Fiduciary Duties Regarding Proxy Voting and Shareholder Rights

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1

Throughout this preamble, the Department’s

discussion of plan fiduciaries includes named

fiduciaries under the plan, along with any persons

that named fiduciaries have designated to carry out

fiduciary responsibilities as permitted under ERISA

section 405(c)(1). Similarly, references to proxy

voting also encompass situations in which a

fiduciary directly casts a vote in a matter (e.g.,

voting in person at a shareholder meeting) rather

than by proxy.

2

ERISA section 404(a)(1). See also ERISA section

403(c)(1) (‘‘[T]he assets of a plan shall never inure

to the benefit of any employer and shall be held for

the exclusive purposes of providing benefits to

participants in the plan and their beneficiaries’’).

3

Fifth Third Bancorp v. Dudenhoeffer, 573 U.S.

409, 421 (2014) (the ‘‘benefits’’ to be pursued by

ERISA fiduciaries as their ‘‘exclusive purpose’’ does

not include ‘‘nonpecuniary benefits’’) (emphasis in

original).

4

Pegram v. Herdrich, 530 U.S. 211, 235 (2000)

(quoting Donovan v. Bierwirth, 680 F.2d 263, 271

(2d Cir. 1982)).

5

See, e.g., Tibble v. Edison Int’l, 843 F.3d 1187,

1197 (9th Cir. 2016).

6

Letter to Helmuth Fandl, Chairman of the

Retirement Board, Avon Products, Inc. 1988 WL

897696 (Feb. 23, 1988). Only a few commenters on

the proposal mentioned the Avon Letter, either

supporting the views taken in the letter as being

consistent with other professional codes of ethics or

asserting that the proposed rule reversed the intent

of the Avon Letter by establishing a presumption

that voting proxies is a cost to be minimized and

not an asset to be prudently managed.

7

59 FR 38860 (July 29, 1994).

8

See 1994 DOL Press Conference, at 2–4, 10, 15–

16; see also Leslie Wayne, U.S. Prodding

Companies to Activism on Portfolios, N.Y. Times

(July 29, 1994), www.nytimes.com/1994/07/29/

business/us-prodding-companies-to-activism-on-

portfolios.html (quoting official stating that the

Department is ‘‘trying to encourage corporations to

be activist owners,’’ and that ‘‘such activism is

consistent with your fiduciary duty and we expect

it will improve your corporate performance’’).

DEPARTMENT OF LABOR

Employee Benefits Security

Administration

29 CFR Parts 2509 and 2550

RIN 1210–AB91

Fiduciary Duties Regarding Proxy

Voting and Shareholder Rights

AGENCY

: Employee Benefits Security

Administration, Department of Labor.

ACTION

: Final rule.

SUMMARY

: The Department of Labor

(Department) is amending the

‘‘Investment Duties’’ regulation to

address the application of the prudence

and exclusive purpose duties under the

Employee Retirement Income Security

Act of 1974 (ERISA) to the exercise of

shareholder rights, including proxy

voting, the use of written proxy voting

policies and guidelines, and the

selection and monitoring of proxy

advisory firms. This document also

removes Interpretive Bulletin 2016–01

from the Code of Federal Regulations as

it no longer represents the view of the

Department regarding the proper

interpretation of ERISA with respect to

the exercise of shareholder rights by

fiduciaries of ERISA-covered plans.

DATES

: Effective Date: The final rule is

effective on January 15, 2021.

Applicability Dates: See Section

B.3(vi) of this document and

§ 2550.404a–1(g) of the final rule for

compliance dates for § 2550.404a–

1(e)(2)(ii)(D) and (E), (e)(2)(iv), (e)(4)(ii)

of the final rule.

FOR FURTHER INFORMATION CONTACT

:

Jason A. DeWitt, Office of Regulations

and Interpretations, Employee Benefits

Security Administration, (202) 693–

8500. This is not a toll-free number.

Customer Service Information:

Individuals interested in obtaining

information from the Department of

Labor concerning ERISA and employee

benefit plans may call the Employee

Benefits Security Administration

(EBSA) Toll-Free Hotline, at 1–866–

444–EBSA (3272) or visit the

Department of Labor’s website

(www.dol.gov/agencies/ebsa).

SUPPLEMENTARY INFORMATION

:

A. Background and Purpose of

Regulatory Action

Title I of the Employee Retirement

Income Security Act of 1974 (ERISA)

establishes minimum standards for the

operation of private-sector employee

benefit plans and includes fiduciary

responsibility rules governing the

conduct of plan fiduciaries.

1

In

connection with proxy voting, the

Department’s longstanding position is

that the fiduciary act of managing plan

assets includes the management of

voting rights (as well as other

shareholder rights) appurtenant to

shares of stock. In carrying out these

duties, ERISA mandates that fiduciaries

act ‘‘prudently’’ and ‘‘solely in the

interest’’ and ‘‘for the exclusive

purpose’’ of providing benefits to

participants and their beneficiaries.

2

This regulatory project was

undertaken, in part, to confirm that,

when exercising shareholder rights,

ERISA plan fiduciaries may not

subordinate the interests of plan

participants and beneficiaries in

receiving financial benefits under a plan

to non-pecuniary objectives.

3

This duty

of loyalty—a bedrock principle of

ERISA, with deep roots in the common

law of trusts—requires those serving as

fiduciaries to act with a single-minded

focus on the interests of beneficiaries.

The duty of prudence prevents a

fiduciary from choosing an investment

alternative that is financially less

beneficial than reasonably available

alternatives. The Supreme Court has

described the duty of loyalty as

requiring that fiduciaries act with an

‘‘eye single’’ to the interests of

participants and beneficiaries,

4

and

appellate courts have described ERISA’s

fiduciary duties as ‘‘the highest known

to the law.’’

5

The subject of this

rulemaking is how these ERISA

fiduciary duties apply to the exercise of

shareholder rights by ERISA-covered

plans, as a result of the Department’s

belief that confusion exists among some

fiduciaries and other stakeholders with

respect to the exercise of shareholder

rights, perhaps due in part to varied

statements the Department has made on

the consideration of non-pecuniary or

non-financial factors over the years in

sub-regulatory guidance on these

activities.

The Department began interpreting

the duties of prudence and loyalty and

issuing sub-regulatory guidance in the

area of proxy voting and the exercise of

shareholder rights in the 1980s. The

Department issued an opinion letter to

Avon Products, Inc. in 1988 (the Avon

Letter), in which the Department took

the position that, while the fiduciary act

of managing plan assets that are shares

of corporate stock includes the voting of

proxies appurtenant to those shares, the

named fiduciary of a plan has a duty to

monitor decisions made and actions

taken by investment managers with

regard to proxy voting.

6

Subsequent to the Avon Letter, the

Department issued additional guidance

concerning fiduciary duties in the

context of exercising shareholder rights.

In 1994, the Department issued its first

interpretive bulletin on proxy voting,

Interpretive Bulletin 94–2 (IB 94–2).

