applies as a legal matter, the Department

[[Page 55223]]

believes that it is important to expressly reject the notion of such a
presumption.
---------------------------------------------------------------------------

\40\ See supra note 12.
\41\ See, e.g., U.S. Dep't of Labor Office of Inspector General
Report No. 09-11-001-12-121, Proxy-Voting May Not be Solely for the
Economic Benefit of Retirement Plans (Mar. 31, 2011),
www.oig.dol.gov/public/reports/oa/2011/09-11-001-12-121b.pdf, at 4
(``EBSA does not have adequate assurances that fiduciaries or third
parties voted proxies solely for the economic benefit of plans.'').
---------------------------------------------------------------------------

In proposing this regulation, the Department wishes to be clear:
There is no fiduciary mandate under ERISA always to vote proxies
appurtenant to shares of stock. The Department's longstanding
position--that ``the decision as to how proxies should be voted with
regard to the issues that might affect the economic value of the
underlying securities is a fiduciary act of plan asset management''
\42\--does not mean that ERISA requires fiduciaries to always vote such
proxies.\43\ Instead, ERISA mandates that fiduciaries manage voting
rights prudently and for the ``exclusive purpose'' of securing economic
benefits for plan participants and beneficiaries--which may or may not
require a proxy vote to be cast.\44\ In the Department's view there is
no presumption that abstaining from voting proxies appurtenant to
shares of stock is a per se fiduciary breach. Rather, fiduciaries must
vote proxies in a manner that is in the best interest of the plan. The
proposed regulation is designed to reflect these principles while
permitting fiduciaries to execute such duties in a cost-efficient
manner.
---------------------------------------------------------------------------

\42\ Pension and Welfare Benefits Administration, Proxy Project
Report (Mar. 2, 1989), at 2; see also Testimony of David Walker,
Ass't Sec'y for Pension and Welfare Benefits, Tax Policy Aspects of
Mergers and Acquisitions, before the H. Ways and Means Comm., Serial
101-10 (Feb. 2, 1989), at 525 (``[P]ension plan fiduciaries [have an
obligation] to vote shares that could have an effect on the economic
value of the stock in accordance with what is in interest of plan
participants and beneficiaries, recognizing the plan as a separate
legal entity designed for the purpose of providing retirement
income.'').
\43\ See also Comment Letter to SEC from Institutional
Shareholder Services, Inc. (Nov. 7, 2018), www.sec.gov/comments/4-725/4725-4629940-176410.pdf, at 7 (``[I]nvestment advisers have no
absolute duty to vote every proxy relating to their clients'
portfolios'').
\44\ The Supreme Court as recently as 2014 unanimously held in
the context of ERISA retirement plans that benefits must be
understood to refer to ``financial'' rather than ``nonpecuniary''
benefits. See Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421
(2014) (the ``benefits'' to be pursued by ERISA fiduciaries as their
``exclusive purpose'' do not include ``nonpecuniary benefits'')
(emphasis in original).
---------------------------------------------------------------------------

iv. Recent SEC Actions Regarding Proxy Voting

As part of its ongoing proxy reform initiative, the SEC has issued
guidance and adopted rule amendments that, to the extent applicable to
ERISA fiduciaries, address some of the Department's concerns about
ERISA fiduciaries properly discharging their duties with respect to
proxy voting activities and appropriately selecting and overseeing
proxy advisory firms. Although persons subject to SEC's jurisdiction
would also be ERISA investment advice fiduciaries to the extent they
meet the five-part test in the Department's regulation at 29 CFR
2510.3-21, the SEC's actions would not apply to ERISA fiduciaries that
are outside of the SEC's jurisdiction. The Department believes that it
would be appropriate to consider updating its regulations to ensure
more consistent conduct by all plan fiduciaries.
On August 21, 2019, the SEC issued guidance regarding proxy voting
responsibilities of investment advisers.\45\ The guidance described a
number of steps investment advisers could take where the investment
adviser has assumed the authority to vote proxies on behalf of a client
to demonstrate that it is making voting determinations in a client's
best interest and in accordance with the investment adviser's proxy
voting policies and procedures. Among other things, the investment
adviser must conduct a reasonable investigation into matters on which
the adviser votes and vote in the best interest of each client for whom
the adviser performs proxy voting services, and should consider
reasonable measures to determine that it is casting proxy votes on
behalf of its clients consistently with the adviser's voting policies
and procedures and in its client's best interest.\46\
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\45\ See Commission Guidance Regarding Proxy Voting
Responsibilities of Investment Advisers, 84 FR 47420 (Sept. 10,
2019) (2019 SEC Guidance).
\46\ 2019 SEC Guidance, 84 FR at 47423-47424.
---------------------------------------------------------------------------

The SEC guidance also provides that before casting votes,
investment advisers that retain proxy advisory firms to provide voting
recommendations or voting services should consider additional steps to
evaluate whether the voting determinations are consistent with the
investment adviser's voting policies and procedures and in the client's
best interest. The SEC guidance also provides that investment advisers
should consider whether the proxy advisory firm has the capacity and
competency to adequately analyze the matters for which the investment
adviser is responsible for voting. The SEC guidance also explains that
an investment adviser's decision regarding whether to retain a proxy
advisory firm should also include a reasonable review of the proxy
advisory firm's policies and procedures regarding how it identifies and
addresses conflicts of interest.\47\ Further, as part of the investment
adviser's ongoing compliance program, the investment adviser must
annually review and document the adequacy of its voting policies and
procedures.\48\
---------------------------------------------------------------------------

\47\ Id. at 47424-47425.
\48\ Id.
---------------------------------------------------------------------------

On July 22, 2020, the SEC adopted rule amendments that, among other
things, require proxy advisory firms that are engaged in a solicitation
to provide specified disclosures, adopt written policies and procedures
designed to ensure that proxy voting advice is made available to
securities issuers, and provide proxy advisory firm clients with a
mechanism by which the clients can reasonably be expected to become
aware of a securities issuer's views about the proxy voting advice so
that the clients can take such views into account as they vote
proxies.\49\ At the same time, the SEC issued supplemental guidance to
assist investment advisers in assessing how to consider the additional
information that may become more readily available to them as a result
of these amendments, including in circumstances where the investment
adviser uses a proxy advisory firm's electronic vote management system
that ``pre-populates'' the adviser's proxies with suggested voting
recommendations and/or voting execution services.\50\ The Department
believes that activities of proxy advisory firms have similar relevance
for fiduciaries under ERISA.
---------------------------------------------------------------------------

\49\ SEC Release No. 34-89372 (July 22, 2020), Exemptions from
the Proxy Rules for Proxy Voting Advice (2020 SEC Proxy Voting
Advice Amendments).
\50\ SEC Release No. IA-5547 (July 22, 2020), Supplement to
Commission Guidance Regarding Proxy Voting Responsibilities of
Investment Advisers (2020 SEC Supplemental Guidance).
---------------------------------------------------------------------------

C. Provisions of the Rule

This proposed rule would amend the current ``Investment duties''
regulation 29 CFR 2550.404a-1 and address the prudence and exclusive
purpose duties under sections 404(a)(1)(A) and 404(a)(1)(B) of ERISA in
the context of proxy voting and other exercises of shareholder rights
by the responsible ERISA plan fiduciaries.\51\
---------------------------------------------------------------------------

\51\ As explained in paragraph (e)(2)(ii)(B) and paragraph
(e)(4)(i) of the proposal, the responsibility for exercising
shareholder rights 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) or
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).
---------------------------------------------------------------------------

Paragraph (e)(1) of the proposed rule provides that the fiduciary
duty to manage plan assets that are shares of stock includes the
management of shareholder rights appurtenant to those plan assets, such
as the right to vote proxies.
Paragraph (e)(2)(i) provides that when deciding whether to exercise

[[Page 55224]]

shareholder rights and when exercising such rights, including the
voting of proxies, fiduciaries must carry out their duties prudently
and solely in the interests of the participants and beneficiaries and
for the exclusive purpose of providing benefits to participants and
beneficiaries and defraying the reasonable expenses of administering
the plan pursuant to ERISA sections 403 and 404.
Paragraph (e)(2)(ii) sets forth specific standards that fiduciaries
must meet when deciding whether to exercise shareholder rights and when
exercising shareholder rights. Specifically, the paragraph states that
plan fiduciaries must (1) act solely in accordance with the economic
interest of the plan considering only factors that they prudently
determine will affect the economic value of the plan's investment based
on a determination of risk and return over an appropriate investment
horizon consistent with the plan's investment objectives and the
funding policy of the plan; (2) consider the likely impact on the
investment performance of the plan based on such factors as the size of
the plan's holdings in the issuer relative to the total investment
assets of the plan, the plan's percentage ownership of the issuer, and
the costs involved; (3) not subordinate the interests of the
participants and beneficiaries in their retirement income or financial
benefits under the plan to any non-pecuniary objective, or sacrifice
investment return or take on additional investment risk to promote
goals unrelated to these financial interests of the plan's participants
and beneficiaries or the purposes of the plan; (4) investigate material
facts that form the basis for any particular proxy vote or other
exercise of shareholder rights (e.g., the fiduciary may not adopt a
practice of following the recommendations of a proxy advisory firm or
other service provider without appropriate supervision and a
determination that the service provider's proxy voting guidelines are
consistent with the economic interests of the plan and its participants
and beneficiaries); (5) maintain records on proxy voting activities and
other exercises of shareholder rights, including records that
demonstrate the basis for particular proxy votes and exercises of
shareholder rights; and (6) exercise prudence and diligence in the
selection and monitoring of persons, if any, selected to advise or
otherwise assist with exercises of shareholder rights, such as
providing research and analysis, recommendations regarding proxy votes,
administrative services with voting proxies, and recordkeeping and
reporting services.
The proposed provisions confirm that when making their voting
decisions, fiduciaries must perform reasonable investigations,
understanding that certain proposals may require a more detailed or
particularized voting analysis. Information that will better enable
fiduciaries to determine whether or how to vote proxies on particular
matters includes the cost of voting, including opportunity costs; the
type of proposal (e.g., those relating to social or public policy
agendas versus those dealing with issues that have a direct economic
impact on the investment); voting recommendations of management; \52\
and an analysis of the particular shareholder proponents. In the
Department's view, fiduciaries must be prepared to articulate the
anticipated economic benefit of proxy-vote decisions in the event they
decide to vote.
---------------------------------------------------------------------------

\52\ Corporate directors owe their own fiduciary duties to their
corporation, and can be subjected to shareholder lawsuits for breach
of those duties. See, e.g., Aronson v. Lewis, 473 A.2d 805 (Del.
1984) (citing Loft, Inc. v. Guth, 2 A.2d 225 (Del. Ch. 1938), aff'd,
5 A.2d 503 (Del. 1939)) (``The existence and exercise of this power
carries with it certain fundamental fiduciary obligations to the
corporation and its shareholders.'').
---------------------------------------------------------------------------

As stated above, the Department recognizes that fiduciaries may
reasonably delegate their proxy voting authority to investment
managers. In such cases, ERISA requires fiduciaries to monitor proxy
voting decisions made by their investment managers to ensure such
entities are voting, or refraining from voting, in a manner that
maximizes investment returns and does not sacrifice economic benefits
for non-pecuniary objectives, as described above. Therefore, it is the
view of the Department that, consistent with the duty to monitor,
fiduciaries should require documentation of the rationale for proxy-
voting decisions so that fiduciaries can periodically monitor proxy-
voting decisions made by third parties. A plan fiduciary must also
assess and monitor an investment manager's use of any proxy advisory
firm, including any review by the manager of the advisory firm's
policies and procedures for identifying and addressing conflicts of
interest.\53\
---------------------------------------------------------------------------

\53\ Many investment managers are registered as investment
advisers with the SEC. As such, they are required by an SEC rule to:
(i) Adopt and implement written policies and procedures reasonably
designed to ensure they vote securities in a client's best interest,
and which procedures must include how the adviser will address
material conflicts of interest that may arise between the adviser's
interests and those of its client; (ii) disclose to clients about
how they may obtain information about how the adviser voted with
respect to their securities; and (iii) describe to clients the
adviser's proxy voting policies and procedures and, upon request,
furnish a copy of the policies and procedures to the requesting
client. See 17 CFR 275.206(4)-6; see also 2019 SEC Guidance, 84 FR
at 47424 (addressing considerations that an investment adviser
should take into account if it retains a proxy advisory firm to
assist it in discharging its proxy voting duties).
---------------------------------------------------------------------------

Similarly, any ERISA plan fiduciary that uses a proxy advisory firm
is responsible for ensuring that the proxy advisory firm's practices
with respect its services to the ERISA plan are consistent with the
prudence and loyalty obligations that govern the fiduciary's proxy
voting actions.\54\ In particular, fiduciaries must be aware that
conflicts of interest can arise at proxy advisory firms that could
affect vote recommendations. For example, in certain instances a proxy
advisory firm may issue proxy voting recommendations while the company
that is the subject of such recommendations is a client of the firm's
consulting business.\55\ When using a proxy advisory firm, ERISA
fiduciaries must exercise prudence and diligence in selecting and
monitoring the firm, as both are fiduciary acts. Such diligence should
include assessing whether the proxy advisory firm is able to
competently analyze proxy issues, identify and address potential
conflicts of interest, and adhere to the plan's proxy voting policy
guidelines. Particular attention must be given to proxy advisory firms
that provide both proxy advisory services to investors and consulting
services to issuers on matters subject to proxy resolutions.\56\ In

[[Page 55225]]

addition, the Department's long-established position is that compliance
with the duty to monitor necessitates proper documentation of the
activities that are subject to monitoring.
---------------------------------------------------------------------------

\54\ For example, research has shown that a significant number
of asset managers automatically vote in accordance with the
recommendations of proxy advisory firms. See, e.g., Paul Rose,
Robovoting and Proxy Vote Disclosure (Nov. 2019), https://corpgov.law.harvard.edu/2019/11/25/robovoting-and-proxy-vote-disclosure (detailing the prevalence of such ``robovoting'' by firms
that contract with proxy advisory firms and expressing concern
regarding this lack of diligence).
\55\ See, e.g., GAO Report 07-765, Issues Relating to Firms That
Advise Institutional Investors on Proxy Voting (June 2007), at 4, 9-
10. By contrast, section 201 of the Sarbanes-Oxley Act of 2002,
Public Law 107-204, mandates the independence of auditors in part by
prohibiting a public accounting firm that performs an audit from
simultaneously offering non-audit services.
\56\ The SEC has issued guidance on the elements an investment
adviser should consider in retaining or continuing to retain a proxy
advisory firm, including the process an investment adviser should
take to review and assess a proxy advisory firm's policies and
procedures for identifying and addressing conflicts of interest. See
2019 SEC Guidance, 84 FR at 47425. The SEC issued supplementary
guidance for investment advisers on how to consider additional
information that may become more readily available to them as a
result of the amendments to the proxy rule for proxy voting advice,
including when an investment adviser utilizes a proxy advisor's
electronic vote management system that ``pre-populates'' with
suggested voting recommendations and/or for voting execution
services. See 2020 SEC Supplemental Guidance. In the event
fiduciaries believe the retention of a proxy advisory firm is
appropriate, the Department likewise views the SEC's guidance as
reasonable direction for the diligence that ERISA plan fiduciaries
should perform when reviewing and assessing a proxy advisory firm.
The Department notes, however, that the SEC standards do not
necessarily capture all the actions that ERISA may require as a
result of that review and assessment.
---------------------------------------------------------------------------

