Critics bristle at timing of DOL actions on proxy voting and investment advice

The Department of Labor in just five days this month finalized two distinct yet controversial rule-making actions as the Trump administration's time in office nears its end.

The first rule, unveiled Dec. 11, stipulated that fiduciaries governed by the Employee Retirement Income Security Act can engage in proxy voting decisions only when it's in the interest and for the exclusive purpose of providing plan benefits to participants and beneficiaries. The proxy rule will go into effect Jan. 15, five days before the Biden administration takes office.

On Dec. 15, the Labor Department issued a final prohibited transaction exemption permitting investment-advice fiduciaries to receive compensation for more types of guidance, including advice to roll over assets from a retirement plan to an individual retirement account.

During the exemption's review process, the Office of Management and Budget designated it a "major rule" because it would likely result in an annual effect on the economy of $100 million or more, which means the exemption can't go into effect until 60 days after publication in the Federal Register. The exemption's effective date is Feb. 16. Since the new administration will be in office at that time, it could halt and review any rule-making effort that is not in effect, meaning that the exemption has an uncertain fate.

Opponents of the proxy rule and investment-advice exemption criticized the Labor Department for its timing, including Heather Slavkin Corzo, Washington-based head of U.S. policy for the Principles for Responsible Investing, who said the proxy rule was rushed to get it done "right under the wire."

"They're trying to get it done before the new president comes in and make it as difficult as possible for the new administration to implement new policies that will be more effective in trying to make sure that investors are internalizing the realities of climate change and other ESG factors in the investment actions," Ms. Slavkin Corzo added with respect to the proxy rule.

Sen. Patty Murray, D-Wash., ranking member of the Senate Health, Education, Labor and Pensions Committee, said in a statement that the proxy rule will hurt families' financial futures by taking away a key tool fiduciaries can use to fight for their clients' interests. "With the clock ticking on his presidency and a pandemic raging across the country, President Trump and (Labor) Secretary (Eugene) Scalia are spending valuable time and energy jamming through another attack on workers and retirees," Ms. Murray said.

The proxy rule was proposed Aug. 31 and had a 30-day comment period that drew thousands of responses. The final rule is more principles-based than the proposal and includes several changes, including the removal of a requirement for ERISA-governed fiduciaries to cast proxy votes any time a matter up for a vote has an economic impact on their plans.

Based on the comments, the Labor Department said it was persuaded that the complexity involved in a determination of economic vs. non-economic impact would be costly to implement. Moreover, it believes the core structure of the proposal that focused on "whether a fiduciary has a prudent process for proxy voting and other exercises of shareholder rights is a more workable framework for achieving the objectives of the proposal," it stated in the final rule.

"The plan fiduciary must never subordinate the interests of participants and beneficiaries in their retirement income to unrelated objectives, including promoting non-pecuniary goals or benefits," said Jeanne Klinefelter Wilson, acting assistant secretary of labor for the Employee Benefits Security Administration, on a call with reporters Dec. 11.

In order to satisfy their responsibilities when deciding whether to vote proxies, the rule allows fiduciaries to adopt at least one of two policies, which the Labor Department refers to as safe harbors. One notes that ERISA plans' voting resources will focus only on proposals related to the corporation's business activities or on proposals that are expected to have a material effect on the value of the plan's investment. The other safe harbor is a policy of refraining from voting on proposals when the size of the plan's holdings in the stock subject to the vote are below quantitative thresholds that the fiduciary prudently determines.

Thomas Quaadman, Washington-based executive vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said in a statement that the rule, along with actions from the Securities and Exchange Commission, "will ultimately help ensure proxy voting follows a transparent and unconflicted process." In July, SEC commissioners approved sweeping changes to the rules governing proxy advisory firms, including a requirement for those firms to disclose conflicts of interests to clients and allow companies that are the subject of voting advice to be able to access that advice before or at the same time as the advice is disseminated to clients.

On the other side of the proxy rule argument, Ms. Slavkin Corzo said the rule is "completely out of touch and actually impairs ERISA fiduciaries from making decisions that are in the best interest of plan participants by undermining their comfort with ESG integration."

The Labor Department's investment-advice exemption, which was proposed June 29 and received 106 written comments during a 30-day comment period, received a similar breakdown of support and criticism.

Currently, ERISA prohibits investment-advice fiduciaries from self-dealing, or taking actions that would provide additional compensation from transactions for themselves, their affiliates or related entities involving plans and individual retirement accounts. The exemption would allow registered investment advisers, broker-dealers, insurance companies and banks to receive compensation for more types of guidance as long as the parties using the exemption abide by the impartial conduct standards. Those standards require fiduciaries to adhere to basic fiduciary norms, like acting in the best interest of customers, charging no more than reasonable compensation and not making misleading statements. Fiduciaries relying on the new exemption would have to provide advice in the best interest of retirement investors and give those investors basic information about conflicts of interests, said the EBSA's Ms. Klinefelter Wilson during a Dec. 15 briefing call with reporters.

The exemption would be interpreted and applied consistent with the SEC's best-interest standard, known as Reg BI, which went into effect June 30.

George Michael Gerstein, Washington-based co-chairman of the fiduciary governance group at Stradley Ronon Stevens & Young LLP, said the exemption is "intended to be a fairly nimble, principles-based exemption that is holding firmly to the impartial conduct standards."

Whether the exemption goes into effect will ultimately be up to the Biden administration. David Meyer, Columbus, Ohio-based president of the Public Investors Advocate Bar Association, said in a statement that the exemption lowers the current standard for retirement advice, and he urged the incoming administration to "delay the effectiveness of the rule-making and to review the steps taken by DOL to push through this gift to Wall Street."

Upon proposing the exemption, the Labor Department also issued a final rule reinstating the five-part test used to determine whether an investment professional or financial institution is a fiduciary. It was in 2016 that the Labor Department under the Obama administration finalized a rule, commonly known as the fiduciary rule, that aimed to replace the five-part test by broadening the definition on when a person or entity is taking on fiduciary responsibilities. The 2016 rule was struck down in federal court in 2018.

In the exemption's preamble, the Labor Department stipulated that rollover advice is covered by the five-part test as long as each of the five prongs is met.