7

IB

94–2 recognized that fiduciaries may

engage in shareholder activities

intended to monitor or influence

corporate management in situations

where the responsible fiduciary

concludes that, after taking into account

the costs involved, there is a reasonable

expectation that such shareholder

activities (by the plan alone or together

with other shareholders) will enhance

the value of the plan’s investment in the

corporation. The Department expected

that increased shareholder engagement

by pension funds—encouraged by the

new interpretive bulletin—would

improve corporate performance and

help ensure companies treated their

employees well.

8

However, the

Department also reiterated its view that

ERISA does not permit fiduciaries, in

voting proxies or exercising other

shareholder rights, to subordinate the

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9

73 FR 61731 (Oct. 17, 2008).

10

Id. at 61732.

11

Id.

12

Id. at 61734.

13

81 FR 95879 (Dec. 29, 2016). In addition, the

Department issued a Field Assistance Bulletin to

provide guidance on IB 2016–01 on April 23, 2018.

See FAB 2018–01, at www.dol.gov/sites/dolgov/

files/ebsa/employers-and-advisers/guidance/field-

assistance-bulletins/2018-01.pdf.

14

Id. at 95882.

15

See id. at 95881.

16

85 FR 55219 (Sept. 4, 2020).

17

See, e.g., Barbara Novick, Revised and

Extended Remarks at Harvard Roundtable on

Corporate Governance Keynote Address ‘‘The

Goldilocks Dilemma’’ (Nov. 6, 2019),

www.blackrock.com/corporate/literature/

publication/barbara-novick-remarks-harvard-

roundtable-corporate-governance-the-goldilocks-

dilemma-110619.pdf, at 15 (Avon Letter indicated

‘‘that asset managers should generally vote shares

as part of their fiduciary duty’’); see Former SEC

Commissioner Daniel M. Gallagher, Outsized Power

& Influence: The Role of Proxy Advisers,

Washington Legal Foundation (Aug. 2014), https://

s3.us-east-2.amazonaws.com/washlegal-uploads/

upload/legalstudies/workingpaper/GallagherWP8-

14.pdf, at 3; Business Roundtable Comment Letter

on SEC Proposed Amendments to Rule 14a-8 (Feb.

3, 2020), www.sec.gov/comments/s7–22–19/s72219–

6742505–207780.pdf, at 2–3 (‘‘many institutional

investors historically interpreted SEC and

Department of Labor rules and guidance as

requiring institutional investors to vote every share

on every matter on a proxy’’) (citing Gallagher);

Manifest Information Services Ltd, Response to

ESMA Discussion Paper ‘An Overview of the Proxy

Advisory Industry: Considerations on Possible

Policy Options’ (June 2012), www.osc.gov.on.ca/

documents/en/Securities-Category2-Comments/

com_20120622_25–401_wilsons.pdf, at 37

(comment letter from European proxy voting agency

describing DOL proxy guidance as concerning

‘‘duties of . . . fiduciaries . . . to vote the shares

in companies held by their pension plans’’); Charles

M. Nathan, The Future of Institutional Share

Voting: Three Paradigms (July 23, 2010), https://

corpgov.law.harvard.edu/2010/07/23/the-future-of-

institutional-share-voting-three-paradigms/ (‘‘the

current system for voting portfolio securities by

application of uniform voting policies . . . is

perceived as successfully addressing the commonly

understood fiduciary duty of institutional investors

to vote all of their portfolio securities on all

matters’’). See also U.S. Department of Labor,

Transcript of Press Conference on Corporate

Activist Role in Pension Planning (July 28, 1994),

at 15–16 (then-Secretary Robert Reich stating that

IB 94–2 ‘‘makes very clear that . . . pension fund

managers, trustees, [and] fiduciaries have an

obligation to vote proxies’’ unless the costs

‘‘substantially outweigh’’ the benefits) (1994 DOL

Press Conference).

18

85 FR 55219 at 55221–22 (Sept. 4, 2020).

19

See id., at 55222.

20

Kosmas Papadopoulos, The Long View: US

Proxy Voting Trends on E&S Issues from 2000 to

2018, Harvard Law School Forum on Corporate

Governance (Jan. 31, 2019), https://

corpgov.law.harvard.edu/2019/01/31/the-long-view-

us-proxy-voting-trends-on-es-issues-from-2000-to-

2018, (2019 ISS Proxy Voting Trends).

21

See, e.g., Commission Guidance Regarding

Proxy Voting Responsibilities of Investment

Continued

economic interests of participants and

beneficiaries to unrelated objectives.

In October 2008, the Department

replaced IB 94–2 with Interpretive

Bulletin 2008–02 (IB 2008–02).

9

The

Department’s intent was to update the

guidance in IB 94–2 and to reflect

interpretive positions issued by the

Department after 1994 on shareholder

engagement and socially-directed proxy

voting initiatives. IB 2008–02 stated that

fiduciaries’ responsibility for managing

proxies includes both deciding to vote

or not to vote.

10

IB 2008–02 further

stated that the fiduciary duties

described at ERISA sections 404(a)(1)(A)

and (B) require that in voting proxies

the responsible fiduciary shall consider

only those factors that relate to the

economic value of the plan’s investment

and shall not subordinate the interests

of the participants and beneficiaries in

their retirement income to unrelated

objectives. In addition, IB 2008–02

stated that votes shall only be cast in

accordance with a plan’s economic

interests. IB 2008–02 explained that if

the responsible fiduciary reasonably

determines that the cost of voting

(including the cost of research, if

necessary, to determine how to vote) is

likely to exceed the expected economic

benefits of voting, the fiduciary has an

obligation to refrain from voting.

11

The

Department also reiterated in IB 2008–

02 that any use of plan assets by a plan

fiduciary to further political or social

causes ‘‘that have no connection to

enhancing the economic value of the

plan’s investment’’ through proxy

voting or shareholder activism is a

violation of ERISA’s exclusive purpose

and prudence requirements.

12

In 2016, the Department issued

Interpretive Bulletin 2016–01 (IB 2016–

01), which reinstated the language of IB

94–2 with certain modifications.

13

IB

2016–01 reiterated and confirmed that

‘‘in voting proxies, the responsible

fiduciary [must] consider those factors

that may affect the value of the plan’s

investment and not subordinate the

interests of the participants and

beneficiaries in their retirement income

to unrelated objectives.’’

14

In further

interpreting ERISA’s duties, the

Department has stated that it has

rejected a construction of ERISA that

would render the statute’s tight limits

on the use of plan assets illusory and

that would permit plan fiduciaries to

expend trust assets to promote myriad

public policy preferences, including

through shareholder engagement

activities, voting proxies, or other

investment policies.

15

On September 4, 2020, the

Department published in the Federal

Register a proposed rule to amend the

‘‘Investment Duties’’ regulation at 29

CFR 2550.404a-1 (Investment Duties

regulation) to address the prudence and

loyalty duties under sections

404(a)(1)(A) and 404(a)(1)(B) of ERISA

in the context of proxy voting and other

exercises of shareholder rights by the

responsible ERISA plan fiduciaries, the

use of written proxy voting policies and

guidelines, and the selection and

monitoring of proxy advisory firms.