Consistent with these principles, paragraph (e)(2)(iii) of the
proposal states that, where the authority to vote proxies or exercise
shareholder rights has been delegated to an investment manager pursuant
to ERISA section 403(a)(2) or a proxy voting firm or other person
performs advisory services as to the voting of proxies, plan
fiduciaries shall require such investment manager, proxy voting firm,
or other advisor to document the rationale for proxy voting decisions
or recommendations sufficient to demonstrate that the decision or
recommendation was based on the expected economic benefit to the plan,
and that the decision or recommendation was based solely on the
interests of participants and beneficiaries in obtaining financial
benefits under the plan. To facilitate transparency, the Department
also reminds fiduciaries that proxy voting guidelines must be made
available to plan participants, either as a separate document or by
including them in the plan's existing investment policy statement. When
an investment manager's rationale on a vote for recurring issues is to
follow a uniform internal policy, the manager should document the
reasons for any vote that goes against the policy, which would
generally only require a brief explanation directly in the proxy-voting
record.
Paragraph (e)(3) sets forth certain proposed requirements and
limitations pertaining to proxy voting. The proposed rule provides in
paragraph (e)(3)(i) that a plan fiduciary must vote any proxy where the
fiduciary prudently determines that the matter being voted upon would
have an economic impact on the plan after considering those factors
described in paragraph (e)(2)(ii) and taking into account the costs
involved (including the cost of research, if necessary, to determine
how to vote). As a corollary, paragraph (e)(3)(ii) provides that a plan
fiduciary must not vote any proxy unless the fiduciary prudently
determines that the matter being voted upon would have an economic
impact on the plan after considering those factors described in
paragraph (e)(2)(ii) and taking into account the costs involved.
These provisions are intended to reflect the fact that there will
be circumstances when fiduciaries are required to vote a proxy and
there will be circumstances when a fiduciary is required not to vote a
proxy. In those circumstances when a fiduciary prudently determines
that the fiduciary's duties to the plan require the fiduciary to vote,
the fiduciary must exercise care, skill, prudence, diligence, and
loyalty when making voting decisions on behalf of the plan.\57\
---------------------------------------------------------------------------

\57\ ERISA section 404(a)(1).
---------------------------------------------------------------------------

The Department recognizes that because the decision regarding
whether a proxy vote will or will not affect the economic value of a
plan's investments is critical in triggering a fiduciary's obligations
under ERISA to vote or abstain from voting, fiduciaries may need to
conduct an analytical process which could in some cases be resource-
intensive (requiring, among other things, organizing proxy materials,
diligently analyzing portfolio companies and the matters to be voted
on, determining how the votes should be cast, and submitting proxy
votes to be counted), and that these activities may often burden
fiduciaries out of proportion to any potential benefit to the plan.\58\
Given that widely diversified plans significantly dilute the effect of
a single holding, and the mixed evidence regarding whether proxy voting
affects firm value,\59\ the Department is concerned that the costs for
fiduciaries to prudently exercise proxy voting rights often will exceed
any potential economic benefits to a plan.
---------------------------------------------------------------------------

\58\ The SEC described a number of functions performed by proxy
voting advice businesses and observed that in the absence of such
services, investment advisers and other clients of these businesses
may require considerable resources to independently conduct the work
necessary to analyze and make voting determinations. See 2020 SEC
Proxy Voting Advice Amendments, at 140-141.
\59\ See supra note 39.
---------------------------------------------------------------------------

To address this concern, the Department has proposed potential
options for fiduciaries that are intended to reduce the need for
fiduciaries to consider proxy votes that are unlikely to have an
economic impact on the plan, thereby allowing plans to focus resources
on matters most likely to have an economic impact. These various
options (labeled ``permitted practices'' in the proposed rule) will
thus help fiduciaries more cost-effectively comply with the obligations
under paragraphs (e)(3)(i) and (ii). Under the proposed provisions, a
fiduciary may adopt proxy voting policies that encompass one or more of
the permitted practices, and the fiduciary may then apply those proxy
voting policies to proxy votes. The development and adoption of such
policies is subject to the fiduciary's duties of prudence and loyalty.
However, paragraph (e)(3)(v) ensures that such proxy voting policies
would not preclude a fiduciary from voting in any particular case in
which a fiduciary subsequently determines that the proxy matter being
voted upon would have an economic impact on the plan, or from
refraining from voting based on a subsequent determination that the
matter being voted upon would not have an economic impact.
Accordingly, the Department proposes to assist plan fiduciaries by
providing in paragraph (e)(3)(iii) that it is permissible to adopt
general proxy voting policies or parameters for exercising voting
rights that are prudently designed to serve the plan's economic
interest. Paragraphs (e)(3)(iii)(A), (B), and (C) provide examples of
such policies.
In paragraph (e)(3)(iii)(A), the Department proposes that a
fiduciary may adopt a policy of voting proxies in accordance with the
voting recommendations of a corporation's management on proposals or
types of proposals that the fiduciary has prudently determined are
unlikely to have a significant impact on the value of the plan's
investment, subject to any conditions determined by the fiduciary as
requiring additional analysis because the matter being voted upon
concerns a matter that may present heightened management conflicts of
interest or is likely to have a significant economic impact on the
value of the plan's investment. Under this permitted practice, a
fiduciary may, consistent with its obligations set forth in ERISA
section 404(a)(1)(A) and (B), maintain a proxy voting policy that
relies on the fiduciary duties that officers and directors owe to a
corporation based on state corporate laws.\60\ On that basis, the proxy
voting policy may state that the responsible plan fiduciary, if it so
determines, ordinarily will follow the recommendations of a
corporation's management. Furthermore, empirical observations indicate
that nearly all management proposals are approved with little
opposition.\61\ Fiduciaries retain the right to override this practice
or any voting policy if they

[[Page 55226]]

subsequently determine that prudence dictates a different voting
decision pursuant to paragraphs (e)(3)(i) and (ii).
---------------------------------------------------------------------------

\60\ See Aronson v. Lewis, supra note 51.
\61\ See The Conference Board, Proxy Voting Analytics (2015-
2018), at 105, (2018), https://law.rutgers.edu/sites/law/files/RR-1674-18-R.pdf.
---------------------------------------------------------------------------

The Department proposes in paragraph (e)(3)(iii)(B) that a
fiduciary may determine in its proxy voting policy to focus its
resources only on particular types of proposals that the fiduciary has
prudently determined are likely to have a significant impact on the
value of the plan's investment, such as proposals relating to corporate
events (mergers and acquisitions transactions, dissolutions,
conversions, or consolidations), corporate repurchases of shares (buy-
backs), issuances of additional securities with dilutive effects on
shareholders, or contested/elections for directors.
Paragraph (e)(3)(iii)(C) proposes that a fiduciary may adopt a
policy of refraining from voting on proposals or particular types of
proposals when the plan's holding of the issuer relative to the plan's
total investment assets is below quantitative thresholds that the
fiduciary prudently determines, considering its percentage ownership of
the issuer and other relevant factors, is sufficiently small that the
matter being voted upon is unlikely to have a material impact on the
investment performance of the plan's portfolio (or investment
performance of assets under management in the case of an investment
manager). The Department believes that establishing a specific
quantitative upper limit for the threshold (i.e., a cap) under
paragraph (e)(3)(iii)(C) may help fiduciaries by reducing the
circumstances when borderline cases might result in plans performing
individual cost/benefit analyses to decide whether to vote proxy
proposals, a likely inefficient use of plan resources. The Department
also believes that determining materiality based on a percentage of
plan assets could be a straightforward way for fiduciaries to apply
such a cap, and specifically solicits comments on whether in setting
this upper limit, the Department should look to financial practices and
existing regulations regarding quantitative measures of materiality.
The Department solicits comments on whether a maximum cap should be
defined and, if so, what factors should be considered in setting a cap.
In particular, the Department solicits comments on whether a five-
percent cap would be appropriate, or some other percent level of plan
assets.\62\
---------------------------------------------------------------------------

\62\ The proposal is not intended to suggest or express a view
on whether in any particular case investing five percent of a plan's
portfolio in one holding would comply with ERISA's diversification
requirement, 29 U.S.C. 1104(a)(1)(C).
---------------------------------------------------------------------------

The proposed permitted practices provisions in paragraph
(e)(3)(iii) include conditions that are intended to require a fiduciary
to make prudence-based judgments about the policies. The specified
types of proposals are not intended to be limiting, and a fiduciary
could prudently determine other criteria for determining in advance the
types of proposals on which to focus. These proposed provisions are
also intended to be applied flexibly rather than in a binary ``all or
none'' manner, and may be used either independently or in conjunction
with each other.
A fiduciary should adopt proxy voting policies that are appropriate
for a plan's particular facts and circumstances. For example, a
fiduciary declining to submit any proxy votes for holdings below a
prudently determined quantitative materiality threshold may modify the
policy in advance to allow proxy voting if needed for the portfolio
holding to achieve a quorum for its shareholders' meeting.\63\ As
another example, a fiduciary could determine not to spend plan assets
on proxy votes for nonbinding proposals, unless it is aware that such a
proposal will somehow still have an economic impact on the value of the
plan's investment. A fiduciary could also utilize the permitted
practices to create a proxy voting policy that votes in accordance with
management's recommendations for uncontested elections of directors and
ratification of independent auditors and certain types of non-binding
proposals, but primarily reserves its proxy voting resources for
corporate events that are expected to have a significant economic
impact on the value of the plan's holding, such as share buy-backs,
dilutive issuances of securities, and contested elections for directors
of the board. Plans could also fashion policies or exceptions from
policies to account for circumstances where a plan's vote share is more
likely to affect the outcome of a vote and the fiduciary believes
changing the outcome would have an economic impact on the plan.
---------------------------------------------------------------------------

\63\ The direct and indirect costs incurred by the corporation
related to delaying the shareholders' meeting, such as additional
proxy solicitation, legal, and administrative costs, would be an
economic detriment to the plan's holding.
---------------------------------------------------------------------------

Paragraph (e)(3)(iv) would require plan fiduciaries to review any
proxy voting policies adopted pursuant to paragraph (e)(3)(iii) at
least once every two years. Paragraph (e)(3)(iv) is intended to permit
fiduciaries to prudently determine a review cycle for their proxy
voting policies, but establishes a maximum interval of no more than two
years, which the Department believes is an appropriate limit to ensure
a plan's proxy voting policies remain prudent given ongoing changes in
financial markets and the investment world. The Department also
understands that this provision is consistent with industry practices
regarding periodic review and approval of investment policy
statements.\64\ The Department solicits comments on whether some other
maximum interval would be appropriate to better ensure that plan
policies adopted pursuant to paragraph (e)(3)(iii) remain prudent
without unnecessarily burdening plan fiduciaries.
---------------------------------------------------------------------------

\64\ See also PBGC regulations at 29 CFR 4002.1(a)(4) (stating
that PBGC Board must review the Corporation's Investment Policy
Statement at least every two years and approve the Investment Policy
Statement at least every four years).
---------------------------------------------------------------------------

Finally, the Department's proposed rule acknowledges in paragraph
(e)(3)(v) that a fiduciary's fundamental priority is to act in the best
interest of participants and beneficiaries. In the view of the
Department, no policies adopted under paragraph (e)(3)(iii) would
interfere with, or impose liability for, submitting a proxy vote when
the fiduciary prudently determines that the matter being voted upon
would have an economic impact on the plan after taking into account the
costs involved. Rather, in situations where a fiduciary has prudently
determined it is in the economic interest of the plan to vote, a
fiduciary responsible for proxy voting must carry out this
responsibility ``solely'' and ``for the exclusive purpose of'' the
participants' and beneficiaries' interest in the economic value of the
plan assets.
In addition to the solicitation of public comments on the
particular proposed permitted practices, the Department requests
comment on whether the proposed permitted practices should contain
additional examples regarding when advance proxy voting directions may
be exercised pursuant to specific parameters designed to serve the
plan's economic interest and, if so, what situations those examples
should cover. For example, the Department requests comment on whether
the permitted practice in paragraph (e)(3)(iii)(B) should have
additional specified types of proposals and, if so, which types of
proposals. The Department also requests comment on whether the
permitted practices in paragraphs (e)(3)(iii)(A) and (B) should be
subject to quantitative limitations on plan holdings like those
referenced in paragraph (e)(3)(iii)(C).
Paragraphs (e)(4)(i) and (ii) adopt provisions from the
Department's prior IBs and state that the responsibility for exercising
shareholder rights lies

[[Page 55227]]

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) or 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) of ERISA, the
investment manager has exclusive authority to vote proxies or exercise
other shareholder rights appurtenant to such plan assets, except to the
extent the plan or trust document or investment management agreement
expressly provides that the responsible 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 exercise or
management of some or all of such shareholder rights.
Paragraph (e)(4)(ii) provides proposed language concerning the
obligations of an investment manager of a pooled investment vehicle
that holds assets of more than one employee benefit plan that may be
subject to an investment policy statement that conflicts with the
policy of another plan. Compliance with ERISA section 404(a)(1)(D)
requires 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)). In the case of proxy
voting, to the extent permitted by applicable law, the investment
manager must vote (or abstain from voting) the relevant proxies to
reflect such policies in proportion to each plan's economic interest in
the pooled investment vehicle. Such an investment manager may, however,
develop an investment policy statement consistent with Title I of ERISA
and this section, and require participating plans to accept the
investment manager's investment policy, including any proxy voting
policy, before they are allowed to invest. In such cases, a fiduciary
must assess whether the investment manager's investment policy
statement and proxy voting policy are consistent with Title I of ERISA
and this regulation before deciding to retain the investment manager.
Paragraph (g) provides for the effective date for the proposed
rule. Under paragraph (g), the proposed rule would be effective on a
date thirty days after the date of the publication of the final rule.
The Department notes that on June 30, 2020 (85 FR 39113), it published
in the Federal Register a proposed rule on Financial Factors in
Selecting Plan Investments. Both this proposal and the Financial
Factors in Selecting Plan Investments proposal are amendments to Sec.
2550.404a-1. Both proposals include a proposed paragraph (g), but the
Financial Factors in Selecting Plan Investments proposal proposes an
effective date of 60 days after publication of a final rule. Depending
on the publication date of the respective final rules, the Department
may need to revise paragraph (g) to separately effectuate the final
rules. For example, if a final rule on Financial Factors in Selecting
Plan Investments is published exactly 30 days before a final rule on
Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, and no
changes were made to the proposed effective dates as part of the final
rules, then no revision to paragraph (g) would be necessary. The
Department requests comment on how to structure the effective date of
this proposed rule, including whether it should be adjusted to ensure
it matches the effective date of the rule on Financial Factors in
Selecting Plan Investments, if finalized. The Department also requests
comment on whether any transition or applicability date provisions
should be added to for any of the provisions of the proposal.
Paragraph (h) provides that should a court of competent
jurisdiction hold any provision of the rule invalid, such action will
not affect any other provision. Including a severability clause
provides clear guidance that the Department's intent is that any legal
infirmity found with part of the proposed rule should not affect any
other part of the proposed rule. The Department notes that it included
the exact same paragraph in the proposed rule on Financial Factors in
Selecting Plan Investments.

