Compliance News | September 28, 2020

DOL’s Latest Proposed Regulation: Proxy Voting

The DOL has issued a proposed regulation that would revise proxy voting and shareholder rights for retirement plans subject to ERISA. These revisions intend to modify a standard that has largely been in place for three decades. The comment deadline is soon: October 5, 2020.

This is the third proposed regulation that the DOL has issued this summer addressing fiduciary obligations. The two other related regulations also had 30-day comment periods (as opposed to the usual 60-day comment period).

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The proposed guidance would address fiduciary responsibility to vote proxies

The proposed regulation on proxy voting (published in the September 4, 2020 Federal Register) would modify the DOL’s investment duties regulation by addressing the duties of a fiduciary to vote on shareholder issues. Previous DOL guidance on proxy voting has been largely in advisory opinions and other sub-regulatory guidance.

When a retirement plan invests in a public company or in a fund that invests in public companies, the right to vote on shareholder issues is tied to the stock. The plan’s fiduciary or investment adviser must decide whether and how to vote on proxy issues. For plans that are subject to ERISA, these decisions are governed by ERISA’s standards for fiduciary decisions.

The DOL expresses concern that some fiduciaries believe that they have a fiduciary obligation to vote in all cases. The DOL’s position is that fiduciaries weigh the costs and benefits of voting. Given that the cost-benefit analysis is likely too costly to justify casting the vote, the DOL outlines permitted practices fiduciaries may adopt that would not require the preliminary cost benefit analysis. See the DOL fact sheet.

As noted above, the proposed regulation has a 30-day comment period.

Guidance for fiduciaries on investment advice and proposed conflict-of-interest exemption

At the end of June, the DOL removed its 2016 investment advice fiduciary regulation and reverted back to the five-part regulatory test. The DOL purports to take this action to reflect a 2018 decision by the U.S. Court of Appeals for the 5th Circuit holding the DOL’s final regulation invalid.

At the same time, the DOL issued a proposed exemption from its conflict-of-interest rules that would allow fiduciaries to provide conflicted advice as long as they satisfied a “best-interest” standard (similar to the SEC’s standard). See the DOL’s fact sheet. The DOL received 106 comments on the proposed exemption.

ESG investing

Also at the end of June, the DOL issued a proposed regulation under its investment duties regulation addressing environmental, social and governance (ESG) investing. Previously, the DOL issued Advisory Opinions and other sub-regulatory guidance.

The DOL described its objective as providing regulatory guideposts in light of fiduciaries making investments that seemed to consider ESG goals improperly. The DOL reflects the perspective that fiduciaries may look at non-pecuniary goals (not return or risk related) only if the investments are identical from a pecuniary viewpoint. It further supports the concept that two investments are rarely identical. The DOL also appears to suggest that fiduciaries are treating ESG factors as having a pecuniary impact (i.e., on return or risk) too often. See the DOL’s fact sheet. The DOL received 1,100 comments on the proposed regulation, the dramatic majority of which essentially condemned the regulation.

What’s next?

As was the case with the proposed exemption and the ESG proposed regulation, the proxy voting proposed regulation is likely to be controversial and receive a significant number of comments opposing the DOL’s position.

The 30-day comment periods are a sign that the DOL intends to issue final guidance as soon as possible. This is likely the reason for the urgency: historically, Republican and Democratic administrations have had very different ideas on these issues. Issuing regulations on proxy voting and ESG investing would make it more difficult for a new administration to change the prior administration’s position.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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