16

The Department explained its belief that

addressing the application of ERISA

fiduciary obligations with respect to

exercise of shareholder rights, including

proxy voting, through notice-and-

comment regulatory action under the

Administrative Procedure Act was

appropriate and would benefit ERISA

plan fiduciaries and plan participants.

This regulatory project also was

initiated to respond to a number of other

issues. The Department was concerned,

for example, that the Avon Letter and

subsequent sub-regulatory guidance

from the Department has resulted in a

misplaced belief among some

stakeholders that fiduciaries must

always and in every case vote proxies,

subject to limited exceptions, in order to

fulfill their obligations under ERISA.

17

Further, the Department was responding

to significant changes in the way ERISA

plans invest and changes in the

investment world more broadly since

the Department first issued guidance on

these topics in 1988. Widespread

shareholder activism and corporate

takeovers at that time created an intense

focus on shareholder voting by ERISA

plans and confusion as to how fiduciary

standards applied to such voting.

The Department described in the

proposal a variety of changes in proxy

voting policies and behavior, including

an increase in the percentage of

individual securities held by, and plan

assets managed by, institutional

investors, diminishing the scope of

proxy voting rights and obligations

attributable to individual securities held

by ERISA plans.

18

At the same time,

since the 1980s, the type of investments

held by ERISA plans has changed, for

example through the development and

growth of exchange-traded funds,

sector-based equity products, hedge

funds, and passive investments. The

proportion of ERISA plan assets held in

alternative investments like hedge,

private equity, and venture capital

funds has grown significantly.

19

When

issuing the proposed rule, the

Department cited evidence that

investors continue to add to the set of

factors considered in their review and

analysis of corporate practices.

20

The Department also took note of the

issues and concerns identified during

the U.S. Securities and Exchange

Commission’s (SEC’s) ongoing proxy

reform initiative.

21

Pursuant to the 2019

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Advisers, 84 FR 47420 (Sept. 10, 2019) (2019 SEC

Guidance).

22

See Exemptions from the Proxy Rules for Proxy

Voting Advice, 85 FR 55082 (Sept. 3, 2020) (2020

SEC Proxy Voting Advice Amendments).

23

See Supplement to Commission Guidance

Regarding Proxy Voting Responsibilities of

Investment Advisers, 85 FR 55155 (Sept. 3, 2020)

(2020 SEC Supplemental Guidance).

24

85 FR at 55219.

25

Id., beginning at 55221 and in the proposed

regulatory impact analysis beginning at 55227.

26

See www.dol.gov/agencies/ebsa/laws-and-

regulations/rules-and-regulations/public-comments.

SEC Guidance, where an investment

adviser has the authority to vote on

behalf of its client, the investment

adviser, among other things, must have

a reasonable understanding of the

client’s objectives and must make voting

determinations that are in the best

interest of the client. Under this

guidance, for an investment adviser to

form a reasonable belief that its voting

determinations are in the best interest of

the client, the investment adviser

should conduct an investigation

reasonably designed to ensure that the

voting determination is not based on

materially inaccurate or incomplete

information. The 2019 SEC Guidance

also provides that investment advisers

that retain proxy advisory firms to

provide voting recommendations or

voting execution services should

consider additional steps to evaluate

whether the voting determinations are

consistent with the investment adviser’s

voting policies and procedures, and in

the client’s best interest before the votes

are cast. The 2019 SEC Guidance

provides that investment advisers

should consider whether the proxy

advisory firm has the capacity and

competency to adequately analyze the

matters for which the investment

adviser is responsible for voting. The

2019 SEC Guidance also explains that

an investment adviser’s decision

regarding whether to retain a proxy

advisory firm should also include a

reasonable review of the proxy advisory

firm’s policies and procedures regarding

how it identifies and addresses conflicts

of interest. Further, as part of the

investment adviser’s ongoing

compliance program, the investment

adviser must, no less frequently than

annually, review and document the

adequacy of its voting policies and

procedures.

The SEC also adopted regulatory

amendments that, among other things,

require proxy advisory firms that are

engaged in a solicitation to provide

specified disclosures, adopt written

policies and procedures reasonably

designed to ensure that proxy voting

advice is made available to securities

issuers, and provide proxy advisory firm

clients with a mechanism by which the

clients can reasonably be expected to

become aware of a securities issuer’s

views about the proxy voting advice, so

that the clients can take such views into

account as they vote proxies.

22

The SEC

issued supplemental guidance to assist

investment advisers in assessing how to

consider the additional information that

may become more readily available to

them as a result of these amendments,

including in circumstances when the

investment adviser uses a proxy

advisory firm’s electronic vote

management system that ‘‘pre-

populates’’ the adviser’s proxies with

suggested voting recommendations and/

or for voting execution services.

23

The proposal on proxy voting and

shareholder rights provided the

Department with a vehicle to coordinate

many of the fiduciary concepts

concerning investing according to the

pecuniary interests of plans with the

rules governing the use of plan

resources on proxy voting and the

exercise of other shareholder rights.

24

A

more detailed discussion of the basis for

the rulemaking and the evidence

supporting the proposal can be found in

the preamble to the Department’s

proposal.

25

As discussed throughout

this preamble, the final rule reflects

significant modifications to the proposal

based on the public record and

commenters’ feedback. The Department

continues to believe that enhancing the

effectiveness and efficiency of the proxy

voting process for ERISA plans is an

important goal. This process will be

improved to the extent ERISA plan

fiduciaries better understand how to

make informed decisions when

executing shareholder rights in

compliance with ERISA’s obligations of

prudence and loyalty—specifically that

the execution of such rights must be

conducted in a manner to ensure that

plan resources are not inappropriately

allocated. The Department also believes

that this rule is necessary to modernize

standards for ERISA plan fiduciaries in

this context, for example to recognize

that proxy voting advice businesses,

such as proxy advisory firms, now play

a more significant role in the proxy

voting process. It is not the

Department’s intention to judge the

value of any specific proposal to be

voted upon, for example, or to take a

position on the merits of any particular

topic. Rather, the Department intends

only to address the standards according

to which plan fiduciaries must make

such judgments, a goal that the

Department believes is more

appropriately advanced in light of

revisions made in the final rule.

The Department invited interested

persons to submit comments on the

proposed rule, and in response received

approximately 300 written comments

from a variety of parties, including plan

sponsors and fiduciaries, plan service

and investment providers (including

investment managers and proxy voting

firms), and employee benefit plan and

participant representatives. The

Department also received approximately

6,700 submissions in response to

petitions. The comments are available

for review on the ‘‘Public Comments’’

page under the ‘‘Laws and Regulations’’

tab of the Department’s Employee

Benefits Security Administration

website.

26

B. Final Rule

After evaluating the full range of

public comments and extensive record

developed on the proposal, the final

rule as described below amends the

Investment Duties regulation to address

the prudence and loyalty duties under

sections 404(a)(1)(A) and 404(a)(1)(B) of

ERISA in the context of proxy voting

and other exercises of shareholder rights

by responsible ERISA plan fiduciaries.