D. Request for Public Comments

The Department invites comments from interested persons on all
facets of the proposed rule. Commenters are free to express their views
not only on the specific provisions of the proposed regulation as set
forth in this document, but on other issues germane to the subject
matter of the proposal. Comments should be submitted in accordance with
the instructions at the beginning of this document. Comments on the
proposal must be submitted on or before October 5, 2020. The Department
believes that this period of time will afford interested persons an
adequate amount of time to analyze the proposed rule and submit
comments.

E. Regulatory Impact Analysis

Executive Orders

The Department has examined the effects of this rule as required by
Executive Order 12866,\65\ Executive Order 13563,\66\ Executive Order
13771,\67\ the Congressional Review Act,\68\ the Paperwork Reduction
Act of 1995,\69\ the Regulatory Flexibility Act,\70\ Section 202 of the
Unfunded Mandates Reform Act of 1995,\71\ and Executive Order
13132.\72\
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\65\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\66\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 18, 2011).
\67\ Reducing Regulation and Controlling Regulatory Costs, 82 FR
9339 (Jan. 30, 2017).
\68\ 5 U.S.C. 804(2) (1996).
\69\ 44 U.S.C. 3506(c)(2)(A) (1995).
\70\ 5 U.S.C. 601 et seq. (1980).
\71\ 2 U.S.C. 1501 et seq. (1995).
\72\ Federalism, 64 FR 43255 (Aug. 10, 1999).
---------------------------------------------------------------------------

Executive Orders 12866 and 13563 direct agencies to assess the
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects; distributive impacts; and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility.
Under Executive Order 12866, ``significant'' regulatory actions are
subject to review by the Office of Management and Budget (OMB). Section
3(f) of the Executive order defines a ``significant regulatory action''
as an action that is likely to result in a rule (1) having an annual
effect on the economy of $100 million or more in any one year, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or state, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating a serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive order. OMB has determined
that this rule is economically significant within the meaning of
section 3(f)(1) of the Executive Order 12866. Therefore, the

[[Page 55228]]

Department has provided an assessment of the potential costs, benefits,
and transfers associated with this proposed rule. OMB has reviewed the
proposal pursuant to the Executive order. Pursuant to the Congressional
Review Act, OMB has designated this proposed rule as a ``major rule,''
as defined by 5 U.S.C. 804(2).
1. Introduction
ERISA plan assets comprise a substantial stake of the shares of
public companies. In 2017, plan assets contained stock holdings of $2.1
trillion, including 28 percent of defined benefit plan assets and 15
percent of defined contribution plan assets.\73\ However, ERISA pension
holdings represent a decreasing share of all corporate equity. ERISA
defined benefit and defined contribution plans held just 5.5 percent of
total corporate equity in 2019, down from a high of 22 percent in
1985.\74\
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\73\ Department estimates are based on Form 5500 annual reports
filed by plans with 100 or more participants. These estimates
include only stocks held directly or through Direct Filing Entities,
not through mutual funds.
\74\ Department calculations based on U.S. Federal Reserve
statistics.
---------------------------------------------------------------------------

Prior to its annual meeting, a publicly traded company sets a
record date and sends out a list of proposals on which shareholders
will vote. A shareholder must hold shares as of the record date in
order to vote at a shareholder meeting. There are two types of
proposals: Management proposals and shareholder proposals. Management
proposals--including director elections, audit firm ratification
proposals, and proposals regarding the company's executive compensation
program (also known as ``say-on-pay'' proposals)--account for 98
percent of proposals and are largely mandated by law or exchange
listing requirements. Over the period 2011 to 2017, shareholder
proposals accounted for about 2 percent of proposals but often were
more controversial and thus received more attention than management
proposals.\75\ Shareholder votes on some proposals, such as director
elections, are binding. Votes on many other proposals, including
shareholder proposals and say-on-pay proposals, are not binding and
serve only as shareholder recommendations for the company's board.\76\
---------------------------------------------------------------------------

\75\ Morris Mitler, Dorothy Donohue & Sean Collins, Proxy Voting
by Registered Investment Companies, 2017, ICI Research Perspective
(July 2019), at 4 (hereinafter ``ICI Proxy Voting Report'').
\76\ Id. at 6; see also 15 U.S.C. 78n-1.
---------------------------------------------------------------------------

As shareholders, ERISA-covered plans have the right to vote on
proposals. Some of these proposals may have an economic impact on a
plan's investment, while others may not. The responsible plan fiduciary
generally must decide whether (and how) to vote the plan's shares on
each proposal. As noted earlier in the preamble, the determination of
whether or not the vote will affect the economic value of a plan's
investment portfolio is critical in triggering a fiduciary's
obligations under ERISA to vote or abstain from voting. For example, if
a shareholder vote approves an economically beneficial transaction, the
value of the plan's investment could increase.\77\ Fiduciaries may need
to conduct an analytical process that could in some cases be resource-
intensive (requiring, among other things, organizing proxy materials,
diligently analyzing portfolio companies and the matters to be voted
on, determining how the votes should be cast, and submitting proxy
votes to be counted), and these activities may often impose burdens on
fiduciaries that are disproportional to any potential economic benefit
to the plan. To address this concern, the Department proposes several
potential options for fiduciaries to consider that are intended to
reduce the need for them to consider proxy votes thereby freeing
resources for fiduciaries to focus on activities most likely to have an
economic impact on the plan's investment. This proposed rule preserves
fiduciaries' role in casting such votes, and includes provisions to
ensure that fiduciaries make proxy voting decisions for the exclusive
purpose of securing net economic benefits for plans and their
participants as ERISA requires.
---------------------------------------------------------------------------

\77\ See Art Durnev & E. Han Kim, To Steal or Not to Steal: Firm
Attributes, Legal Environment, and Valuation, 60 Journal of Finance
1461-1493 (2005); see also Gerald F. Davis & E. Han Kim, Business
Ties and Proxy Voting by Mutual Funds, 85 Journal of Financial
Economics 552-570 (2007).
---------------------------------------------------------------------------

1.1. Need for Regulation
The cost of determining whether or how a responsible fiduciary
should vote a plan's shares on a proposal is generally borne by the
plan. If the proposal has no or negligible implications for the value
of the plan's investment, it would be better for the plan to simply
refrain from voting than to incur even small costs making this
determination. Even if the proposal has substantial implications for
the company, the cost of voting still may be higher than the potential
benefit to the plan, especially if each fiduciary separately must
collect and analyze the information necessary to reach an appropriate
conclusion. The cost may be lower if the fiduciary can rely on an
impartial, expert third-party adviser who specializes in such matters
and provides similar services to many shareholders. Likewise, the cost
may be lower if the fiduciary can rely on recommendations from the
company's management on proposals where the interests of the plan and
management are aligned.\78\
---------------------------------------------------------------------------

\78\ In 2010, TIAA-CREF senior vice president Jonathan Feigelson
noted: ``Though we dedicate a significant amount of resources to
corporate governance research and the voting of proxies, we still
would have difficulty processing the 80,000 plus unique agenda items
voted by our staff annually without utilizing [proxy advisory firm]
research.'' See letter to Elizabeth Murphy, Secretary, Securities
and Exchange Commission, Re: Concept Release on the U.S. Proxy
System, File No. S7-14-10 (Nov. 8, 2010), www.sec.gov/comments/s7-14-10/s71410-263.pdf. In 2017, the average mutual fund voted on
1,500 separate proposals. See ICI Proxy Voting Report, at 5.
Furthermore, institutional investors' incentives to remain informed
and hold specific voting positions varies according to how much the
fund benefits from voting. The more the fund is invested in a
company, the more likely it is to perform independent research on
the proposal. See Peter Iliev & Michelle Lowry, Are Mutual Funds
Active Voters?, 28 Review of Financial Studies.446-85 (2014).
---------------------------------------------------------------------------

The Department has two main concerns. First, the Department is
concerned that responsible plan fiduciaries, in their efforts to decide
whether or how to vote plan shares--and where applicable, to vote
them--and exercise other shareholder rights, may impose costs on plans
that exceed the consequent economic benefits to them. Some stakeholders
believe that fiduciaries must always vote proxies, subject to limited
exceptions, in order to fulfill their obligations under ERISA.\79\
---------------------------------------------------------------------------

\79\ See supra note 12.
---------------------------------------------------------------------------

Second, the Department has reason to believe that responsible
fiduciaries may sometimes rely on third-party advice without taking
sufficient steps to ensure that the advice is impartial and rigorous.
Such action would fall short of ERISA's standards of fiduciary care and
loyalty in the exercise of plans' shareholder rights. Both of these
concerns point to the risk that a plan's proxy voting activity
sometimes will impair rather than benefit participants' economic
interests. The Department's objective in issuing this proposed rule is
to ensure that plan fiduciaries only incur costs to vote proxies and
exercise other shareholder rights that are economically justified. The
Department further seeks to ensure that plans' shareholder rights are
exercised by responsible fiduciaries consistent with ERISA's fiduciary
requirements.
Large ERISA plans and certain financial intermediaries holding
ERISA-covered assets file annual reports with the Department that
include some information on certain fees paid directly to specific
service providers. The

[[Page 55229]]

reported information sheds little light on the costs attendant to
voting proxies or exercising other shareholder rights. The information
omits very small direct payments, direct payments by small plans, and
essentially all indirect payments. The last omission may be
particularly important because plans may delegate asset management,
including proxy voting, to third-party asset managers, who then may
hire proxy advisory firms. In that case, plans' reports would bundle
proxy voting costs, including any proxy advisory fees, into asset
management fees. A preliminary examination of all ERISA plan and
intermediary fee reports identifies just 18 direct payments to one of
the two leading proxy advisory firms, and none to the other. Measured
against the reporting plans' total assets, the 18 reported payments
averaged 0.2 basis points. The reports additionally identify 46
payments to a second service provider known to provide proxy advice,
which averaged 0.2 basis points, and 363 payments to a third, which
averaged 6.3 basis points. It is unclear whether all of these payments
relate to proxy voting, as the service providers may provide other
services as well. Many reported payments to the third service provider
in particular appear likely to be for other types of services in
addition to, or rather than, proxy voting services, because a majority
of the plans reporting such payments also reported having no direct
stock holdings. This may help explain why reported payments to the
third provider are higher than payments to the first two service
providers.
While these reported costs might generally seem small, actual total
proxy voting costs could be substantially higher for some or many
plans, and even small costs may not be justified. As noted above, not
all plan payments to proxy advisory firms are reported. Nearly all of
the reported payments came from multiemployer plans. A large majority
of multiemployer plans and nearly all single-employer plans reported no
payment to any known proxy advisory firm. The magnitude of unreported
costs is unknown. Other costs that are not reported separately are
likely included as part of the fees paid to third-party asset managers
who hire proxy advisory firms and/or do their own research on
proposals. In addition, even small voting costs may somewhat impair
participants' financial interest in their benefits if the votes pertain
to issues that have little or no bearing on share value or are
otherwise immaterial to the plan's financial interest. As stated
earlier, research regarding whether proxy voting has reliable positive
effects on shareholder value generally has yielded mixed results.\80\
The Department invites comments on whether, to what extent, and under
what circumstances plans' proxy votes are likely or unlikely to
increase the value of their shares or otherwise advance their
participants' economic interest.
---------------------------------------------------------------------------

\80\ See supra note 39.
---------------------------------------------------------------------------

The Department's concerns about plans' voting costs sometimes
exceeding attendant benefits has been amplified by the recent increase
in the number of environmental and social shareholder proposals
introduced. It is likely that many of these proposals have little
bearing on share value or other relation to plan interests.\81\ From
2011 through 2017, shareholders submitted 462 environmental proposals
and 841 social shareholder proposals, and resubmitted at least once 41
percent of environmental and 51 percent of social proposals.\82\ These
proposals increasingly call for disclosure, risk assessment, and
oversight, rather than for specific policies or actions, such as
phasing out products or activities.\83\ Support for environmental and
social proposals grew between 2004 and 2018.\84\ Few received majority
support, but the number of environmental proposals winning majority
support ticked up sharply in 2018.\85\ By one count, the number of such
proposals submitted or resubmitted grew from approximately 130 in 2000
to more than 240 by 2016, before falling to approximately 180 in
2018.\86\ The Department is aware, however, that in 2019, the SEC
proposed a rule amendment that could have the effect of reducing the
overall number of shareholder proposals that appear on issuer proxy
statements.\87\
---------------------------------------------------------------------------

\81\ See John G. Matsusaka, Oguzhan Ozbas, & Irene Yi, Can
Shareholder Proposals Hurt Shareholders? Evidence from SEC No-Action
Letter Decisions, U.S.C. CLASS Research Paper No. CLASS17-4 (2019),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2881408, at 25;
Joseph P. Kalt, L. Adel Turki, Kenneth W. Grant, Todd D. Kendall &
David Molin, Political, Social, and Environmental Shareholder
Resolutions: Do They Create or Destroy Shareholder Value?, National
Association of Manufacturers (June 2018), www.shopfloor.org/wp-content/uploads/2018/06/nam_shareholder_resolutions_survey.pdf.
\82\ Procedural Requirements and Resubmission Thresholds Under
Exchange Act Rule 14a-8, 84 FR 66458, 66491 (Dec. 4, 2019) (2019 SEC
Rule 14a-8 Proposal).
\83\ 2019 ISS Proxy Voting Trends.
\84\ 2019 SEC Rule 14a-8 Proposal, 84 FR at 66484; see also 2019
ISS Proxy Voting Trends.
\85\ 2019 SEC Rule 14a-8 Proposal, 84 FR at 66486.
\86\ 2019 ISS Proxy Voting Trends.
\87\ 2019 SEC Rule 14a-8 Proposal.
---------------------------------------------------------------------------

Beyond voting costs, the Department is also concerned that plans
may incur substantially larger costs to exercise shareholder rights
more vigorously, such as by sponsoring or campaigning for shareholder
proposals. Such activities may deliver little or no benefit to plans
because they concern issues that have little bearing on share value or
other plan interests.
The Department invites comments on the degree to which plans are
incurring costs to vote on proposals or exercise other shareholder
rights and how they have balanced those costs against any perceived
duty or requirement to vote proxies. The Department requests comments
on the relative size of the regulatory and deregulatory provisions that
would be associated with this rule.
A number of stakeholders have questioned whether third-party proxy
advice is impartial, sufficiently rigorous, and consistent with ERISA's
fiduciary duties, as would be necessary to reliably advance ERISA
investors' interests. Some question whether proxy advisory firms'
practices are sufficiently transparent for investors to be able to
determine whether their interests are being advanced. Some stakeholders
also question whether the market for proxy advice is too concentrated
and insufficiently competitive, which could impair investors' access to
quality, affordable advice.\88\ Proxy advice that is not rigorous or
not aligned with a plan's interest could lead to a responsible plan
fiduciary voting shares when voting costs exceed any benefit, or when
voting would otherwise run counter to the plan's interest.
---------------------------------------------------------------------------

\88\ See, e.g., Proxy Season 2018: Examining Developments &
Looking Forward, presented by the Center for Capital Markets
Competitiveness and NASDAQ, https://www.centerforcapitalmarkets.com/wp-content/uploads/2018/10/ProxySeasonSurvey_v3_Digital.pdf.
---------------------------------------------------------------------------

The Department notes that the SEC recently amended its rules
governing proxy solicitations to help ensure that investors who use
proxy voting advice receive more accurate, transparent, and complete
information on which to make their voting decisions.'' \89\ In its
economic analysis of its proposal, the SEC stated that proxy advisory
firms can capture economies of scale for several of the services they
provide, including voting advice.\90\
---------------------------------------------------------------------------

