DOL Issues Final Ruling on Proxy Voting and Shareholder Rights

The Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) has issued a final rule entitled Fiduciary Duties Regarding Proxy Voting and Shareholder Rights. This ruling establishes a regulatory framework for fiduciaries of private employee benefits plans and helps clear up prior misunderstandings regarding proxy voting. This new ruling will amend the current regulation titled Investment Duties.

Amendment of Investment Duties Rule

The Investment Duties rule was established in 1979 by the DOL and while it guided fiduciaries in how to proceed with planning investments and the process of selecting and advising on assets within the plan, the rule did not stipulate that fiduciaries must proceed in the best interest of participants and beneficiaries.

Over time, this lack of specific guidance led to misunderstanding among plan fiduciaries, especially regarding proxy votes. As proxy votes increased in both quantity and type, there was a further misunderstanding with some fiduciaries expending more money on research for voting on issues that may or may not benefit the plan holders.

This new ruling seeks to increase benefits for retirement account participants and beneficiaries. It will do so by establishing a clear, principles-based approach for plan fiduciaries to adhere to.

DOL Collects Public Feedback

The DOL expressed its proposed amendments to the investment duties rule and posted the proposal online, where it was open for public commentary. There were around 300 comments providing feedback about the rule. Public comments came from a variety of stakeholders including investment managers, plan participants, service providers, proxy advisory firms, and plan sponsors.

There were also just under 7,000 written submissions taken into consideration after the proposals were provided to the public. Based on the feedback that was received, the DOL established the new guidelines that will help fiduciaries navigate proxy voting to maximize the benefit for participants and other beneficiaries.

Fiduciary Duties Regarding Proxy Voting and Shareholder Rights

According to the DOL, the new rule will focus on the interest of plan participants in the following manner,

• Establishing that proxy voting decision and other means of shareholder rights will be done with the interest and for the benefits participants and beneficiaries all while considering the implication of any costs involved, research or otherwise.
• “Ensuring that plan fiduciaries not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals.”
• An improvement in the methods plan fiduciaries use to select and monitor proxy advisory firms.

According to the DOL, the final rule will be a benefit to working Americans’ retirement plans in that the worker’s financial interests will come first when proxy votes occur. The ruling also stipulates that intentional focus will be given to advancing the prudent management of worker’s assets.

The new ruling is also expected to help pass on any cost savings to plan participants and beneficiaries. This will result in a more secure retirement account for Americans.

The Acting Assistant Secretary of Labor for the DOL’s EBSA, Jeanne Klinefelter Wilson, explains that the new ruling will provide clearer guidelines for Employee Retirement Income Security Act (ERISA) plan fiduciaries. This consistent clarity will allow plan fiduciaries to focus their attention on maximizing growth and security for worker's retirement accounts. ERISA plan fiduciaries will also have clearer definitions and guidelines for exercising their prudence and loyal duties to benefit shareholders first.

The US Secretary of Labor, Eugene Scalia, shared the following statement in support of the new ruling: “The final rule will help managers of retirement plans fulfill their duties of prudence and loyalty to American workers and retirees when voting proxies and exercising other shareholder rights. The rule reflects modifications in response to rulemaking comments in order to establish appropriately tailored safeguards for employee benefit plans using a principles-based approach.”

The new ruling will go into effect 30 days after it is published in the Federal Register. Publication in the Federal Register is scheduled for December 15.