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 This document also states that Interpretive Bulletin 2016–01 no longer represents the view of the Department regarding the proper jbell on DSKJLSW7X2PROD with PROPOSALS VerDate Sep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 http://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\
---------------------------------------------------------------------------

    \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.
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    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\
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    \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).
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    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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    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

[[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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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