\89\ 2019 SEC Proxy Voting Advice Amendments, at 1.
\90\ Id. at 141, 201.
---------------------------------------------------------------------------

The SEC noted that the proxy voting advice industry in the United
States consists of three major firms,\91\ and is

[[Page 55230]]

highly concentrated among the two leading proxy advisory firms,
Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co.,
LLC (Glass Lewis). Clients of proxy advisory firms include investment
advisers, banks, and insurers that may be voting ERISA plan shares.
---------------------------------------------------------------------------

\91\ Id. at 150. In the proposal, the SEC identified two
additional firms which claimed a large number of pension and profit
sharing clients as providing proxy advice, but the SEC subsequently
stated in the final amendments that, based on commenters, these two
additional firms did not advise investment advisers and
institutional investors on their voting determinations and would
therefore not be affected by the amendments. Id. at 150 n. 502. The
SEC indicated that was because they vote on behalf of their clients
rather than providing them with research reports and voting
recommendations. Id. at 30.
---------------------------------------------------------------------------

In proposing its amendments, the SEC described concerns regarding
proxy advisory firms, including the adequacy of disclosure of any
actual or potential conflicts of interest, the accuracy and material
completeness of the information underlying proxy advice, and the
inability of proxy advice clients to receive information and views from
the registrant, potentially contrary to that presented in the advice,
in a manner that is consistently timely and efficient.\92\ Moreover,
with respect to a small fraction of proposals, some commenters have
asserted that proxy advisory firms have made factual and/or analytic
errors in additional definitive proxy materials.\93\ Such shortcomings
make it more difficult for a responsible ERISA fiduciary to rely on a
proxy advisory firm's recommendations. A fiduciary who does so rely
could risk violating ERISA's fiduciary requirements.
---------------------------------------------------------------------------

\92\ Amendments to Exemptions from the Proxy Rules for Proxy
Voting Advice, 84 FR 66518, 66525 (Dec. 4, 2019). Id. at 66525.
\93\ Id. at 66545-46.
---------------------------------------------------------------------------

Critics additionally complain that proxy advisory firms sometimes
inappropriately provide the same recommendations to investors with
different duties or obligations. Uniform voting policies for clients
with different investment strategies and objectives have also been
noted as a problem. Such a concern recently led the SEC to state that
``where an investment adviser undertakes proxy voting responsibilities
on behalf of multiple funds, pooled investment vehicles, or other
clients, it should consider whether it should have different voting
policies for some or all of these different funds, vehicles, or other
clients, depending on the investment strategy and objectives of each.''
\94\
---------------------------------------------------------------------------

\94\ 2019 SEC Guidance, 84 FR at 47423.
---------------------------------------------------------------------------

The Department has tried to convey in its prior sub-regulatory
guidance that fiduciaries need not vote all proxies. A fiduciary's duty
is to vote those proxies that are prudently determined to have an
economic impact on the plan after the costs of research and voting are
taken into account. Nevertheless, a misunderstanding that fiduciaries
must research and vote all proxies continues to persist, causing some
plans to expend their assets unnecessarily on matters not economically
relevant to the plan. Accordingly, this proposed rule is necessary to
interpret ERISA and expressly state that fiduciaries must not vote in
circumstances where plan assets would be expended on shareholder
engagement activities that do not have an economic impact on the plan,
whether by themselves or after the costs of engagement are taken into
account. The Department believes that addressing these issues in the
form of a notice and comment regulation will help safeguard the
interests of participants and beneficiaries in their plan benefits.
1.2. Affected Entities
This proposal would affect ERISA-covered pension, health, and other
welfare plans that hold shares of corporate stock. It would affect
plans with respect to stocks they hold directly, as well as with
respect to stocks they hold through ERISA-covered intermediaries, such
as common trusts, master trusts, pooled separate accounts, and 103-12
investment entities. The proposal would not affect plans with respect
to stock held through registered investment companies, because the
proposal does not apply to such funds' internal management of such
underlying investments.
ERISA-covered plans with 100 or more participants (large plans)
annually report data on their stock holdings on Form 5500 Schedule H
(see Table 1). Approximately 29,000 defined contribution plans and
5,500 defined benefit plans, with approximately 86 million
participants, hold either common stocks or employer stocks, totaling
approximately $2.1 trillion. Common stocks constitute about 20 percent
of total assets of those plans holding common stock but not employer
securities. Out of the 29,000 plans that hold common stock, but not
employer securities, about 24,000 plans hold common stock through an
ERISA-covered intermediary and approximately 3,700 plans hold common
stock directly. A smaller number of plans hold stock both directly and
indirectly.\95\ In addition to the large pension plans, approximately
619,000 small pension plans hold assets and may invest in stock.\96\
Additionally 597 health and other welfare plans file the schedule H and
report holding either common stocks or employer stocks. The Department
solicits comments regarding the number of plans that exercise
shareholder rights and thus would be affected by this proposal.
---------------------------------------------------------------------------

\95\ DOL estimates from the 2017 Form 5500 Pension Research
Files.
\96\ The Form 5500 does not require these plans to categorize
the assets as common stock, so the Department does not know if they
hold stock.

Table 1--Number of Pension Plans Holding Common Stocks or Employer Stocks by Type of Plan, 2017 a
----------------------------------------------------------------------------------------------------------------
Defined Defined
benefit contribution Total plans
----------------------------------------------------------------------------------------------------------------
Common Stock
Direct Holdings............................................. 1,460 2,241 3,701
Indirect Holdings........................................... 3,035 20,701 23,736
Direct and Indirect Holdings................................ 982 664 1,646
-----------------------------------------------
Total................................................... 5,476 23,606 29,082
Employer Securities............................................. .............. 6,457 6,457
Common Stock and Employer Securities............................ .............. 634 634
-----------------------------------------------
Total Plans Holding Stocks.................................. 5,476 29,430 34,906
----------------------------------------------------------------------------------------------------------------
\a\ DOL calculations from the 2017 Form 5500 Pension Research Files.

[[Page 55231]]

While this proposal would directly affect ERISA-covered plans that
possess the relevant shareholder rights, the activities covered under
the proposal would be carried out by responsible fiduciaries on plans'
behalf. Many plans hire asset managers to carry out fiduciary asset
management functions, including proxy voting. In 2017, large ERISA
plans reportedly used approximately 18,000 different service providers,
some of whom provide services related to the exercise of plans'
shareholder rights. Such service providers include trustees, trust
companies, banks, investment advisers, and investment managers.\97\
---------------------------------------------------------------------------

\97\ DOL estimates from the 2017 Form 5500 Schedule C.
---------------------------------------------------------------------------

In addition, this proposal would indirectly affect proxy advisory
firms. ERISA plans' demand for proxy advice might decline if
fiduciaries refrain from voting shares under the provisions of this
proposal or under proxy voting policies adopted pursuant to paragraph
(e)(3)(iii). Plan fiduciaries may want customized recommendations about
which particular proxy proposals would have an economic impact on their
particular plan and how they should cast their vote. Plans' preferences
for proxy advice services could shift to prioritize services offering
more rigorous and impartial recommendations. These effects may be more
muted, however, if the SEC rule amendments enhance the transparency,
accuracy, and completeness of the information provided to clients of
proxy voting firms in connection with proxy voting decisions.
1.3. Benefits
This proposed rule would benefit plans by providing improved
guidance regarding how ERISA's fiduciary duties apply to proxy voting.
As discussed above, sub-regulatory guidance that the Department has
issued over the years may have led to a misunderstanding among some
that fiduciaries are required to vote on all proxies presented to them.
This misunderstanding may lead some plans to expend plan assets
unnecessarily to research and vote on proxy proposals not likely to
have a material impact on the value of the plan's investments. The
proposed rule is intended to eliminate that confusion and ensure ERISA
fiduciaries execute shareholder rights in an appropriate and cost-
efficient manner. The proposal clarifies the duties of fiduciaries in
regard to proxy voting and the monitoring of proxy advisory firms. Plan
fiduciaries would be better able to conserve plan assets by having
clear direction and permitted practices to refrain from researching and
voting on proposals that they prudently determine have no economic
impact on the value of the plan's investment. When votes are cast on
behalf of plans, they would more frequently advance plans' economic
interests. Cost savings and other benefits to plans would flow to plan
participants and beneficiaries and plan sponsors.
The proposed rule would replace existing guidance on fiduciary
responsibilities for exercising shareholders' rights. The proposed rule
provides more certainty than sub-regulatory guidance and is subject to
public notice and comment. And unlike guidance, a substantive
regulation sets forth binding requirements.
The proposed regulation could increase the investment return on
plan assets by specifying when plan fiduciaries should or should not
exercise their shareholder rights to vote proxies. The proposal also
requires fiduciaries to maintain records on proxy voting activities and
other exercises of shareholder rights, including records demonstrating
the basis for particular proxy votes and other exercises of shareholder
rights. Plan fiduciaries are responsible for maximizing the economic
benefits to the plan, including in their management of proxy voting
rights, which may require voting proxies or declining to vote them. If
the cost of obtaining information that informs the vote exceeds the
likely economic benefits to the plan of voting, then fiduciaries should
not vote. This course of action will save resources and increase
societal benefits.
Another benefit of the rule is it allows plan fiduciaries and asset
managers to focus on where they can add value the most. The rule allows
plan fiduciaries to determine if diverting resources away from proxy
voting and into researching new investment opportunities presents a
better use of time and resources to increase value. They can then act
on this decision and bring added value to the plan and its participants
and beneficiaries. To the extent that the proposed regulation increases
the investment return on plan assets, it would broaden participants'
and beneficiaries' retirement security, thereby strengthening a central
purpose of ERISA. For the plans and participants that would be affected
by the proposed rule, the benefits they would experience from higher
investment returns, compounded over many years, could be considerable.
The Department seeks information that could be used to quantify the
increase in investment returns.
The societal resources freed for other uses due to voting fewer
proxies (minus potential upfront transition costs) would represent
benefits of the rule; in other words, the increased returns would be
associated with investments generating higher pre-fee returns, which
means the higher returns qualify as benefits of the rule. However, to
the extent that there are any externalities, public goods, or other
market failures, those might generate costs to society on an ongoing
basis. For example, a fiduciary may vote for a proposal on a corporate
merger or acquisition transaction to maximize shareholder value even
though implementation of the proposal would bring about impacts in an
affected geographic area that would be adverse for local businesses or
residents. Finally, some portion of the increased returns would be
associated with transactions in which there is an opposite party
experiencing a decreased return of equal magnitude. This portion of the
rule's impact would, from a society-wide perspective, be appropriately
categorized as a transfer, and is discussed further below (though it
should be noted that, if there is evidence of wealth differing across
the transaction parties, it would have implications for marginal
utility of the assets).
The proposal's provisions establish certain ``permitted practices''
that allow plans to prudently adopt proxy voting policies to guide
their proxy voting decisions. These permitted practices would assist
plan fiduciaries in carrying out their duties under paragraphs
(e)(3)(i) and (ii) in a cost-effective manner that preserves plan
resources. The Department anticipates that plans would derive savings
from the proposal's ``permitted practices'' provisions. The proposed
permitted practices are designed to provide clear examples of proxy
voting policies that a fiduciary may determine are prudent. The
expenditure of plan resources is generally warranted only when
proposals have a meaningful bearing on share value or when plan
fiduciaries have determined that the interests of the plan are unlikely
to be aligned with the positions of a company's management. In general,
such proposals include those that are substantially related to the
company's business activities or that relate to corporate events
(mergers and acquisitions transactions, dissolutions, conversions, or
consolidations), corporate repurchases of shares (buy-backs), issuances
of additional securities with dilutive effects on shareholders, and
contested elections for directors, where plans' exposure to the stock
is

[[Page 55232]]

sufficiently large to justify the expenditure.
The proposal also emphasizes that plan resources may not be
expended in circumstances where the fiduciary prudently determines that
a proxy vote would not affect the economic value of the plan's
investment. The Department also believes that the expenditure of plan
resources to decide whether and how to vote on other proposals that are
unlikely to have an impact on a plan's economic value may be
unwarranted and, given the particular facts and circumstances, could
constitute a fiduciary breach. The Department invites comments on this
view, including any examples of proposals that could fall under the
proposed permitted practices but for which such expenditures to vote
would be justified and consistent with ERISA's fiduciary requirements.
The Department also invites comments on whether the proposed rule,
if finalized, would enable plans to retain proxy advisory firms at
lower cost or with more attractive fee arrangements, since a much
narrower range of responsibilities might be encompassed, and on whether
the proposed rule would lead to new, narrower advisory engagements or
new services.
1.4. Costs
The proposal includes requirements that a responsible fiduciary
must satisfy when exercising a plan's shareholder rights appurtenant to
specific security holdings or monitoring third parties providing proxy
advice. It requires a responsible fiduciary to determine that the
exercise of shareholder rights advances the plan's economic interest,
investigate the basis for voting on proposals, and maintain records
showing the basis of their decisions. The proposal also requires a
fiduciary to require an investment manager and proxy adviser to
document their decisions and recommendations.
The Department believes that the incremental costs of these
provisions will be small on a per plan basis because the Department
anticipates that most, if not all plans, will adopt policies that
utilize the permitted practices and the activities described in the
proposal already are reflected in common practice and are best
practices. If plan fiduciaries choose not to use any of the permitted
practices, the costs of the proposed rule, including determining
whether each proxy vote will have an economic impact, may be
significantly greater While the Department believes responsible plan
fiduciaries would spend some time familiarizing themselves with the
rule, it expects that these costs would be minimal. The Department
requests comments and data it could use to quantify such costs.
The Department's IB 2008-02 guidance addressed ``the exercise of
shareholder rights'' explaining that ``the duty to monitor necessitates
proper documentation.'' \98\ Its 2008 guidance on economically targeted
investing likewise explained that a written record of the basis for
economically targeted investment decisions may be necessary to
demonstrate compliance with ERISA.\99\ The Department acknowledges,
however, that such practices are not universal. In the course of its
enforcement activity, the Department sometimes encounters instances
where documentation is absent or does not meet the requirements of this
proposal. Accordingly, the Department invites comments addressing to
what degree existing practices already satisfy these proposed
requirements and what the cost would be to fully satisfy them. The
Department additionally believes that the availability of economies of
scale limit the costs of this proposal. The Department understands that
under the proposal, most of the relevant fiduciary duties will reside
with, and most of the required activities will be performed by, third-
party asset managers, as is already common practice. Such asset
managers are often large and provide the relevant fiduciary services
for a large number of plans. The Department invites comments on the
assignment of the responsibilities under this proposal and the degree
to which economies of scale might limit the proposal's costs. Costs for
maintaining the required documentation are discussed in the Paperwork
Reduction Act section of this document.
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\98\ 29 CFR 2509.08-2 (2010).
\99\ 29 CFR 2509.08-1 (2010).
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As noted earlier, this proposal's permitted practices and other
provisions would eliminate or reduce plans' costs for voting on many
proposals, because plans would not vote on proposals the responsible
plan fiduciary has determined are not economically relevant to the
plan. The Department generally does not expect this proposal to change
the costs associated with plans' remaining voting activity. Provisions
requiring responsible fiduciaries to monitor and document voting
policies and activities would generally be satisfied by current best
practices that satisfy earlier Department guidance. Neither does the
Department expect plans to incur substantial costs from proxy advisory
firms' potential efforts to help fiduciaries meet this proposal's
requirements. If they do not already meet the standards detailed in the
proposed regulation, plans that currently exercise shareholder rights,
including proxy voting activities, would now incur the costs associated
with deciding whether to exercise shareholder rights pursuant to this
proposal.
It is possible that proxy advisory firms would take steps to avoid
or mitigate conflicts of interest, strengthen factual and analytic
rigor, better match their research and recommendations with ERISA
plans' interests, or increase transparency. The Department notes,
however, that proxy advisory firms are likely to take at least some of
these steps in response to recent SEC policy initiatives and spread
their related costs across all of their clients, not just ERISA
plans.\100\ At the same time, the proposed rule may reduce plans'
demand for proxy advice. However, this reduction in demand is
beneficial to plans as they previously were purchasing more advice than
they would have chosen to, due to their misinterpretation that they
were required to vote all proxies. This reduced demand will lower the
market price and the amount of advice purchased. Consequently, any
compliance costs passed on from proxy advisory firms to ERISA plans are
likely to be at least partially offset by plans' cost savings from
purchasing a smaller amount of advice. It should be noted that proxy
advisory firms will see a reduction in revenues as a result of the
decreased demand for their services. In addition, proxy advisory firms'
efforts to satisfy any SEC requirements might ease responsible
fiduciaries' efforts to comply with this proposal. For example, it may
be easier to monitor proxy advisory firms if those firms provide
additional disclosure about their conflicts of interest and their
policies and procedures to address such conflicts.
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\100\ The SEC's rule amendments require proxy advisory firms
engaged in a solicitation to provide conflicts of interest
disclosure, to adopt and publicly disclose policies and procedures
designed to ensure that the company subject of the proxy voting
advice has such advice made available to it at or prior to the time
the advice is disseminated, and to provide a mechanism by which its
clients can become aware of any written statements by the company in
response to the proxy advice. The SEC also modified its proxy
solicitation antifraud rule to specifically include material
information about the proxy advisor's methodology, sources of
information, or conflicts of interest, as examples of when the
failure to disclose could, depending upon the particular facts and
circumstances, be considered misleading. See 2020 SEC Proxy Voting
Advice Amendments, at 242-246.