The Department anticipates that actions

taken by the SEC as part of its proxy

reform initiative may result in changes

in practices among investment advisers

and proxy advisory firms that will help

address some of the Department’s

concerns about ERISA fiduciaries

properly discharging their duties with

respect to proxy voting activities and

appropriately selecting and overseeing

proxy advisory firms. However, the

Department continues to believe that

notice-and-comment rulemaking in this

area is appropriate, in part because the

Department’s existing sub-regulatory

guidance may have created a perception

that ERISA fiduciaries must vote proxies

on every proposal. In the Department’s

view, a regulation in this area will

address the misunderstanding that

exists on the part of some stakeholders

that ERISA fiduciaries are required to

vote all proxies and, to the extent that

proxies are voted, direct fiduciaries to

act in a manner consistent with the

economic interests of plans and plan

participants that does not subordinate

their interests to any non-pecuniary

objectives or promote goals unrelated to

the financial interests of participants

and beneficiaries.

Some commenters complained that

the 30-day comment period was too

short given the complexity of issues

involved, the magnitude of such

changes to the current marketplace

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27

One commenter suggested that the rule may

especially benefit fiduciaries of small plans, for

whom the cost and burden of voting all proxies may

be an impediment to sponsoring a plan.

28

See 85 FR 72846 (Nov. 13, 2020).

practices related to proxy voting and

other exercises of shareholder rights,

and the need to prepare supporting data.

Many commenters requested an

extension of the comment period and

that the Department schedule a public

hearing on the proposal and allow the

public record to remain open for post-

hearing comments from interested

parties. The Department has considered

these requests, but has determined that

it is neither necessary nor appropriate to

extend the public comment period, hold

a public hearing, or withdraw or

republish the proposed regulation. A

substantial and comprehensive public

comment record was developed on the

proposal sufficient to substantiate

promulgating a final rule. The scope and

depth of the public record that has been

developed itself belies arguments that a

30-day comment period was

insufficient. In addition, most issues

relevant to the proposal have been

analyzed and reviewed by the

Department and the public in the

context of three separate Interpretive

Bulletins issued in 1994, 2008, and 2016

and the public feedback that resulted.

Finally, public hearings are not required

under the Department’s general

rulemaking authority under section 505

of ERISA, nor under the Administrative

Procedure Act’s procedures for

rulemaking at 5 U.S.C. 553(c). In this

case, a public hearing is not necessary

to supplement an already

comprehensive public record.

Thus, this final rulemaking follows

the notice-and-comment process

required by the Administrative

Procedure Act, and fulfills the

Department’s mission to protect,

educate, and empower retirement

investors. This rule is considered to be

an Executive Order (E.O.) 13771

regulatory action. Details on the

estimated costs of this rule can be found

in the final rule’s economic analysis.

The Department has concluded that the

additions to the Investment Duties

regulation and the rule’s improvements

as compared to the Department’s

previous sub-regulatory guidance are

appropriate and warranted. The final

rule furthers the paramount goal of

ERISA plans to provide a secure

retirement for American workers.

Accordingly, after consideration of the

written comments received, the

Department has determined to adopt the

proposed regulation as modified and set

forth below. As explained more fully

below, the final regulation contains

several important changes from the

proposal in response to public

comments.

1. General Public Comments and

Adoption of a Principles-Based

Approach

In response to the proposed rule, the

Department received a considerable

amount of support and opposition from

interested parties.

Commenters supporting the rule

argued that the proposed rule was

essential because the Department’s

existing sub-regulatory guidance has

created a perception that ERISA

fiduciaries must vote proxies on every

proposal. This rulemaking, according to

some commenters, would provide

certainty to plan fiduciaries and benefit

ERISA plan participants, by ensuring

that plan resources will be expended

only on proxy research and voting

matters that are necessary to protect the

economic interests of plan participants.

Commenters supporting the proposal

endorsed the Department’s view that

these rights must be exercised with a

singular focus in mind—the economic

interests of ERISA plan participants and

beneficiaries. They agreed that in a

rapidly changing investment landscape,

plan fiduciaries and asset managers

should not be influenced by non-

financial interests. For example, some

commenters explained that it is the duty

of ERISA fiduciaries to reject attempts to

advance political or social objectives at

the expense of investment returns,

growth, and stability for individuals

saving for retirement, the very

population that the Department, through

ERISA, has been charged to protect. As

one commenter explained, ERISA

fiduciary duties are predicated on trust

law, and trusts must be managed to the

advantage of formally named

beneficiaries—in this case plan

participants and their beneficiaries—

and not to benefit corporate

management or vague notions of societal

good as determined by other parties.

Some commenters argued that proxy

advisory firms, which often assist with

proxy voting, have an outsized

influence on voting decisions and have

‘‘taken sides’’ politically and socially.

A number of commenters agreed in

general with the Department’s position

on these issues, and some provided

additional information substantiating

the need for, and propriety of, the

Department’s proposed approach to

managing proxy voting practices. Some

further argued that, although exercising

shareholder rights on the basis of

environmental, social, or governance

factors (commonly referred to as ‘‘ESG’’)

may be welcomed by some private

investors, proxy rights should be

exercised only for financial matters that

will help secure the retirement of plan

participants in the case of ERISA-

covered pension and other retirement

savings plans because when fiduciaries

exercise proxy rights for non-financial

reasons they are more likely to incur

additional, unnecessary risks for

investors that may not produce

corresponding economic value. A few

commenters supported the Department’s

assertion that the amount of ESG

shareholder proposals has increased

since 1988, as more such proposals are

being put forward by groups with

objectives other than increasing

shareholder returns. While some

commenters agreed with ESG

proponents on the importance of

environmental protections, social and

political issues, and transparency in

corporate governance, they nevertheless

expressed their concern that proxy

advisory firms, in particular, seem to

have increasing power to promote these

goals without the knowledge and

agreement of a corporation’s ‘‘real’’

owners, the shareholders, which

include ERISA plans. They agreed that

the Department has appropriately

undertaken in this rulemaking to

improve fiduciary oversight of these

firms. Finally, commenters supporting

the rule also said that any increased

costs associated with the rule would be

manageable, or, according to some

commenters, that the rule would

ultimately decrease plan costs and

compliance burdens.

27

Other commenters, however, objected

to the Department’s proposed

rulemaking and raised a variety of legal

and practical concerns. Some

commenters who objected to the

proposal requested that the Department

withdraw the rule entirely, propose a

different rule that takes a more

principles-based approach to this

subject matter, or wait until the

Department analyzes the impact of its

rule concerning ‘‘Financial Factors in

Selecting Plan Investments.’’

