On Monday, August 31, 2020, the Employee Benefits Security Administration of the United States Department of Labor (DOL) released a proposed regulation governing the conduct of employee benefit plan fiduciaries (the “Regulation”). Specifically, the Regulation restricts the manner in which fiduciaries of employee benefit plans governed by ERISA exercise shareholder voting rights, including proxy voting power, on securities owned by such plans.

DOL guidance has long held that the exercise of proxy voting power over securities held by an employee benefit plan is a fiduciary act under ERISA. Fiduciary acts are subject to several restrictions under ERISA. Most relevant to the Regulation are the “prudent expert” rule, which indicates that any such act must be taken with appropriate skill and prudence, and the “exclusive benefit” rule, indicating that a fiduciary must exercise his or her authority solely for the benefit of the plan and its participants. 

The Regulation interprets these requirements as obligating the fiduciary to (i) determine whether it should exercise any proxy voting rights solely with respect to the economic interests of the plan and (ii) if such rights are exercised, exercise them solely with respect to the economic interests of the plan. The Regulation specifically indicates that the economic interests of the plan may not be “subordinated” to any other interest (including, for example, social or environmental issues). The preamble to the Regulations explicitly states that a fiduciary must be able to articulate the economic benefit that the decision to exercise the voting right provides to the plan.

The Regulation does permit a fiduciary to engage a service provider to exercise this authority. However, as with other aspects of ERISA, the fiduciary retains oversight responsibility over such service provider, and can be held responsible if the fiduciary knows, or should have known, that the service provider is not abiding by the Regulation’s requirements.

These Regulations, if finalized, are likely to have a chilling effect on the exercise of proxy voting rights by fiduciaries. Because of the explicit requirement that a fiduciary be able to economically justify the decision to exercise their authority, many fiduciaries are likely to decline to vote. The Regulation notes that, in many cases, it is likely that the costs of justifying the vote will exceed any economic benefit to the plan.

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