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[[Page 55233]]

1.5. Transfers
Proxy advisory firms that respond best to this proposal will likely
gain a relative competitive advantage. Firms that limit or eliminate
conflicts of interest and modify their services to better align with
the guidance of these proposed regulations could gain market share
relative to firms that do not. Firms that are willing to tailor their
voting guidelines, strategies, and costs according to each plan's
investment guidelines could gain market share relative to firms that do
not.
Moreover, as noted previously, if some portion of rule-induced
increases in returns would be associated with transactions in which the
opposite party experiences decreased returns of equal magnitude, then
this portion of the proposed rule's impact would, from a society-wide
perspective, be appropriately categorized as a transfer.
1.6. Regulatory Alternatives
The Department considered a purely principles-based approach that
would not have included the permitted practices in paragraph
(e)(3)(iii). However, for the reasons described above, the Department
believes that clearly articulating examples of permitted proxy voting
policies would be helpful to plan fiduciaries and ultimately beneficial
to plan participants and beneficiaries. A purely principles-based
approach could result in a responsible fiduciary, for each individual
proxy proposal, having to determine whether to vote. This determination
process could consume significant plan resources, even where the
potential economic benefit to the plan is small or difficult to
determine. A responsible fiduciary might arrive at his or her own
policies for simply not voting, or voting in a specific manner on
certain types of proposals, based on the plan's limited exposure to a
stock or the economic immateriality of the matter being voted upon.
However, under a principles-based approach fiduciaries would likely be
cautious about adopting such policies, and might believe it prudent to
be able to demonstrate in each case why a decision was made not to
vote, and therefore err on the side of devoting excessive resources to
voting decisions. The Department invites comment on the inclusion of
permitted practices and their usefulness in aiding a fiduciary's
determination of whether to vote.
The Department also considered including a specific numeric cap for
the materiality permitted practice in paragraph (e)(3)(iii)(C), but
opted not to do so until it has the opportunity to review the comments
solicited earlier in this preamble on this question. The Department
similarly invites comments here on those issues for purposes of this
regulatory impact analysis.
The Department also invites comments generally on its choice of
permitted practices, including whether any should not be retained and
whether any other practices should be added.
1.7. Uncertainty
The Department's economic assessment of this proposal's effects is
subject to uncertainty. The Department invites comments that can more
fully inform its assessment.
Cost Savings--As noted earlier, the Department currently lacks
complete data on plans' exercise of their shareholder rights
appurtenant to their stock holdings, including proxy voting activities,
and on the attendant costs and benefits. The Department invites
comments that illuminate these activities, including their costs and
benefits, as well as comments regarding how this proposal would change
these activities.
In light of the uncertainty regarding the proxy voting activities
of ERISA plans, and the attendant costs and benefits of this proposal,
the Department presents an illustration below of an analytical approach
to evaluating the possible impacts of this notice of proposed
rulemaking (NPRM). Details on the estimated impacts of this proposed
rule are presented in a supplemental illustrative analysis in Appendix
A. This illustration is a part of the Department's solicitation of
comments on an appropriate methodology and assumptions for evaluating
the costs and savings that could result from the rule. The analytical
model assumes that proxies are primarily voted by asset managers or
other service providers. The Department also assumes that the proposed
rule may require some plans or service providers to expend more effort
researching whether a proxy vote will have a relevant economic impact
on the plan and how the plan should vote in cases in which the proposal
has such an economic impact. Service providers, plans, or both, may
also need to provide more documentation of their decisions than they
already produce. Additionally, plans may take advantage of the
permitted practices described in the proposal that allow them to
conserve plan assets, because they may not need to conduct as extensive
an amount of research or expend as much time on documenting decisions.
In this illustration, the Department estimates that each service
provider will vote 9.3 times, on average, per stock.\101\ If there are
1,988 service providers impacted by the rule's requirements,\102\ and
8,020 stocks voted annually per service provider, then the Department
estimates that those entities take a cumulative total of 148,276,968
annual stock votes.\103\ As discussed previously, some stocks may fall
within the permitted practice provisions of the rule and would be less
burdensome to research and document. The Department assumes that 5.6
percent of all proxy votes could fall outside the permitted practices
and would still need to be researched, voted, and documented under the
proposal.\104\ For votes falling within the permitted practices, on
average the Department estimates that responsible plan fiduciaries
would take 30 minutes to conduct research and 10 minutes to document
each vote at a total cost of $435,042,756.\105\ For votes falling
outside the permitted practices, the Department estimates two hours of
research and 20 minutes to document each vote at a total cost of
$100,175,208. Under this illustrative analysis, the total costs of a
hypothetical alternative to the proposed rule, for increases in
research and documentation costs, excluding cost savings that could
occur if the permitted practices are used, could reach $535,217,964.
The cost savings from the permitted practices are discussed later.
However, the Department fully expects that most of these potential
costs will not be realized, because plans will use the permitted
practices to avoid incurring them. The Department requests comments on
the assumptions and underlying data used to reach this illustrative
estimate.
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\101\ Investment Company Institute. ``Proxy Voting by Registered
Investment Companies, 2017.'' Vol 25, No. 5. July 2019. See endnote
15. https://www.ici.org/pdf/per25-05.pdf.
\102\ Estimate based on the number of clients for the three
largest proxy advisory firms.
\103\ Based on 4,684 domestic stocks and 3,336 foreign stocks,
1,988 service providers, and an estimate of 9.3 votes per stock for
each service provider.
\104\ Investment Company Institute. ``Proxy Voting by Registered
Investment Companies, 2017.'' Vol 25, No. 5. July 2019. See Figures
2 and 3. https://www.ici.org/pdf/per25-05.pdf. We developed this
assumption by looking at the ICI data from 2011 to 2017 on the
percentage of total proxy proposals that related to mergers,
acquisitions n, dissolution, conversions, consolidation, corporate
repurchase of shares, issuance of additional securities, and
contested elections for directors.
\105\ Research labor rate of $116.96/hr and documentation rate
of $110.39/hr.
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[[Page 55234]]

share of plans that do not currently meet such standards. To illustrate
the potential burden for firms whose practices are inconsistent with
the proposed standards, DOL assumes that research costs will increase
by 5% and that documentation costs will increase by 1%. The Department
requests data that could be used to estimate the share of plans that do
not currently meet such standards.
To illustrate potential cost savings from responsible plan
fiduciaries using the permitted practices, the Department notes that
responsible plan fiduciaries do not have to vote proxies that fall
within the permitted practices, which could save at least some of the
costs associated with research and documentation. The Department
intends that the permitted practices will impact a large share of all
proxy votes and the burden associated with these votes when using the
permitted practices will likely be very low. By way of illustration, if
under permitted practices 10 percent of proxy votes are no longer voted
and responsible plan fiduciaries therefore did not incur research and
documentation costs, the total cost savings could exceed $1
billion.\106\
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\106\ $800m in cost savings due to a reduction in research costs
(10 percent permitted practice cost savings x 0.5 hours x
139,973,458 votes x $116.96 per hour = $818,582,278) and $250m in
cost savings due to a reduction in documentation costs (10 percent
permitted practice cost savings x 0.167 hours x 139,973,458 votes x
$110.39 per hour = $257,516,169). Instead of thinking about this as
a reduction in actual votes, it can also be viewed as a 10 percent
reduction in costs if votes are still cast pursuant to the permitted
practices that allow voting but reduce burden, such as paragraph
(e)(3)(iii)(A) of the proposal, which would allow fiduciaries to
adopt a policy to vote proxies in accordance with the voting
recommendations of corporate management.
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Demand for New Services--The Department also invites comments
regarding whether this proposal, if finalized, would create a demand
for new services, and if so, what alternate services or relationships
with service providers might result and how overall plan expenses could
be impacted.
Other Securities--This proposal generally would govern plans'
exercise of shareholder rights appurtenant to their stock holdings of
individual companies, but not to their holdings of other securities.
The Department cannot determine whether some plans nonetheless would
modify their practices with respect to other securities because of this
proposal. As noted earlier, ERISA pensions held just 5.5 percent of
total corporate equity in 2019, down from a high of 22 percent in 1985.
Mutual funds, in contrast, held 22 percent of all corporate equity in
2019, up from 6 percent in 1985.\107\ As ERISA-covered pensions have
shifted from defined benefit to defined contribution plans, both the
proportion of pension assets invested in mutual funds and the
proportion of all mutual fund shares owned by pensions have increased
dramatically. In 2019, ERISA-covered pensions held 25 percent of all
mutual fund shares, up from 8 percent in 1985. ERISA would apply to any
proxy votes for mutual fund shares and shares of other funds registered
with the SEC for which the plan fiduciary is responsible. ERISA does
not govern the management of the portfolio internal to a fund
registered with the SEC, including such fund's exercise of its
shareholder rights appurtenant to the portfolio of stocks it holds,
though ERISA would apply to similar funds organized as collective
investment trusts. The Department invites comments as to whether or how
this proposal might influence plans' exercise of shareholder rights for
SEC-registered funds, or their selection of such funds as plan
investments, as well as comments on the costs and benefits associated
with any such influence, such as impacts on the ability to achieve a
quorum at shareholder meetings of such funds.
---------------------------------------------------------------------------

\107\ Department calculations based on U.S. Federal Reserve
statistics.
---------------------------------------------------------------------------

Operation of Permitted Practices--The permitted practices
provisions in paragraph (e)(3)(iii) would deliver benefits by relieving
plans from much of the cost of deciding whether and how to vote
proxies. Responsible fiduciaries might be inclined to use the permitted
practices as expansively as possible, to conserve plan assets or even
in some cases in an effort to reduce possible exposure to fiduciary
liability when exercising shareholder rights. However, a responsible
fiduciary may use them less expansively if for practical reasons it is
operationally more efficient to do so, or if the fiduciary identifies
an opportunity to advance the plan's economic interest by voting on a
proposal that falls within the permitted practices. Accordingly, the
Department invites comments on the optimal operation of the permitted
practices provisions.
Fiduciaries would still be required to vote shares in situations
not encompassed by proxy voting policies adopted pursuant to the
permitted practices provisions of paragraph (e)(3)(iii) if they
prudently determine that the matter being voted upon would have an
economic impact on the plan. For instance, the Department believes that
voting the shares of plan holdings that comprise a small portion of
total plan assets rarely advances plans' economic interests, but
invites comments on whether or under what circumstances such voting
might do so. For example, might this sometimes be the case for large
plans and asset managers for whom even a small threshold of total plan
assets would represent a large financial stake in dollar terms that
might justify the cost of deciding whether and how to vote? As an
illustration, a five-percent threshold for a pension plan with more
than $1 billion in assets would be more than $50 million. In 2017,
there were 1,391 plans with more than $1 billion in assets each. These
plans together represented just 0.2 percent of all pension plans, but
held $5.3 trillion in assets, representing more than one-half of ERISA-
covered pension assets.
More generally, the Department solicits comments on whether the
permitted practices included in this proposal might produce unintended
costs by discouraging responsible fiduciaries from voting shares when
voting may be economically beneficial.
Non-ERISA Investors--Many asset managers serve both ERISA plans and
other investors. The Department invites comments as to whether any such
asset managers currently follow uniform proxy policies for both, and
vote shares uniformly for both. The Department believes such uniform
voting for ERISA and non-ERISA clients may sometimes jeopardize
responsible fiduciaries' satisfaction of their duties under ERISA.
However, as noted earlier in the preamble, this concern may be
mitigated in the case of investment managers subject to the SEC's
jurisdiction by the fact that federal securities law requires
investment advisers to make the determination in their client's best
interest and not to place the investment adviser's own interests ahead
of their client's.\108\ Where an SEC registered

