The U.S. Department of Labor (the “DOL”), on December 29, 2016, issued Interpretive Bulletin 2016-1 (“IB 2016-1”) under the Employee Retirement Income Security Act of 1974 ("ERISA") regarding the duties of fiduciaries under ERISA-covered employee benefit plans to vote proxies and exercise other shareholder rights. IB 2016-1 withdraws Interpretive Bulletin 2008-2 (“IB 2008-2”) issued by the administration of George W. Bush, and reinstates, with certain changes, its predecessor, Interpretive Bulletin 94-2 (“IB 94-2”).
A significant change that had been made by IB 2008-2 was expressly to permit a cost-benefit analysis to allow a plan fiduciary not to exercise shareholder rights. In IB 2016-1, the DOL expressed concern that IB 2008-2 had been read by some to prohibit ERISA plans broadly from exercising shareholder rights, including voting proxies, unless the plan had performed a cost-benefit analysis and concluded that the action was more likely than not to result in a quantifiable increase in the economic value of the plan’s investment. IB 2016-1 clarifies that the DOL did not intend for such an interpretation. The DOL noted that the “essential point of IB 94-2 . . . was to articulate a general principle that a fiduciary’s obligation to manage plan assets prudently extends to proxy voting” and, furthermore, that “proxies should be voted as part of the process of managing the plan’s investment in company stock unless a responsible plan fiduciary determined that the time and costs associated with voting proxies . . . may not be in the plan’s best interest.” The DOL also expressed concern that the Bush-era cost-benefit provisions may have acted as an impediment to a fiduciary’s consideration of environmental, social and governance factors (so-called “ESG” factors, which were addressed earlier by Interpretive Bulletin 2015-1), thus providing an additional basis for reinstating the approach that had been taken in IB 94-2.
The DOL recognized that “there may be special circumstances that might warrant a discrete analysis of the cost of the shareholder activity versus the economic benefit associated with the outcome of the activity.” However, the DOL went on to say that it “did not intend to imply that such an analysis should be conducted in most cases.”
In support of its approach, the DOL noted that many proxy votes involve very little cost to the individual plan shareholder to arrive at a prudent result, and that engaging consultants, like proxy advisory firms, can help to reduce costs. The DOL also worried that undue focusing on cost-benefit analysis might “discourag[e] fiduciaries from recognizing long-term financial benefits that, although difficult to quantify, can result from thoughtful shareholder engagement when voting proxies, establishing a proxy voting policy, or otherwise exercising rights as shareholders.”
With respect to other shareholder-engagement matters, such as monitoring the independence and expertise of candidates for the board of directors, assuring the board has adequate information to properly monitor management and considering the appropriateness of executive compensation and other corporate policies, IB 2016-1 states the DOL’s view that activities intended to monitor or influence corporate management are permissible if a fiduciary concludes that there is a reasonable expectation that the activity is likely to enhance the value of the plan’s investment in the corporation. Such a reasonable expectation may exist, for example, where the stock is held as a long-term investment, where a plan may not be able to easily dispose of the investment or where the same issue is likely to exist in available investment alternatives.
The DOL also confirmed, however, that it has rejected a construction of ERISA that would render ERISA’s tight limits on the use of plan assets illusory and that would permit plan fiduciaries to expend trust assets to promote myriad public policy preferences. Rather, plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order to promote collateral goals. Thus, the DOL emphasized that fiduciaries are not permitted to subordinate the economic interests of participants and beneficiaries to unrelated objectives in voting proxies or exercising other shareholder rights.
If you would like to discuss any aspect of IB 2016-1 or would like any additional information, please contact one of the Dechert attorneys listed below or any Dechert attorney with whom you regularly work.