In a rulemaking which was separate from the Final ESG Rule but related to it, on December 16, 2020, the DOL issued a final rule confirming its position that ERISA’s fiduciary duties of prudence and loyalty apply to an ERISA plan fiduciary’s exercise of shareholder rights, including proxy voting, proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms (“Final Proxy Voting Rule”). DOL Announcement on ESG Investments and Proxy Voting. The Proxy Voting Rule generally became effective on January 15, 2021.
Similar to the Final ESG Rule, the Proxy Voting Rule was structured in a manner that would amend the DOL’s investment duties regulation. When the DOL finalized the ESG Rule, it reserved a section of the amended regulation for the Final Proxy Voting Rule.
The Final Proxy Voting Rule reflected the DOL’s attempt at clarifying prior guidance in this area. In particular, the rule clarified the fiduciary standards around proxy voting for investment portfolios subject to the ERISA fiduciary responsibility rules. The rule made clear that a fiduciary is not required to vote on shareholder rights taking in account the costs of voting. This provided the fiduciary discretion to decide that not voting or exercising a particular right is in the plan’s economic interest. The final rule instead took a principles-based approach and details the obligations of fiduciaries when making such decisions in order to satisfy their duties of prudence and loyalty, which included the following:
1. act exclusively in accordance with the economic interest of the plan and its participants and beneficiaries;
2. evaluate any costs involved;
3. not to allow any non-pecuniary objectives to override the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan, or further non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries;
4. consider material facts that form the basis for any particular proxy vote or other exercise of shareholder rights;
4. maintain records concerning proxy voting activities and other exercises of shareholder rights; and
5. exercise prudence and diligence in the selection and monitoring of individuals (if any) who have been assigned authority to exercise shareholder rights, or who have been selected to advise or otherwise assist with the exercise of shareholder rights.
Essentially, the rule limited plan fiduciaries from casting shareholder votes in favor of social or political position that do not advance the financial interests of retirement plan participants.
There was concern that the Final Proxy Voting Rule could have a chilling effect on considering ESG investments in retirement plans. Thus, on March 10, 2021 (The same day that the government tabled the enforcement of the Final ESG Rule), the DOL stated that it would not enforce the rule.
Like the Final ESG Rule, the DOL could undertake a new notice-and-comment rulemaking to implement an alternative rule. Given President Biden administration’s proclivity to ESG investing, it would not be surprising that this occurs.