[[Page 55235]]

investment adviser has assumed the authority to vote on behalf of its
client, the SEC would require the investment adviser, among other
things, must have a reasonable understanding of the client's objectives
and must make voting determinations that are in their best interest.
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\108\ See Commission Interpretation Regarding Standard of
Conduct for Investment Advisers, 84 FR 33669, 33673 (July 12, 2019)
(discussing an adviser's obligation to make a reasonable inquiry
into its client's financial situation, level of financial
sophistication, investment experience and financial goals and have a
reasonable belief that the advice it provides is in the best
interest of the client based on the client's objectives); Commission
Guidance Regarding Proxy Voting Responsibilities of Investment
Advisers, Release No. IA-5325 (Aug. 21, 2019) (82 FR 47420 (Sep. 10,
2019) (clarifying investment advisers' duties when voting
shareholder proxies). See also Rule 206(4)-6 under the Investment
Advisers Act of 1940, 17 CFR 275.206(4)-6 (Under rule 206(4)-6, it
is a fraudulent, deceptive, or manipulative act, practice or course
of business within the meaning of section 206(4) of the Investment
Advisers Act for an investment adviser to exercise voting authority
with respect to client securities, unless the adviser (i) has
adopted and implemented written policies and procedures that are
reasonably designed to ensure that the adviser votes proxies in the
best interest of its clients, which procedures must include how the
investment adviser addresses material conflicts that may arise
between the adviser's interests and interests of their clients; (ii)
discloses to clients how they may obtain information from the
investment adviser about how the adviser voted with respect to their
securities; and (iii) describes to clients the investment adviser's
proxy voting policies and procedures and, upon request, furnishes a
copy of the policies and procedures to the requesting client.
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Under this proposed rule, responsible fiduciaries might increase
their demands for asset managers to implement separate policies
customized for particular ERISA plans or for ERISA plans generally,
such as policies that align with the proposed permitted practices in
paragraph (e)(3)(iii). The Department invites comments on the degree to
which such customized policies by asset managers could benefit ERISA
plans or increase plan costs.
Asset Allocation--This proposal could exert influence on a plan's
asset allocation. For example, the quantitative threshold provision in
paragraph (e)(3)(iii)(C) would permit responsible fiduciaries, after
prudently considering the relevant factors, to adopt proxy voting
policies allowing them to refrain from voting shares when the plan's
holding in a single issuer is sufficiently small relative to the plan's
total investment that the outcome of the vote is unlikely to have a
material impact on the investment performance of the plan's portfolio.
This provision might produce additional economic benefits by promoting
fuller and more optimal diversification where it may otherwise have
been lacking. That is, the quantitative threshold could prompt a
fiduciary to diversify what otherwise would have been a concentration
of more than the specified threshold amount of a plan's portfolio in a
single stock. The Department invites comments on this possibility.
Vote Categories -- Proxy votes can be tallied in four ways: For,
against/withhold, abstain, and not voted. The vast majority of
outstanding shares are held in ``street name'' by intermediaries, such
as broker-dealers. Broker-dealers may have discretionary authority to
vote proxies without receiving voting instructions from the owner of
the shares for routine and noncontroversial matters, such as the
ratification of a company's independent auditors. For matters in which
a broker-dealer does not have discretionary authority to vote, a broker
non-vote is required. For matters that require approval of a majority
of shares present and voting, abstentions (which are cast neither for
nor against a proposal) and broker non-votes are not counted in the
final tally. For matters that require approval of a majority of the
shares issued and outstanding, abstentions or broker-non votes are
treated as votes against the proposal. If an investor is unsure about a
matter or unsure whether her interests and management's interests are
aligned, the investor arguably should abstain. The Department requests
comments on how often this alignment of interests might occur, and on
whether additional direction on voting, such as on the distinction
between not voting and abstaining, would be beneficial to fiduciaries.
1.8. Conclusion
The proposed rule would benefit ERISA-covered plans, as it provides
guidance regarding how ERISA's fiduciary duties apply to proxy voting
and in particular when fiduciaries should refrain from voting. Plan
fiduciaries will be able to conserve plan assets as they refrain from
researching and voting on proposals that are unlikely to economically
impact the plan, and thereby increase the return on plan assets. The
Department believes that the benefits of the proposal would justify its
costs, but also invites comments on this question.
2. Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department conducts a preclearance consultation program to
allow the general public and federal agencies to comment on proposed
and continuing collections of information in accordance with the
Paperwork Reduction Act of 1995 (PRA).\109\ This helps to ensure that
the public understands the Department's collection instructions,
respondents can provide the requested data in the desired format,
reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the Department can
properly assess the impact of collection requirements on respondents.
---------------------------------------------------------------------------

\109\ 44 U.S.C. 3506(c)(2)(A) (1995).
---------------------------------------------------------------------------

Currently, the Department is soliciting comments concerning the
proposed information collection request (ICR) included in the Fiduciary
Duties Regarding Proxy Voting and Shareholder Rights ICR. To obtain a
copy of the ICR, contact the PRA addressee shown below or go to
www.RegInfo.gov.
The Department has submitted a copy of the proposed rule to the
Office of Management and Budget (OMB) in accordance with 44 U.S.C.
3507(d) for review of its information collections. The Department and
OMB are particularly interested in comments that:
Evaluate whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronic submission of responses).
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503 and marked ``Attention: Desk
Officer for the Employee Benefits Security Administration.'' Comments
can also be submitted by fax at (202) 395-5806 (this is not a toll-free
number), or by email: [email protected]. OMB requests that
comments are received within 30 days of publication of the proposed
rule to ensure their consideration.
PRA Addresses: Address requests for copies of the ICR to G.
Christopher Cosby, Office of Policy and Research, U.S. Department of
Labor, Employee Benefits Security Administration, 200 Constitution
Avenue NW, Room N-5718, Washington, DC 20210. The PRA Addressee may be
reached by telephone at (202) 693-8410 or by fax at (202) 219-5333.
These are not toll-free numbers. ICRs also are available at
www.RegInfo.gov (www.RegInfo.gov/public/do/PRAMain).
It has long been the view of the Department that the duty to
monitor necessitates proper documentation of the activities that are
subject to monitoring.\110\ Accordingly, the

[[Page 55236]]

Department's proposal requires that plan fiduciaries maintain records
on proxy voting activities and other exercises of shareholder rights,
including records that demonstrate the basis for particular proxy votes
and exercises of shareholder rights. This requirement applies to all
pension plans with investments, including those that have shareholder
rights and proxy votes that may need to be exercised. Fiduciaries'
proxy voting decisions may only involve consideration of those factors
economically relevant to the plan.
---------------------------------------------------------------------------

\110\ 29 CFR 2509.08-2 (2010).
---------------------------------------------------------------------------

Plan fiduciaries that have followed prior guidance, or good
business practices, are already performing much if not all of the
recordkeeping actions the proposal would require. While the incremental
burden of the proposal is generally small, perhaps even de minimis, the
full burden of the requirements will be included below to allow for
full evaluation of the requirements in the information collection.
According to the most recent Form 5500 data there are 709,527
pension plans (90,604 large plans and 618,923 small plans) and 8,475
health or welfare plans (5,626 large plans filing a schedule H, and
2,849 small plans filing a schedule I).\111\ While the Schedule H
collects information on a plan's stock holdings, Schedule I lacks the
specificity to determine if small plans hold stocks. As shown in Table
1, 34,906 pension plans hold stocks and would have shareholder rights
they may need to exercise. Additionally, 597 health and other welfare
plans file the schedule H and report holding either common stocks or
employer stocks. The Department lacks information on the number of
small plans that hold stock. Small plans are significantly less likely
to hold stock than larger plans. For purposes of estimating the burden,
five percent of small plans are presumed to hold stock resulting in
30,946 small plans needing to comply with the information collection.
Therefore, a total of 66,649 plans will need to comply with this
information collection.
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\111\ EBSA estimates using 2017 Form 5500 filing data.
---------------------------------------------------------------------------

2.1. Maintain Documentation
The proposed rule requires that the named plan fiduciary must
maintain records on proxy voting activities and other exercises of
shareholder rights, including records that demonstrate the basis for
particular proxy votes and exercises of shareholder rights. Where the
authority to vote proxies or exercise shareholder rights has been
delegated to an investment manager pursuant to ERISA section 403(a)(2),
or a proxy voting firm or another person performs advisory services as
to the voting of proxies, plan fiduciaries must require such investment
manager, proxy voting firm or other person to document the rationale
for proxy voting decisions or recommendations. This is required of all
plans with investments and includes plans that may exercise shareholder
rights.
Much of the information needed to fulfill this requirement is
generated in the normal course of business. Plans may need additional
time to maintain the proper documentation, but this burden is likely to
be reduced by the adoption of policies by plan fiduciaries that
incorporate one or more of the proposed rule's permitted practices. The
Department estimates that plan fiduciaries or investment managers will
require a half hour annually and a half hour of help from clerical
staff to maintain or document the required information. This is likely
an overestimate, because many, if not most, plans use investment
managers. These investment managers provide similar services for many
plans. This results in an annual cost burden estimate of
$6,291,078.\112\
---------------------------------------------------------------------------

\112\ The burden is estimated as follows: 66,449 plans * 0.5
hours = 33,224.6 hours for both a plan fiduciary and clerical staff.
A labor rate of $134.21 is used for a plan fiduciary and a labor
rate of $55.14 for clerical staff (33,224.6 * $134.21 = $4,459,074
and 33,224.6 * $55.14 = $1,832,004).
---------------------------------------------------------------------------

As a note, included in the uncertainty section of the regulatory
impact analysis above is a model that seeks to quantify the costs and
cost savings of the rule. It provides an alternative estimate of the
documentation costs. Depending on comments received on the model, the
Department could revise the burden associated with this ICR to reflect
the estimates derived by using the model.
These paperwork burden estimates are summarized as follows:
Type of Review: New collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Fiduciary Duties Regarding Proxy Voting and Shareholder
Rights.
OMB Control Number: 1210-NEW.
Affected Public: Businesses or other for-profits.
Estimated Number of Respondents: 66,499.
Estimated Number of Annual Responses: 66,499.
Frequency of Response: Occasionally.
Estimated Total Annual Burden Hours: N/A.
Estimated Total Annual Burden Cost: $6,291,078.
3. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \113\ imposes certain
requirements with respect to federal rules that are subject to the
notice and comment requirements of section 553(b) of the Administrative
Procedure Act \114\ and are likely to have a significant economic
impact on a substantial number of small entities. The Department has
determined that this proposal is likely to have a significant economic
impact on a substantial number of small entities, and therefore
presents this initial regulatory flexibility analysis of the proposed
rule pursuant to section 603 of the RFA.
---------------------------------------------------------------------------

\113\ 5 U.S.C. 601 et seq. (1980).
\114\ 5 U.S.C. 551 et seq. (1946).
---------------------------------------------------------------------------

For purposes of analysis under the RFA, the Employee Benefits
Security Administration (EBSA) considers employee benefit plans with
fewer than 100 participants to be small entities.\115\ The basis of
this definition is found in section 104(a)(2) of ERISA, which permits
the Secretary of Labor to prescribe simplified annual reports for plans
that cover fewer than 100 participants. Under section 104(a)(3) of
ERISA, the Secretary may also provide for exemptions or simplified
annual reporting and disclosure for welfare benefit plans. Pursuant to
the authority of section 104(a)(3), the Department has previously
issued (see 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46,
and 2520.104b-10) simplified reporting provisions and limited
exemptions from reporting and disclosure requirements for small plans,
including unfunded or insured welfare plans, that cover fewer than 100
participants and satisfy certain requirements. While some large
employers have small plans, small plans are generally maintained by
small employers. Thus, the Department believes that assessing the
impact of this proposed rule on small plans is an appropriate
substitute for evaluating the effect on small entities. The definition
of small entity considered appropriate for this purpose differs,
however, from a definition of small business based on size standards
promulgated by the Small Business Administration \116\ pursuant to the
Small Business Act.\117\ Therefore, EBSA requests comments on the
appropriateness of the size standard

[[Page 55237]]

used in evaluating the impact of this proposed rule on small entities.
---------------------------------------------------------------------------

\115\ The Department consulted with the Small Business
Administration Office of Advocacy in making this determination, as
required by 5 U.S.C. 603(c) and 13 CFR 121.903(c) in a memo dated
June 4, 2020.
\116\ 13 CFR 121.201 (2011).
\117\ 15 U.S.C. 631 et seq. (2011).
---------------------------------------------------------------------------

3.1. Need for and Objectives of the Rule
As detailed above, the Department is concerned that responsible
plan fiduciaries, in their efforts to decide whether or how to vote
plan shares--and where applicable, to vote them--and exercise other
shareholder rights, may sometimes impose on plans costs that exceed the
consequent economic benefits to the plans. Moreover, the Department has
reason to believe that responsible fiduciaries may sometimes rely on
third-party advice without taking sufficient steps to ensure that the
advice is impartial and rigorous, potentially violating ERISA's
standards of fiduciary care and loyalty in their exercise of plans'
shareholder rights. Both of these concerns point to the risk that a
plan's proxy voting activity will sometimes impair rather than advance
participants' economic interest in their benefits. This proposed rule
aims to ensure that the costs plans incur to vote proxies and exercise
other shareholder rights are economically justified, and that
responsible fiduciaries' use of third-party advice supports rather than
jeopardizes their adherence to ERISA's fiduciary requirements.
Small plans may be especially likely to rely on third-party service
providers, such as asset managers, to act as responsible fiduciaries or
otherwise assist with the exercise of plans' shareholder rights. Many
small plan sponsors are likely to lack the expertise to perform this
function themselves. Small plans additionally stand to benefit most
from the economies of scale that specialized service providers, such as
asset managers and proxy advisory firms, can provide. Consequently,
small plans may be especially vulnerable to any deficiencies in the
services such entities provide, and to costs incurred to select and
monitor service providers so as to minimize such deficiencies.
3.2. Affected Small Entities
The proposal would affect ERISA-covered pension, health, and
welfare plans that hold stock either through common stock or employer
securities. This includes plans that indirectly hold stocks through
Direct Filing Entities (DFE) such as common trusts, master trusts,
pooled separate accounts, and 103-12 investment entities. Plans that
only hold their assets in registered investment companies, such as
mutual funds, will be unaffected by the proposed rule.
There is minimal data available about small plans' stock holdings.
The primary source of information on assets held by pension plans is
the Form 5500. Schedule H, which reports data on stock holdings, is
filed almost exclusively by large plans. While the majority of
participants and assets are in large plans, most plans are small plans
(plans with fewer than 100 participants). It is likely that many small
defined benefit plans hold stock. Many small defined contribution plans
hold stock only through mutual funds, and consequently would not be
affected by this proposal. In 2017, there were 39,000 small defined
benefit plans and 580,000 small defined contribution plans. The
Department lacks information on the number of small plans that hold
stock; however, believes small plans are significantly less likely to
hold stock than larger plans. For purposes of estimating the burden,
five percent of small plans are presumed to hold stock resulting in
approximately 30,950 small plans needing to comply with the proposed
regulation.
Small service providers like asset managers could also be impacted
by this rule. To the extent that service providers, and not plans, are
the ones that primarily vote proxies, as discussed in section 3.3,
below, they would incur costs, which they would likely pass on to their
plan clients. An approach discussed in the alternative section suggests
that 1,988 service providers could be providing services to plans.
According to data from the 2012 Economic Census, 97 percent of firms
reporting an NAICS code for portfolio management meet the SBA's
definition of a small business. Accordingly, the Department estimates
that approximately 1,930 small service providers would be affected by
the proposed regulation. Thus, together with the approximately 30,950
small plans described above that we estimate would need to comply with
the proposed regulation, overall, the Department estimates that
approximately 32,880 small entities would be affected. The Department
requests comments on the number of small entities the rule will affect.
3.3. Impact of the Rule
This proposed rule would benefit small plans, by providing guidance
regarding how ERISA's fiduciary duties apply to proxy voting and the
monitoring of proxy advisory firms, and in particular when fiduciaries
should refrain from voting. Plan fiduciaries would be able to better
conserve plan assets by having clear direction to refrain from
researching and voting on proposals that they prudently determine have
no economic impact on the plan. The proposal also would benefit plans
by improving the frequency with which voting resources are expended on
matters that have an economic impact on the plan. Cost savings and
other benefits to small plans would flow to plan participants and
beneficiaries in the form of more secure retirement income.
As discussed under the Cost section above, while the Department
assumes that small affected entities would spend some time
familiarizing themselves with the rule, it expects that these
familiarization costs would be minimal, because the activities that
would be required by the proposed rule are reflected in common
practice. The Department estimates it would take an hour for an in-
house attorney to review the rule, at an hourly labor cost of $138.41.
The Department requests comments or data to inform the Department's
estimate of the costs associated with familiarization.
Fiduciaries of plans must ensure that all investments are prudently
monitored. The proposed rule provides that fiduciaries responsible for
the exercise of shareholder rights must maintain records in order to
demonstrate compliance with ERISA's fiduciary provisions. The
Department assumes that, because the documentation of fiduciary
decision-making is a common practice, responsible fiduciaries are
likely already recording and maintaining documentation related to their
own and investment managers' actions, including their exercise of
shareholder rights.
For plans that are not currently in full compliance, the rule will
have a small impact to maintain records or document decisions related
to voting proxies or exercising other shareholder rights. Much of the
information required to comply with this requirement is generated by
affected entities in the normal course of business; however, additional
time may be required to maintain the proper documentation. The
Department estimates that compliance with this proposed regulation
would require 30 minutes of a plan fiduciary's time and 30 minutes of a
clerical worker's time. The Department assumes an hourly rate of
$134.21 for a plan fiduciary and an hourly rate of $55.14 for a
clerical worker, resulting in an estimated per-entity annual cost of
$94.68.\118\ Under these assumptions, the Department believes that
these requirements will not significantly increase costs for small
plans. For service providers, the

