DOL’S Final ERISA Proxy Voting Rule Largely Changed to Principles-Based Approach

By: Michael B. Richman, Julie K. Stapel, Craig A. Bitman, Lindsay B. Jackson, Daniel R. Kleinman, and Natalie R. Wengroff, Morgan, Lewis & Bockius LLP

The U.S. Department of Labor (DOL) has released its final rule on the application of the Employee Retirement Income Security Act (ERISA) fiduciary duties—specifically the duties of prudence and loyalty—to proxy voting and the exercise of shareholder rights. It took effect on January 15, 2021, with delayed applicability dates for certain provisions. It adds an additional subsection to the DOL’s final financial factors regulation that was published in the Federal Register in November.

The proposed regulation, published in September 2020, had been controversial in a number of respects, with much of the criticism focused on what were considered to be overly prescriptive rules requiring fiduciaries to undertake, and document, a specific cost-benefit analysis before voting any proxies or exercising shareholder rights. In response to the comments, the DOL has eliminated many of those prescriptive requirements, resulting in what the DOL describes as a principles-based rule designed to provide certainty on fiduciaries’ responsibilities under ERISA with respect to proxy voting, while offering more flexibility on how those responsibilities may be met. Some of the required steps in the proposal have been effectively replaced by safe harbors. The result, while still possibly requiring changes to existing practices to ensure compliance (as discussed under Observations, below), should be viewed as more consistent with those practices developed in the wake of the DOL’s previous guidance in this area.

The DOL’s description of the final rule notes several areas where the rule is intended to align with U.S. Securities and Exchange Commission (SEC) guidance on proxy voting. See below for a chart comparing key elements of the final DOL rule and the SEC guidance.

The DOL’s guidance on proxy voting for ERISA plans dates back to the 1980s, taking the position (stated in a 1988 advisory opinion) that the fiduciary act of managing plan assets that are shares of stock includes voting proxies appurtenant to that stock. Subsequent guidance in 1994, 2008, and 2016 emphasized that these votes should be based on the economic interests of the plan, but with some variations on the ability to take cost and noneconomic considerations into account when deciding whether or how to vote proxies. All of this was in the form of subregulatory guidance, which the Trump administration did not consider to be binding. CLICK HERE TO READ THE FULL ARTICLE IF YOU ARE A PRACTICAL GUIDANCE SUBSCRIBER