The proposal would apply to the fiduciary who is ultimately responsible for a plan's proxy voting and shareholder engagement efforts, whether internally or externally managed. It outlines specific steps fiduciaries must take when deciding whether to exercise shareholder rights and voting proxies, including a requirement to consider the likely impact on the investment performance of the plan; investigate the material facts that form the basis for any particular proxy vote or other exercise of shareholder rights; and maintain records on proxy voting activities and other exercises of shareholder rights.
"The plan fiduciary must never subordinate the interests of participants and beneficiaries in their retirement income or other benefits to unrelated objectives, including promoting non-pecuniary goals," the senior Labor Department official said.
The U.S. Chamber of Commerce, which has long advocated for regulations curtailing what it calls "nuisance" shareholder resolutions and the outsized influence of proxy advisory firms, welcomed the Labor Department's initiative.
"This proposal will strengthen investor protection and promote the interests of retirees," said Thomas Quaadman, executive vice president of the Chamber's Center for Capital Markets Competitiveness in Washington, in a statement. Along with recent actions taken by the Securities and Exchange Commission, the "DOL proposal will ensure that proxy voting is directly tied to the economic return for retirees and follows a transparent and unconflicted process," Mr. Quaadman added.
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.
Proponents of additional proxy regulation have said that automatic, or "robo" voting, when a proxy ballot is prepopulated with an advisory firms' recommendation and submitted before client review, is a problem in need of reform, a claim disputed by the institutional investor community throughout the SEC rule-making process.
"This 'automatic voting' prohibits pension beneficiaries from having full transparency on the proxy votes that affect them," said Christopher Burnham, president of the Washington-based Institute for Pension Fund Integrity, in a statement. "The SEC rightfully issued guidance to restrict this mismanaged practice and the Labor Department should similarly issue new oversight to this end. A process for review and rectifying flaws in the research and recommendations by proxy voters better legitimizes the proxy process and ensures that shareholders are voting with accurate information."
The Labor Department also outlined the "permitted practices" that a fiduciary could adopt in order to comply with the proposal, including voting proxies in accordance with the voting recommendations of a corporation's management on proposals that the fiduciary has prudently determined are unlikely to have a significant impact on the value of the retirement plan's investment.
George Michael Gerstein, co-chairman of the fiduciary governance group at Stradley Ronon Stevens & Young LLP in Washington, called that permitted practice a "nudge toward following management's recommendations."
Moreover, defining an economic benefit for a plan might be difficult, Mr. Gerstein added. "The way the proposal is currently drafted, I think there's a real question as to whether long-term benefits that are not easily quantifiable in the here and now will pass muster under the proposal," he said. "That has a significant consequence because any engagement takes a long time to materialize. If you're engaging a company board on an ESG issue, it could take months or years to get to the point where there's greater disclosure or they amend certain practices."
That outstanding question and whether there's a true economic consideration for a plan in voting a given proxy are going to present litigation risks, and "it's going to be incumbent upon fiduciaries to show that they considered these issues," Mr. Gerstein said.