[[Page 55238]]

Department developed a model that illustrates the impact of the
proposed rule by assuming that service providers, like asset managers,
provide the required research and documentation that would be required
to vote by proxy. The model is included for illustrative purposes as
some of the assumption used are speculative. The following analysis
should be viewed with the understanding of the high degree of
uncertainty and the assumptions used. The model's costs estimates
suggest an average cost per service provider of approximately $50,400
(for more information on the assumptions, see the Uncertainty section
in the regulatory impact analysis). The Department does not have data
on how the number of proxy votes a service provider would need to
prepare differs by service provider size. Based on data supplied by SBA
from the 2012 Census, the Department estimates that the estimated
average cost of $50,400 would account for 0.8 percent of average annual
revenue for all service providers.\119\ Considering fixed costs and
economies of scale, the costs of complying with the proposed regulation
would likely account for a higher proportion of revenue for small
service providers. If it were assumed that the costs of complying with
the proposed regulation would be the same, regardless of firm size, the
Department assumes it would account for 4.1 percent of revenues on
average for small entities.\120\ The estimated proportions of costs are
broken down by firm size for small firms in the Revenue Test column in
the table below.
---------------------------------------------------------------------------

\118\ 0.5 hours * $134.21 + 0.5 hours * $55.14 = $94.68.
\119\ Based on data supplied by SBA from the 2012 Census, the
Department calculated the average revenue of entities for relevant
NAICS codes as $6.4 million. In its calculation, the Department
included the following industries; portfolio management (NAICS
523920); investment advice (523930); and trust, fiduciary, and
custody activities (NAICS 523991).
\120\ Based on data supplied by SBA from the 2012 Census, the
Department calculated the average revenue of small entities for
relevant NAICS codes as $1.2 million. In its calculation, the
Department included the following industries; portfolio management
(NAICS 523920); investment advice (523930); and trust, fiduciary,
and custody activities (NAICS 523991). In accordance with SBA
guidelines, entities with receipts less than $41.5 million were
considered small.
---------------------------------------------------------------------------

These estimates likely overestimate the costs for small service
providers. The cost estimate assumes that these service providers are
researching and documenting proxy votes for over 8,000 stocks. While
the Department does not have data on how the number of proxy votes
prepared by service providers would vary by firm size, the Department
believes that small entities are less likely to oversee investments
over the investment universe considered here. Accordingly, the
Department assumes smaller entities would need to research and document
fewer proxy votes, resulting in reduced demand on time resources and
overall lower cost.
Additionally, the data presented in the table below considers all
firms for the respective industries. A majority of firms in these
industries will not be providing services that are affected by these
proposed rules. The table illustrates the impact on affected firms and
the dispersion of firms by revenue. For example, the Department
believes that the smallest firms are not likely to be providing proxy-
voting services to ERISA plans. Therefore, the Department believes that
what appears to be the most serious cost impact for firms with less
than $100,000 in receipts would not occur.
The Department believes it is reasonable to assume that costs for
small entities account for between 0.8 percent and 4.1 percent of
revenues. A weighted average of these two approaches by firm size,
results in an estimate that costs account for an average of 2.4 percent
of revenues for small entities. The estimated proportions of costs are
broken down by firm size for small firms in the Adjusted Revenue Test
column in the table below. The Department requests comments on the
model and its assumptions, particularly with regard to business size.

Portfolio Management (NAICS 523920), Investment Advice (NAICS 523930), and Trust, Fiduciary, and Custody
Activities (NAICS 523991)--$41.5 Million Size Standard
----------------------------------------------------------------------------------------------------------------
Adjusted
Firm size (by receipts) Average annual Annualized Percent of Revenue test revenue test
revenue cost per firm small firms (%) ** (%)
----------------------------------------------------------------------------------------------------------------
All firms....................... $ 6,345,828 $ 50,390 N/A <1% <1%
Small Firms..................... 1,220,890 50,390 100 4 2
<100,000........................ 46,505 50,390 22 108 55
100,000-499,999................. 251,618 50,390 41 20 10
500,000-999,999................. 696,025 50,390 14 7 4
1M-2,49M........................ 1,531,804 50,390 12 3 2
2.5M-4.99M...................... 3,390,789 50,390 5 1 1
5M-7.49M........................ 5,779,106 50,390 2 <1 <1
7.5M-9.99M...................... 7,854,990 50,390 1 <1 <1
10M-14.99M...................... 10,752,200 50,390 1 <1 <1
15M-19.99M...................... 14,201,734 50,390 <1 <1 <1
20M-24.99M...................... 18,062,969 50,390 <1 <1 <1
25M-29.99M...................... 17,501,113 50,390 <1 <1 <1
30M-34.99M...................... 22,451,441 50,390 <1 <1 <1
35M-39.99M...................... 28,100,088 50,390 <1 <1 <1
40M-41.5M....................... 30,715,982 50,390 <1 <1 <1
----------------------------------------------------------------------------------------------------------------
* Annualized compliance costs as a percentage of revenue.
** The Adjusted Revenue Test considers a weighted averages of the low estimate--assuming the proportion of costs
for all firms is equal to the proportion of costs for the average of 0.8--and the high estimate of assuming
all firms incur a cost of $50,390 by firm size.

It is likely that service providers will pass most, if not all, of
these costs onto their clients, which is estimated to be about $1,500
per plan holding stock. This initial regulatory flexibility analysis
(IRFA) only considers the incremental cost the proposed regulation
would impose on small entities. It, however, does not take into account
the cost savings small entities would realize from the proposed
regulation's permitted practices. As discussed in Appendix A, below,
the Department intends that the permitted practices will impact a large
share of all

[[Page 55239]]

proxy votes, and the burden associated with these votes when using the
permitted practices will likely be very low. Therefore, taking the
permitted practices into account, the net burden on small entities
would be smaller than the Department illustrates in the table above,
and in some cases, small entities could even realize cost savings.
3.4. Alternatives
As discussed above, the Department's longstanding position is that
the fiduciary duties of prudence and loyalty under ERISA sections
404(a)(1)(A) and 404(a)(1)(B) apply to the exercise of shareholder
rights, including proxy voting, proxy voting policies and guidelines,
and the selection and monitoring of proxy advisory firms. These duties
apply to all affected entities--large and small.
The Department carefully considered the proposed rule's impact on
small entities in deliberating alternatives for the proposal. For
example, the Department considered a purely principles-based approach
that would not have included the permitted practices in paragraph
(e)(3)(iii) of the proposal. However, the Department was concerned that
small entities would not sufficiently benefit for this approach. The
Department believes that clearly articulating examples of permitted
proxy voting policies would be helpful to small plan fiduciaries and
ultimately beneficial to small plan participants and beneficiaries
because it will reduce the frequency with which voting resources are
expended on matters that do not have an economic impact on small plans
compared to a purely principles-based approach paired with the
permitted practices. The Department thus concluded that a purely
principles-based approach would not have preserved plan assets or
enhanced the retirement income security of participants and
beneficiaries of small plans as much as the Department's chosen
alternative.
Moreover, a purely principles-based approach could result in a
responsible fiduciary, having to determine whether to vote each
individual proxy proposal. This determination process could consume
significant plan resources, even where the potential economic benefit
to the plan is small or difficult to determine. A responsible fiduciary
might arrive at his or her own policies for simply not voting, or
voting in a specific manner on certain types of proposals, based on the
plan's limited exposure to a stock or the economic immateriality of the
matter being voted upon. However, under a principles-based approach
fiduciaries would likely be cautious about adopting such policies, and
might believe it prudent to be able to demonstrate in each case why a
decision was made not to vote, and therefore err on the side of
devoting excessive resources to voting decisions. By creating such
uncertainty and caution in adopting such policies, this result would
provide limited benefits on small entities and lead to unnecessary
expenditure of plan assets. The Department invites comments on the
impact of the inclusion of permitted practices on small entities and
their usefulness in aiding a small plan fiduciary's determination of
whether to vote.
The Department also considered including a specific numeric cap for
the materiality permitted practice in paragraph (e)(3)(iii)(C), but
opted not to do so until it has the opportunity to review the comments
solicited earlier in this preamble on this question. The Department
similarly invites comments regarding the impact on those issues on
small entities for purposes of this IRFA. The Department also invites
comments generally on its choice of permitted practices, including
whether any should not be retained and whether any other practices
should be added or additional alternatives considered to address
specific circumstances affecting small entities.
3.5. Duplicate, Overlapping, or Relevant Federal Rules
The proposed rule would not conflict with any relevant federal
rules. As discussed above, the proposal would merely clarify the
application of ERISA's fiduciary duties to conform to significant
changes in shareholder voting practices. The Department is monitoring
other federal agencies whose statutory and regulatory requirements
overlap with ERISA. In particular, the Department is monitoring SEC
rules and guidance to avoid creating duplicate or overlapping
requirements with respect to proxy voting.
4. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 \121\ requires
each Federal agency to prepare a written statement assessing the
effects of any federal mandate in a proposed or final agency rule that
may result in an expenditure of $100 million or more (adjusted annually
for inflation with the base year 1995) in any one year by state, local,
and tribal governments, in the aggregate, or by the private sector. For
purposes of the Unfunded Mandates Reform Act, as well as Executive
Order 12875, this proposal would not include any federal mandate that
the Department expects would result in such expenditures by state,
local, or tribal governments, or the private sector. This proposed rule
would not result in an expenditure of $100 million or more in any one
year, because the Department is simply restating and modernizing
fiduciary practices related to voting rights and aligning its
regulations to the extent possible with guidance issued by the SEC.
---------------------------------------------------------------------------

\121\ 2 U.S.C. 1501 et seq. (1995).
---------------------------------------------------------------------------

5. Federalism Statement
Executive Order 13132 outlines fundamental principles of federalism
and requires Federal agencies to adhere to specific criteria when
formulating and implementing policies that have ``substantial direct
effects'' on the states, the relationship between the National
Government and states, or on the distribution of power and
responsibilities among the various levels of government. Federal
agencies promulgating regulations that have federalism implications
must consult with state and local officials and describe the extent of
their consultation and the nature of the concerns of state and local
officials in the preamble to the rule.
In the Department's view, these proposed regulations do not have
federalism implications because they do not have direct effects on the
states, the relationship between the National Government and the
states, or the distribution of power and responsibilities among various
levels of government. The proposed regulations describe requirements
and permitted practices related to the exercise of shareholder rights
under ERISA. While ERISA generally preempts state laws that relate to
ERISA plans, and preemption typically requires an examination of the
individual law involved, it appears highly unlikely that the provisions
in this proposed regulation would have preemptive effect on general
state corporate laws. The Department welcomes input from affected
states regarding this assessment.
6. Appendix A
In light of the uncertainty regarding the proxy voting activities
of ERISA plans, and the attendant costs and benefits of this proposal,
the Department is presenting an illustration below of an analytical
approach to evaluating the possible impacts of this NPRM. This is part
of the Department's solicitation of comments on an appropriate
methodology and assumptions for evaluating the costs and

[[Page 55240]]

savings that could result from the rule. The analytical model assumes
that proxies are primarily voted by asset managers or other service
providers. The Department also assumes that the proposed rule may
require some plans or service providers to expend more effort
researching whether a proxy vote will have a relevant economic impact
on the plan and how the plan should vote in cases in which the proposal
has such an economic impact. Service providers, plans, or both, may
also need to provide more documentation of their decisions than they
already produce. Additionally, plans may take advantage of the
permitted practices described in the proposal that allow them to
conserve plan assets, because they may not need to conduct as extensive
an amount of research or expend as much time on documenting decisions.
The analysis used in the illustration is based on a number of
assumptions and estimates. Some of those assumptions and estimates are
based on available data, but the Department does not have supporting
data for some key assumptions and estimates. Specifically, the model
portrays the following as described below and shown in tables 2-4 which
are also found below.
An estimated 1,988 service providers may be impacted by the rule's
requirements, shown in column A. This estimate is obtained by looking
at the number of clients of three of the largest proxy advisory
firms.\122\ While service providers that are affected by this rule may
not use the services of these proxy advisory firms, it is also likely
that not all of these firms provide services to ERISA-covered plans.
---------------------------------------------------------------------------

\122\ SEC Proxy Proposed Rule: Amendments to Exemptions from the
Proxy Rules for Proxy Voting Advice Table 1 Page 84. The estimate
includes those categories of clients viewed most-likely to be
impacted by the rule: Banking or thrift institutions, investment
companies, pooled investment vehicles, pension and profit sharing
plans, other investment advisers, and insurance companies.
---------------------------------------------------------------------------

To obtain the number of proxy votes that need to be evaluated, the
estimate of the number of domestic stock (4,684) was obtained by
looking at the number of shareholder meetings held, and \123\ the
estimate for the number of foreign stock (3,336) was obtained by the
number of stock in a foreign stock index.\124\ These estimates were
used to arrive at an estimate of 8,020 total stocks voted annually.
Each stock can have multiple related proxy votes. Therefore, the
Department estimates that there are 9.3 votes per stock.\125\ These
assumptions lead to an estimate of 148,276,968 proxy votes that could
be impacted by this rule as shown in column C of Table 2.\126\
---------------------------------------------------------------------------

\123\ One service provider said that in 2019 they processed
4,216 shareholder meetings. Also, in 2019 this service provider held
about 90 percent of the market for processing proxy votes. These
statistics would lead to about 4,684 shareholder meetings (4,216/
0.9). https://www.broadridge.com/_assets/pdf/broadridge-proxy-season-stats-final.pdf and (https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-the-us-proxy-system-090519.pdf).
\124\ FTSE All-World ex US Index Fact Sheet, July 31, 2020.
https://www.ftserussell.com/analytics/factsheets/home/search.
\125\ Investment Company Institute. ``Proxy Voting by Registered
Investment Companies, 2017.'' Vol 25, No. 5. July 2019. See endnote
15. https://www.ici.org/pdf/per25-05.pdf.
\126\ 1,988 * (4,684 + 3,336) * 9.3
---------------------------------------------------------------------------

As discussed previously, some stocks may fall within the permitted
practice provisions of the rule. The illustration assumes that
proposals that are within the permitted practices would be less
burdensome to research and document even if the permitted practices
provisions did not exist. The Department estimates that 5.6 percent of
all proxy votes will fall outside the permitted practices; therefore,
they still would be required to be researched, voted, and documented
under the proposal.\127\ The following assumptions were made to
estimate the burden of such researching, voting, and fulfilling
documentation requirements. For votes falling within the permitted
practices, on average the Department estimates that 30 minutes would be
needed for responsible plan fiduciaries to conduct research and 10
minutes would be required to document each vote. For votes falling
outside the permitted practices, the Department estimates that on
average two hours would be needed for responsible plan fiduciaries to
conduct research and 20 minutes would be required to document each
vote. Using these assumptions, and other assumptions about the
proposal's impact discussed below, the Department estimated the total
hours required for responsible plan fiduciaries to research and
document proxy votes.
---------------------------------------------------------------------------