28

Alternatively, they argued that the

Department should wait until the SEC

establishes a track record of experience

with its new proxy advisor and

shareholder proposal rules, so that the

Department can better align its guidance

with the SEC’s rules. Additionally, some

commenters expressed the view that a

principles-based approach would be

consistent with the Investment Advisers

Act of 1940 (Advisers Act) and the

SEC’s Rule 206(4)–6 thereunder and

might help to reduce burdens for

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29

85 FR 55219, 55230 (Sept. 4, 2020).

30

A number of commenters asserted that the

proposal was a not-so-thinly-veiled, policy-based

judgment against the value of ESG shareholder

proposals. They argued that this judgment is not the

Department’s to make; rather, it is the role of plan

fiduciaries to make such judgments, and ESG

proposals are material to shareholder decision-

making and an important part of the due diligence

of fiduciaries in constructing long-term, diversified

portfolios. The Department disagrees with these

commenters. This rulemaking project, similar to the

recently published final rule on ERISA fiduciaries’

consideration of financial factors in investment

decisions, recognizes, rather than ignores, the

economic literature and fiduciary investment

experience that show a particular ‘‘E,’’ ‘‘S,’’ or ‘‘G’’

consideration may present issues of material

business risk or opportunities to a specific company

that its officers and directors need to manage as part

of the company’s business plan and that qualified

investment professionals would treat as economic

considerations under generally accepted investment

theories. However, the Department recognizes that

other ‘‘E,’’ ‘‘S,’’ or ‘‘G’’ factors may be non-

pecuniary and a fiduciary should not assume that

combining ESG factors into a single rating, index,

or score creates an amalgamated factor that is itself

pecuniary. Rather, this final rule and the financial

factors rule sought to make clear that, from a

fiduciary perspective, the relevant question is not

whether a factor under consideration is ’’ESG,’’ but

whether it is a pecuniary factor relevant to the

exercise of a shareholder right or to an evaluation

of the investment or investment course of action.

See 85 FR at 72857 (Nov. 13, 2020).

31

One commenter further warned that the rule

could result in voter suppression, not just

disenfranchisement, by preventing shareholders

from reaching a quorum, which the Department

itself acknowledged in the proposal would result in

economic detriment to ERISA plans’ holdings.

Some corporate bylaws, for example, require a

supermajority for certain votes, which may be

difficult to achieve if certain shareholders are

discouraged from voting.

fiduciaries in reconciling the

Department’s rule with the SEC’s

regulatory regime for investment

advisers.

Some commenters opposing the

proposed rule claimed that the

Department failed to establish that there

is in fact a problem with fiduciaries’

exercise of shareholder rights and

argued that the proposal, if finalized,

would upset decades of Departmental

precedent. These commenters further

said that the approach taken in the

proposal represented a burdensome and

costly solution to a perceived problem

without ‘‘real life’’ examples of any

plans or participants and beneficiaries

that have been harmed.

The Department does not believe that

it is necessary to establish specific

evidence of fiduciary

misunderstandings or injury to plans or

to plan participants in order to issue a

regulation addressing the application of

ERISA’s fiduciary duties to the exercise

of shareholder rights. Under the

Department’s authority to administer

ERISA, the Department may promulgate

rules that are preemptive in nature and

is not required to wait for widespread

harm to occur. The Department can

thereby guard against injuries to plans

and plan participants and beneficiaries

and ensure prospective protections.

Regardless, there are several reasons

for this rulemaking. First, the

Department is aware that some plan

fiduciaries and other parties have

incorporated, or have considered

incorporating, non-pecuniary factors

into their proxy voting decisions.

Further, as documented in the proposal,

there is a history of statements from

stakeholders and others evidencing

misunderstanding of the Department’s

sub-regulatory guidance.

29

Finally,

commenters on the proposal confirmed

that fiduciaries may be over-relying on

proxy advisory firms as a result of such

confusion, by implementing advisory

firms’ voting recommendations without

attention to whether the firms’ policies

are consistent with the economic

interests of the plan. This final rule

confirms that such decisions on proxy

voting and other exercises of

shareholder rights must be made

pursuant to the duties of loyalty and

prudence mandated by ERISA.

Some commenters argued that unless

a number of clarifications and changes

were made in the final rule, for example

with respect to documentation and

other requirements, the rule would be

costly to implement and its standards

costly to execute. Some commenters

opposing the proposed rule argued that,

not only is the rule unnecessary, but it

would create new confusion for

fiduciaries as they implement their

duties under ERISA. According to these

commenters, the rule would undermine

fiduciaries’ ability to act in what they

believe to be the long-term economic

interest of their plans’ participants,

which is a core statutory duty of

fiduciaries to such participants. A few

commenters provided an example of a

potential ‘‘trap’’ that the proposal would

create for fiduciaries, in that the rule

would cause fiduciaries to not vote on

a proposal for fear of violating the rule,

but then later discover that they should

in fact have voted on the proposal,

effectively creating a breach of fiduciary

duties. They claimed that the proposal

was an example of ‘‘government

overreach’’ that could dangerously

impact the efficiency of the U.S. capital

markets and the stability of the global

economy.

30

The opposing commenters

also argued that the proposal, if

finalized, would disenfranchise ERISA

plans, and thereby plan participants, as

investors, by reducing the power and

value of their shareholder rights,

including the right to vote proxies.

31

Instead, voting power would be

concentrated in the hands of non-ERISA

investors, such as hedge funds, foreign

investors, and other activist investors

whose motivations may be based on

short-term profits and non-economic

factors, as well as in the hands of

corporate management, as a result of the

proposal’s provision that, in these

commenters’ view, includes deference

to management views.

Commenters opposing the proposed

rule stated that, in voting on proposals,

investors, including ERISA plans,

generally decide matters that will hold

management accountable and materially

impact the long-term economic value of

corporations. Some commenters argued

that the proposal failed to recognize the

potential long-term performance and

economic impact of shareholder

proposals on topics such as board

independence and accountability—

including opportunities to change a

company’s board of directors, diversity,

approval of auditing firms, executive

compensation policies—from either an

individual investment or a wider

portfolio perspective. These

commenters disagreed with what they

viewed as the Department’s conclusion

that ESG shareholder activity generally

has little bearing on the value of

corporate shares. Rather, these

commenters claimed that a growing

body of evidence demonstrates an

increasing link between ESG activity,

including the impact of ESG issues on

a corporation’s brand and reputation,

and a corporation’s long-term value.

According to commenters, ESG factors

may not appear to be economic on their

face, yet all are fundamental corporate

matters that often are critical to how

companies strategize and manage risk,

therefore impacting financial outcomes.

As to proxy advisory firms, commenters

opposing the rule argued that these

firms engage in a rigorous process when

making recommendations about proxy

voting and that ongoing technological

advances continue to enhance proxy

voting transparency and effectiveness.