\127\ Investment Company Institute. ``Proxy Voting by Registered
Investment Companies, 2017.'' Vol 25, No. 5. July 2019. See Figures
2 and 3. https://www.ici.org/pdf/per25-05.pdf. We developed this
assumption by looking at the ICI data from 2011 to 2017 on the
percentage of total proxy proposals that related to mergers,
acquisitions, dissolutions, conversions consolidations, corporate
repurchase of shares, issuance of additional securities, and
contested elections for directors.
---------------------------------------------------------------------------

The costs of the research and documentation requirements were
calculated by multiplying the total research hours by a labor rate of
$116.96 and the total documentation hours by a labor rate of
$110.39.\128\ Column H shows the total costs of the rule for increases
in research and documenting costs, but excludes cost savings that could
occur if the permitted practices are used. The cost savings from the
permitted practices are discussed later. It should be noted that
although the Department calculated costs in column H, most of these
costs will not be realized, because plans will use the permitted
practices to avoid incurring them.
---------------------------------------------------------------------------

\128\ These labor rates are a composite labor rate. For,
research, it is for a financial manager and a financial professional
with a quarter of the time provided by a financial manager and
three-quarters of the time provided by a financial professional. For
the documentation labor rate, it is for a financial manager and a
clerical professional with each providing half the time. The wage
rate for a financial manager (11-3031), financial professional (13-
2011), and a clerical professional (43-6014) is respectively
$165.63, $100.74, and $55.14. https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
---------------------------------------------------------------------------

As discussed elsewhere in this preamble, while the Department
believes that the common practices of most plans related to proxy
voting are generally consistent with the standards in the proposal, we
do not know with any level of precision the percent of plans that are
not currently meeting such standards. For purposes of illustrating
possible impacts of this rule, the Department assumes that five percent
of total research costs will be new as some responsible plan
fiduciaries will improve their research conducted to determine whether
they should or should not vote proxies and then how to vote. The
Department modeled one percent of the total research costs as new,
because some responsible plan fiduciaries will need to increase the
quality of their documentation for some affected votes. The hours shown
in columns D and E reflect that only some of the votes will necessitate
new burden. To illustrate, the 3,499,336 hours in the first row of
column D is obtained by the following: 1,988 service providers * 8,020
stocks * 9.3 proxy votes per stock * (1-0.056 for share of votes
effected by permitted practices) * 0.5 hours of new research * 5
percent increase in research costs.\129\
---------------------------------------------------------------------------

\129\ In the second row of Table 2, a one percent increase is
reflected, rather than a five percent increase.
---------------------------------------------------------------------------

An illustration of potential cost savings that could be derived
from responsible plan fiduciaries using the permitted practices was
arrived at using the same model. As depicted in table 3, responsible
plan fiduciaries do not have to vote proxies that fall within the
permitted practices, which could save at least some of the costs
associated with research and documentation. Columns A, B, and C of
table 3 are obtained in

[[Page 55241]]

the same manner as columns A, B, and C of table 2. Columns D and E are
obtained in the same manner as in table 2 except replacing the
assumption that five percent of the costs are new with an assumption
about the number of proxy votes that will not be voted due to the
permitted practices. For this illustration, the Department assumed that
10 percent of the proxy votes will not be voted and responsible plan
fiduciaries will not incur research and documentation costs. Instead of
thinking about this as a reduction in actual votes, it can also be
viewed as a 10 percent reduction in costs if votes are still cast
pursuant to the permitted practices that allow voting but reduce
burden, such as paragraph (e)(3)(iii)(A) of the proposal, which would
allow fiduciaries to adopt vote proxies in accordance with the voting
recommendations of corporate management. The Department intends that
the permitted practices will impact a large share of all proxy votes
and the burden associated with these votes when using the permitted
practices will likely be very low. Column H of table 3 is an
illustration of the potential cost reduction from the use of the
permitted practices.

Table 2--Illustration of Possible New Costs Due to Rule of Voting Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total new
Number of Total new cost to
firms Cost Cost cost of plans
providing Number of Number of New due to New due to equivalent equivalent new policy incurring
proxy stock to proxy votes rule: hours rule: hours new due to due to rule: alternative cost if
voting for vote to research to document rule: documentation without using
ERISA plans research permitted permitted
practices practices
(A) (B) (C) (D) (E) (F) (G) (H) (I)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Providers: PP................ 1,988 8,020 139,973,458 3,499,336 233,289 $409,291,139 $25,751,617 $435,042,756 ............
Providers: Non-PP............ 1,988 8,020 8,303,510 830,351 27,678 97,119,931 3,055,277 100,175,208 100,175,208
--------------------------------------------------------------------------------------------------------------------------
Total.................... 1,988 ........... 148,276,968 4,329,687 260,967 506,411,070 28,806,893 535,217,964 100,175,208
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table 3--Illustration of Possible Cost Savings from Permitted Practices of Voting Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
firms New due to New due to Total cost
providing Number of Number of rule: hours rule: hours Cost savings Cost savings savings due to
proxy stock to proxy votes to research to document due to rule: due to rule: permitted
voting for vote saved saved research document practices
ERISA plans
(A) (B) (C) (D) (E) (F) (G) (H)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Provider: PP............................. 1,988 8,020 139,973,458 6,998,673 2,332,891 $818,582,278 $257,516,169 $1,076,098,447
--------------------------------------------------------------------------------------------------------------
Total................................ 1,988 ........... 139,973,458 6,998,673 2,332,891 818,582,278 257,516,169 1,076,098,447
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table 4--Cost Savings from Rule
----------------------------------------------------------------------------------------------------------------
Total costs of policy alternative Cost savings due to permitted
without permitted practices practices Net cost savings
(A) (B) (B-A)
----------------------------------------------------------------------------------------------------------------
$535,217,964 $1,076,098,447 $540,880,483
----------------------------------------------------------------------------------------------------------------

Statutory Authority

This regulation is proposed pursuant to the authority in section
505 of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135) and section
102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17,
1978), effective December 31, 1978 (44 FR 1065, January 3, 1979), 3 CFR
1978 Comp. 332, and under Secretary of Labor's Order No. 1-2011, 77 FR
1088 (Jan. 9, 2012).

List of Subjects in 29 CFR Parts 2509 and 2550

Employee benefit plans, Employee Retirement Income Security Act,
Exemptions, Fiduciaries, investments, Pensions, Prohibited
transactions, Reporting and recordkeeping requirements, Securities.

For the reasons set forth in the preamble, the Department is
proposing to amend parts 2509 and 2550 of subchapters A and F of
chapter XXV of title 29 of the Code of Federal Regulations as follows:

SUBCHAPTER A--GENERAL

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, Pub. L.
109-280, 120 Stat. 780.

Sec. 2509.2016-01 [Removed]

0
2. Remove Sec. 2509.2016-01.

SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

0
3. The authority citation for part 2550 continues to read as follows:

Authority: 29 U.S.C. 1135 and Secretary of Labor's Order No. 1-
2011, 77 FR 1088 (January 9, 2012). Sec. 102, Reorganization Plan
No. 4 of 1978, 5 U.S.C. App. at 727 (2012). Sec. 2550.401c-1 also
issued under 29 U.S.C. 1101. Sec. 2550.404a-1 also issued under sec.
657, Pub. L. 107-16, 115 Stat 38. Sec. 2550.404a-2 also issued under
sec. 657 of Pub. L. 107-16, 115 Stat. 38. Sections 2550.404c-1 and
2550.404c-5 also issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also
issued under 29 U.S.C. 1108(b)(1). Sec. 2550.408b-19 also issued
under sec. 611, Pub. L. 109-280, 120 Stat. 780, 972. Sec. 2550.412-1
also issued under 29 U.S.C. 1112.

[[Page 55242]]

0
4. Section 2550.404a-1, as proposed to be revised at 85 FR 39113 (June
30, 2020), is further amended by adding paragraph (e), revising
paragraph (g), and republishing paragraph (h) to read as follows:

Sec. 2550.404a-1 Investment duties.

* * * * *
(e) Proxy voting and exercise of shareholder rights. (1) The
fiduciary duty to manage plan assets that are shares of stock includes
the management of shareholder rights appurtenant to those shares, such
as the right to vote proxies.
(2)(i) When deciding whether to exercise shareholder rights and
when exercising such rights, including the voting of proxies,
fiduciaries must carry out their duties prudently and solely in the
interests of the participants and beneficiaries and for the exclusive
purpose of providing benefits to participants and beneficiaries and
defraying the reasonable expenses of administering the plan pursuant to
ERISA sections 403 and 404.
(ii) In order to fulfill the fiduciary obligations under paragraph
(e)(2)(i) of this section, when deciding whether to exercise
shareholder rights and when exercising shareholder rights, a plan
fiduciary must:
(A) Act solely in accordance with the economic interest of the plan
and its participants and beneficiaries considering only factors that
they prudently determine will affect the economic value of the plan's
investment based on a determination of risk and return over an
appropriate investment horizon consistent with the plan's investment
objectives and the funding policy of the plan;
(B) Consider the likely impact on the investment performance of the
plan based on such factors as the size of the plan's holdings in the
issuer relative to the total investment assets of the plan, the plan's
percentage ownership of the issuer, and the costs involved;
(C) Not subordinate the interests of the participants and
beneficiaries in their retirement income or financial benefits under
the plan to any non-pecuniary objective, or sacrifice investment return
or take on additional investment risk to promote goals unrelated to
those financial interests of the plan's participants and beneficiaries
or the purposes of the plan;
(D) Investigate material facts that form the basis for any
particular proxy vote or other exercise of shareholder rights. The
fiduciary may not adopt a practice of following the recommendations of
a proxy advisory firm or other service provider without appropriate
supervision and a determination that the service provider's proxy
voting guidelines are consistent with the economic interests of the
plan and its participants and beneficiaries as defined in paragraph
(e)(2)(ii)(A) of this section;
(E) Maintain records on proxy voting activities and other exercises
of shareholder rights, including records that demonstrate the basis for
particular proxy votes and exercises of shareholder rights; and
(F) Exercise prudence and diligence in the selection and monitoring
of persons, if any, selected to advise or otherwise assist with
exercises of shareholder rights, such as providing research and
analysis, recommendations regarding proxy votes, administrative
services with voting proxies, and recordkeeping and reporting services.
(iii) Where the authority to vote proxies or exercise shareholder
rights has been delegated to an investment manager pursuant to ERISA
section 403(a)(2), or a proxy voting firm or other person performs
advisory services as to the voting of proxies, a responsible plan
fiduciary shall require such investment manager or proxy advisory firm
to document the rationale for proxy voting decisions or recommendations
sufficient to demonstrate that the decision or recommendation was based
on the expected economic benefit to the plan, and that the decision or
recommendation was based solely on the interests of participants and
beneficiaries in obtaining financial benefits under the plan.
(3)(i) A plan fiduciary must vote any proxy where the fiduciary
prudently determines that the matter being voted upon would have an
economic impact on the plan after considering those factors described
in paragraph (e)(2)(ii) of this section and taking into account the
costs involved (including the cost of research, if necessary, to
determine how to vote).
(ii) A plan fiduciary must not vote any proxy unless the fiduciary
prudently determines that the matter being voted upon would have an
economic impact on the plan after considering those factors described
in paragraph (e)(2)(ii) of this section and taking into account the
costs involved (including the cost of research, if necessary, to
determine how to vote).
(iii) In deciding whether to vote a proxy pursuant to paragraphs
(e)(3)(i) and (ii) of this section, plans may adopt proxy voting
policies that voting authority shall be exercised pursuant to specific
parameters reasonably designed to serve the plan's economic interest.
Such policies may include, for example:
(A) A policy of voting proxies in accordance with the voting
recommendations of management of the issuer on proposals or particular
types of proposals that the fiduciary has prudently determined are
unlikely to have a significant impact on the value of the plan's
investment, subject to any conditions determined by the fiduciary as
requiring additional analysis because the matter being voted upon may
present heightened management conflicts of interest or is likely to
have a significant economic impact on the value of the plan's
investment;
(B) A policy that voting resources will focus only on particular
types of proposals that the fiduciary has prudently determined are
substantially related to the corporation's business activities or
likely to have a significant impact on the value of the plan's
investment, such as proposals relating to corporate events (mergers and
acquisitions transactions, dissolutions, conversions, or
consolidations), corporate repurchases of shares (buy-backs), issuances
of additional securities with dilutive effects on shareholders, or
contested elections for directors; and
(C) A policy of refraining from voting on proposals or particular
types of proposals when the plan's holding in a single issuer relative
to the plan's total investment assets is below a quantitative threshold
that the fiduciary prudently determines, considering its percentage
ownership of the issuer and other relevant factors, is sufficiently
small that the outcome of the vote is unlikely to have a material
impact on the investment performance of the plan's portfolio (or
investment performance of assets under management in the case of an
investment manager).
(iv) Plan fiduciaries shall review proxy voting policies adopted
pursuant to paragraph (e)(3)(iii) of this section at least once every
two years.
(v) No policies adopted under paragraph (e)(3)(iii) of this section
shall preclude, or impose liability for, submitting a proxy vote when
the fiduciary prudently determines that the matter being voted upon
would have an economic impact on the plan after taking into account the
costs involved, or for refraining from voting when the fiduciary
prudently determines that the matter being voted upon would not have an
economic impact on the plan after taking into account the costs
involved.
(4)(i)(A) The responsibility for exercising shareholder rights lies
exclusively with the plan trustee except to the extent that either:

[[Page 55243]]

(1) The trustee is subject to the directions of a named fiduciary
pursuant to ERISA section 403(a)(1); or
(2) Or 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).
(B) Where the authority to manage plan assets has been delegated to
an investment manager pursuant to section 403(a)(2), the investment
manager has exclusive authority to vote proxies or exercise other
shareholder rights appurtenant to such plan assets in accordance with
this section, except to the extent the plan, trust document, or
investment management agreement expressly provides that the responsible
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 exercise or management of some or all of such shareholder
rights.
(ii) An investment manager of a pooled investment vehicle that
holds assets of more than one employee benefit plan may be subject to
an investment policy statement that conflicts with the policy of
another plan. Compliance with ERISA section 404(a)(1)(D) requires 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)). In the case of proxy voting, to the extent
permitted by applicable law, the investment manager must vote (or
abstain from voting) the relevant proxies to reflect such policies in
proportion to each plan's economic interest in the pooled investment
vehicle. Such an investment manager may, however, develop an investment
policy statement consistent with Title I of ERISA and this section, and
require participating plans to accept the investment manager's
investment policy, including any proxy voting policy, before they are
allowed to invest. In such cases, a fiduciary must assess whether the
investment manager's investment policy statement and proxy voting
policy are consistent with Title I of ERISA and this section before
deciding to retain the investment manager.
* * * * *
(g) Effective date. This section shall be effective on [30 days
after date of publication of final rule].
(h) Severability. Should a court of competent jurisdiction hold any
provision(s) of this subpart to be invalid, such action will not affect
any other provision of this subpart.

Signed at Washington, DC.
Jeanne Klinefelter Wilson,
Acting Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2020-19472 Filed 9-3-20; 8:45 am]
BILLING CODE 4510-29-P

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