The final rule reflects a number of

modifications made by the Department

in response to the public comments. As

in the proposal, the final rule amends

the Investment Duties regulation in

regard to proxy voting and the exercise

of shareholder rights. The most

significant adjustment from the proposal

results from changes to make the final

rule a more principles-based approach

in response to commenters. The

Department is persuaded that the

complexity involved in a determination

of economic versus non-economic

impact would be costly to implement,

and believes the core structure of the

proposal that focused on whether a

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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. The final rule carries

forward from the proposal a provision

that requires plan fiduciaries, when

deciding whether to exercise

shareholder rights and when exercising

such rights, including the voting of

proxies, to carry out their duties

prudently and solely in the interests of

the plan participants and beneficiaries

and for the exclusive purpose of

providing benefits to participants and

beneficiaries and defraying the

reasonable expenses of administering

the plan. Also similar to the proposal,

but with some modifications in

response to public comments, the final

rule includes a list of principles that

fiduciaries must comply with when

making decisions on exercising

shareholder rights, including proxy

voting, in order to meet their prudence

and loyalty duties under ERISA section

404(a)(1)(A) and (B), including duties to

act solely in accordance with the

economic interest of the plan and its

participants and beneficiaries and not

subordinate the interests of the

participants and beneficiaries in their

retirement income or financial benefits

under the plan to any non-pecuniary

objective, or promote non-pecuniary

benefits or goals unrelated to the

financial interests of the plan’s

participants and beneficiaries. Finally,

the final rule includes specific language

to make clear that plan fiduciaries do

not have an obligation to vote all

proxies, as well as a safe harbor

provision, modified from the proposal,

pursuant to which plan fiduciaries may

adopt proxy voting policies and

parameters prudently designed to serve

the plan’s economic interest that

provide optional means for satisfying

their fiduciary responsibilities regarding

determining whether to vote under

ERISA sections 404(a)(1)(A) and

404(a)(1)(B).

2. Elimination of Paragraphs (e)(3)(i)

and (ii) From the Proposal

The principles-based approach

adopted in the final rule is reflected by

the Department’s elimination of

paragraphs (e)(3)(i) and (ii) from the

proposal. Paragraph (e)(3)(i) of the

proposal provided that a plan fiduciary

must vote any proxy where the fiduciary

prudently determined that the matter

being voted upon would have an

economic impact on the plan after

considering those factors described in

paragraph (e)(2)(ii) of the proposal and

taking into account the costs involved

(including the cost of research, if

necessary, to determine how to vote).

Paragraph (e)(3)(ii) of the proposal

provided that a plan fiduciary must not

vote any proxy unless the fiduciary

prudently determined that the matter

being voted upon would have an

economic impact on the plan after

considering those factors described in

paragraph (e)(2)(ii) of the proposal and

taking into account the costs involved.

The Department received a number of

comments suggesting removal of the

requirements in paragraphs (e)(3)(i) and

(ii). Commenters criticized these

provisions of the proposal as requiring

a fiduciary to undertake an economic

impact analysis in advance of each issue

that is the subject of a proxy vote in

order to even consider voting. A

commenter further noted that a

fiduciary may not discover until after

the analysis is performed that the cost

involved in determining whether to vote

outweighs the economic benefit to the

plan. Another commenter characterized

this as a ‘‘high risk compliance

dilemma’’ that could not be resolved

without expending funds on analysis

and documentation, without knowing in

advance whether the expenditure is

allowable. Commenters further

indicated that the proposal was unclear

as to how to establish whether an

economic basis would be strong enough

to justify voting and that it can be

difficult, if not impossible, to ascertain

whether a matter will have a future

economic impact. Commenters further

stated that the criteria enumerated in

paragraph (e)(2)(ii) of the proposal for

determining the economic impact of a

proxy vote were too narrow, which

could result in potentially negative

consequences to plans because

paragraph (e)(3)(ii) of the proposal could

prohibit fiduciaries from engaging in

activities that would mitigate risk. For

instance, a commenter stated that, in its

experience, once an evaluation of a

proxy matter has been done, a situation

with ‘‘no economic impact’’ is more of

a theoretical possibility than a reality.

According to this commenter, either its

research will show that the matter being

voted on will strengthen the company if

implemented, or that it will not. The

commenter further explained that, at a

base level, a matter that would

strengthen or otherwise improve a

company is likely to result in an

economic benefit in connection with a

plan’s investment when considered in

the long-term. If a matter would not

result in a net positive to the company,

the commenter believes a fiduciary

should vote against the proposal, not

decline to vote. The commenter

cautioned that prohibiting fiduciaries

from voting in circumstances where

they otherwise would vote against a

matter may have the unintended

consequence of allowing more frivolous

proxy matters to be approved, resulting

in decreased corporate accountability.

Commenters also raised practical issues

with respect to an obligation to not vote.

Some explained that failing to vote can

have the effect of a ‘‘no’’ vote or a ‘‘yes’’

vote, depending on the circumstances.

Another commenter stated that modern

proxy voting processes do not allow a

holder of securities subject to the proxy

to vote on some but not all proposals.

Other commenters, however,

supported paragraph (e)(3)(ii) of the

proposal. They viewed the provision as

an important clarification that plan

fiduciaries are not required to vote all

proxies, which could reduce diversion

of plan resources by restricting voting

activity only to those issues that offer an

economic benefit to the plan.

The Department has decided not to

include the requirements in paragraphs

(e)(3)(i) and (ii) of the proposal in the

final rule at this time. The Department

recognizes the concerns expressed by

commenters regarding potentially

increased costs and liability exposure,

as well as the difficulty in some

circumstances of determining whether a

matter would have an economic impact

and the possibility that a fiduciary

might prudently determine that there

are risks to plan investments that could

result from not voting even when the

matter being voted upon itself would

not have an economic impact. Instead,

the Department has provided a specific

provision in the final rule stating that

plan fiduciaries are not required to vote

all proxies.

3. Section-by-Section Overview of Final

Rule

(i) Paragraph (e)(1)

Paragraph (e)(1) of the final rule, like

the proposal, provides that the fiduciary

duty to manage plan assets that are

shares of stock includes the

management of shareholder rights

appurtenant to the shares, such as the

right to vote proxies. Commenters raised

a number of issues with respect to the

general scope of fiduciaries’

responsibilities and obligations under

the rule as set forth in paragraph (e)(1)

of the proposal.

Several commenters supported the

Department’s goal of making clear that

plan fiduciaries are not obligated to vote

all proxies, and suggested the rule could

be improved by including that clear

statement in the regulatory text in

paragraph (e)(1). The Department was

clear in the preamble to the proposed

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32

See 59 FR 38860, 38864 (July 29, 1994)

(discussing activities to monitor or influence

management by variety of means including by

exercise of legal rights of a shareholder).

33

85 FR 55219, 55234 (Sept. 4, 2020).

rule that one objective of the proposal

was to correct a misunderstanding

among some fiduciaries and other

stakeholders that ERISA requires every

proxy to be voted. Thus, the Department

agrees that it would be appropriate to

include an explicit statement to that

effect in the final rule. The Department,

however, believes that the statement fits

better in paragraph (e)(2) (regarding the

principles that must be considered in

deciding whether to exercise

shareholder rights) and has added a

statement to paragraph (e)(2)(ii) that the

ERISA fiduciary duty to manage proxy

voting and other shareholder rights does

not require the voting of every proxy or

the exercise of every shareholder right.

A commenter suggested that the rule

should focus only on proxy voting,

including the decision of whether to

exercise voting rights, but should not

extend to ‘‘other shareholder rights.’’

This commenter explained that other

shareholder rights, such as inspecting

an issuer’s corporate record books and

participating in corporate actions taken

by the issuer, are substantively separate

and distinct from proxy voting. Also,

decisions on corporate actions such as

stock splits, tender offers, exchange

offers on bond issues, and mergers and

acquisitions generally are not governed

by proxy voting policies or undertaken

with advice from proxy voting advisors.

On this basis, the commenter

recommended removing other

shareholder rights from the rule. The

Department is not persuaded to make

the suggested change. The exercise of

shareholder rights has been part of the

Department’s prior guidance since the

first Interpretive Bulletin in 1994.

32

The

Department believes that the exercise of

shareholder rights to monitor or

influence management, which may

occur in lieu of, or in connection with,

formal proxy proposals is just as much

an issue of fiduciary management of the

investment asset as proxy voting and

accordingly should be covered by the

final rule.

Commenters also requested

clarifications related to plan

investments in SEC-registered

investment companies, such as mutual

funds. Several commenters noted that

the preamble to the proposal suggested

that the rule would not apply to a

mutual fund’s exercise of shareholder

rights with respect to the stock it holds,

and requested that the Department

provide confirmation. As previously

explained, ERISA does not govern the

management of the portfolio internal to

an investment fund registered with the

SEC, including such fund’s exercise of

its shareholder rights appurtenant to the

portfolio of stocks it holds.

33

Accordingly, the final rule would not

apply to such a fund’s exercise of

shareholder rights.

A commenter requested further

clarification that the Department does

not intend that plan fiduciaries apply

the standards of the rule in reviewing,

analyzing, or making a judgment on the

proxy voting practices of the mutual

funds in which the plan invests. This

commenter explained that SEC-

registered funds have the scale, internal

expertise, and experience to analyze and

vote proxies. According to the

commenter, they also publicly report

their proxy votes to the SEC, and must

describe in their registration statements

the policies and procedures that they

use to determine how to vote proxies for

their portfolio of securities. In the

commenter’s view, placing an obligation

on plan fiduciaries to review and make

judgments on the proxy voting practices

of mutual funds in which they invest

will substantially increase the

administrative burden and costs for

plans that invest in mutual funds. In

contrast, another commenter suggested

that the final rule should require

fiduciaries to investigate a mutual

fund’s objectives in shareholder voting

and engagement with portfolio

companies and determine that the

objectives are consistent with ERISA’s

loyalty requirement prior to deciding to

invest in the fund or considering it as

an option for participants. The

commenter noted that since the

issuance of the Avon Letter, plans

increasingly invest in mutual funds or

exchange-traded funds (ETFs) with

stock voting authority residing in the

funds. This commenter argued that

nothing in the Avon Letter or

subsequent guidance from the

Department suggested that ERISA

absolves a plan investment fiduciary of

any fiduciary duty associated with the

shareholder voting of shares that it owns

indirectly through its share ownership

in mutual funds and ETFs.

In response to these comments, the

Department notes that the issue raised

by these commenters is beyond the

scope of this rulemaking. Rather,

fiduciary responsibilities with respect to

investment decisions are addressed in

the other provisions of the Investment

Duties regulation, as recently amended.

Paragraph (c)(1) provides that, in

general, a fiduciary’s evaluation of an

investment or investment course of

action must be based only on pecuniary

factors and that a fiduciary may not

subordinate the interests of participants

and beneficiaries in their retirement

income or financial benefits under the

plan to other objectives and may not

sacrifice investment return or take on

additional investment risk to promote

non-pecuniary benefits or goals.

Furthermore, the weight given to any

pecuniary factor by a fiduciary should

appropriately reflect a prudent

assessment of its impact on risk and

return. Whether a particular fund’s

proxy voting activities would constitute

a pecuniary factor and, if so, how much

weight it should be given in an

investment decision, are factual

questions that should be resolved by the

responsible fiduciary based on

surrounding circumstances.

Some commenters requested

clarification of whether the rule applies

to plan fiduciaries in the exercise of

shareholder rights with respect to

mutual funds and ETFs (which are

sometimes organized as corporate or

similar entities) when the fund itself

seeks a vote of its shareholders on fund

matters. According to commenters, for a

variety of reasons, SEC-registered funds

often face more challenges than

operating companies to achieve a

quorum and obtain approval of their

proxy matters. The commenters

explained that this is due to major

differences in shareholder bases (funds

have more diffuse and retail-oriented

shareholder bases), proxy voting

behavior of those bases (institutional

investors comprise a larger percentage

of operating companies’ shareholder

bases and are far more likely to vote),

legal obligations, and organizational

differences.

Furthermore, according to

commenters, funds also can have

difficulty even identifying and reaching

their shareholders when they invest

through intermediaries, which severely

limits a fund’s ability to communicate

with its shareholders to encourage

voting. These factors contribute

significantly to the costs and efforts

required to seek and obtain necessary

shareholder approvals for fund matters.

Funds, and therefore fund shareholders,

often bear the proxy costs associated

with proxy campaigns, including costs

associated with follow-up solicitations.

According to a commenter, the SEC

has recognized these issues in recent

years. The commenter, as well as others,

expressed concern that the rule could

create further difficulty for funds in

carrying out their proxy campaigns and

potentially result in imposing

unnecessary costs on funds, particularly

in connection with funds’ ability to

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34

Id. at 55234.

35

Id. at 55226.

36

85 FR 72846, (Nov. 13, 2020).

37

The Department is not suggesting that a

fiduciary must perform its own economic analysis,

or incur expenses to obtain an analysis, to

determine whether the proposal will economically

benefit the corporation and its shareholders. For

example, a fiduciary could prudently consider a

credible economic analysis provided by the

shareholder proponent.

achieve a timely quorum at their own

shareholder meetings. Another

commenter indicated that ERISA plan

investors receive a variety of proxies

that must be evaluated, not only in

connection with shares of common

stock held by the plan, but also from

SEC-registered funds as well as bank

collective trust funds and other

collective funds in which plans invest.

The commenter stated that the regulated

community needs to be able to clearly

identify those proxies that are subject to

the rule and those that are not. The

commenter requested that the rule itself

provide that plan investments in such

securities are not subject to the

requirements of the rule.

In the proposal, the Department

recognized that the proposed rule could

impact the ability to achieve a quorum

at shareholder meetings of funds.

34

The

Department believes that the changes

made to the final rule significantly

eliminate any provisions of the proposal

that might impede achieving a quorum

for shareholder meetings, including

those held by funds. Under the

proposal, a fiduciary would have not

been able to vote unless the fiduciary

prudently concluded that the matter

being voted upon would have an

economic impact on the plan. The

burden of determining whether a

fiduciary must, or must not, vote under

the proposal was likely to result in

fiduciaries opting to refrain from voting

under one of the permitted practices

described in the proposal. The

Department’s removal of the ‘‘vote/not

vote’’ determination from the final rule

should eliminate any concerns with

potential liability on a fiduciary

associated with making an incorrect

decision as to whether or not to cast a

proxy vote. The safe harbors in the final

rule are also sufficiently flexible to

permit a fiduciary to adopt voting

policies that would permit proxy voting

for fund shares while refraining from

voting other types of shares. Moreover,

the Department continues to believe, as

stated in the preamble to the proposal,

that fiduciary proxy voting policies may

consider the economic detriment to a

plan’s investment that might result from

direct and indirect costs incurred

related to delaying a shareholders’

meeting.

35

(ii) Paragraph (e)(2)

Paragraph (e)(2) of the proposal set

forth the general responsibilities with

respect to the exercise of shareholder

rights under the regulation, and stated

that when deciding whether to exercise

shareholder rights and when exercising

such rights, including the voting of

proxies, fiduciaries must carry out their

duties prudently and solely in the

interests of the participants and

beneficiaries and for the exclusive

purpose of providing benefits to

participants and beneficiaries and

defraying the reasonable expenses of

administering the plan pursuant to

ERISA sections 403 and 404.

Paragraph (e)(2)(i)

A commenter noted that paragraph

(e)(2)(i) of the proposal referenced

ERISA sections 403 and 404, and

because those two separate sections

each carry separate responsibilities,

suggested that each be designated as a

separate clause in the final regulation

because a fiduciary could breach or

fulfill one but not the other. The

Department recognizes the separate

responsibilities under sections 403 and

404 of ERISA, but has decided to

remove the reference to section 403 for

paragraph (e)(2)(i) of the final rule. As

explained in connection with recently

adopted amendments to the Investment

Duties regulation, the Department

believes it is important that the

regulation focus on section 404 of

ERISA.

36

Although similar, and

although actions taken in compliance

with section 404 would likely satisfy

similar obligations under section 403,

the text of ERISA section 403 is not

identical to ERISA section 404(a)(1)(A),

and the Department is wary of possible

inferences that compliance with the

provisions of the final rule would also

necessarily satisfy all the provisions of

ERISA section 403. The Department also

believes explicit reference to ERISA

section 404 is not necessary because

paragraph (e) is part of 29 CFR

2550.404a–1. As a result, paragraph

(e)(2)(i) of the final rule provides that

when deciding whether to exercise

shareholder rights and when exercising

such rights, including the voting of

proxies, fiduciaries must carry out their

duties prudently and solely in the

interests of the participants and

beneficiaries and for the exclusive

purpose of providing benefits to

participants and beneficiaries and

defraying the reasonable expenses of

administering the plan.

Activities that are intended to monitor

or influence the management of

corporations in which the plan owns

stock can be consistent with a

fiduciary’s obligations under ERISA, if

the responsible fiduciary concludes that

such activities (by the plan alone or

together with other shareholders) are

appropriate after applying the

considerations set forth in the final rule.

However, the use of plan assets by

fiduciaries to further policy-related or

political issues, including ESG issues,

through proxy resolutions would violate

the prudence and exclusive purpose

requirements of ERISA sections

404(a)(1)(A) and (B) and the final rule

unless such activities are undertaken

solely in accordance with the economic

interests of the plan and its participants

and beneficiaries. The mere fact that

plans are shareholders in the

corporations in which they invest does

not itself provide a rationale for a

fiduciary to spend plan assets to pursue,

support, or oppose such proxy

proposals. Moreover, the use of plan

assets by fiduciaries to further policy or

political issues through proxy

resolutions that are not likely to

enhance the economic value of the

investment in a corporation would, in

the view of the Department, violate the

prudence and exclusive purpose

requirements of ERISA sections

404(a)(1)(A) and (B) as well as the final

rule. For example, with respect to

proposals submitted by shareholders

that request a corporation to incur costs,

either directly or indirectly, without the

proposal including a demonstrable

expected economic return to the

corporation, a fiduciary may, depending

on the facts and circumstances, be

obligated under ERISA and the final

rule to vote against such proposals in

order to protect the financial interests of

the plan’s participants and

beneficiaries.

37

Similarly, in the

Department’s view, it would not be

appropriate for plan fiduciaries,

including appointed investment

managers, to incur expenses to engage

in direct negotiations with the board or

management of publicly held companies

with respect to which the plan is just

one of many investors. Nor generally

should plan fiduciaries fund advocacy,

press, or mailing campaigns on

shareholder resolutions, call special

shareholder meetings, or initiate or

actively sponsor proxy fights on

environmental or social issues relating

to such companies, unless the

responsible plan fiduciary concludes

that such activities (alone or together

with other shareholders) are appropriate

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Although the provision in the proposal also

made reference to ‘‘purposes of the plan,’’ the

language is not carried forward in the final

provision as the Department believes it is

unnecessary because the purposes of a plan would

be encompassed by the financial interests of plan

participants and beneficiaries.

after applying the considerations set

forth in the final rule.

38

Paragraph (e)(2)(ii)

Paragraph (e)(2)(ii) of the proposal set

forth specific standards for fiduciaries to

meet when deciding whether to exercise

shareholder rights and when exercising

shareholder rights. The requirements in

paragraph (e)(2)(ii) of the proposal also

served as the basis for a fiduciary’s

determination of whether a matter being

voted upon would have an economic

impact on a plan for purposes of

compliance with paragraph (e)(3) of the

proposal. Many commenters focused

specifically on paragraphs (e)(2)(ii)(A)

and (B) of the proposal, which required,

in relevant part, that fiduciaries (A)

consider only factors that they

prudently determine will affect the

economic value of the plan’s investment

based on a determination of risk and

return over an appropriate investment

horizon consistent with the plan’s

investment objectives and the funding

policy of the plan, and (B) consider the

likely impact on the investment

performance of the plan based on such

factors as the size of the plan’s holdings

in the issuer relative to the total

investment assets of the plan, the plan’s

percentage ownership of the issuer, and

the costs involved.

Some commenters argued that the

specificity of the proposal did not

comport with what they asserted was a

congressional intent that eschewed a

prescriptive approach to ERISA’s duties

of loyalty and prudence, or with the

Department’s own Investment Duties

regulation. Commenters also noted the

potential burdens that paragraph

(e)(2)(ii) of the proposal would place on

plan fiduciaries to evaluate and justify

decisions for potentially large numbers

of proxy proposals and to monitor an

investment manager’s or proxy advisory

firm’s voting policy for consistency with

the regulation, which could result in

increased costs that would ultimately be

borne by plan participants. Commenters

also stated that the provision’s

requirement to take into account plan-

specific factors did not adequately

recognize that investment managers do

not have information on plan holdings

they do not directly manage.

Commenters further indicated that, with

a focus on individual plans as opposed

to investment managers responsible for

pools of plan assets, paragraph

(e)(2)(ii)(B) of the proposal failed to

consider situations when several ERISA

plans, particularly those with aligned

objectives and liabilities, may together

hold a significant stake in a company.

In such cases, voting together could

impact the investment and, as a result,

each investor’s portfolio. They argued

that the proposal, in contrast,

potentially would result in proxies

being un-voted if each ‘‘slice’’ of the

aggregate is too insignificant.

A commenter further suggested that

an economic impact test, as described in

the proposal, was ill-suited to the

purpose and role of proxy voting.

According to the commenter, many of

the items on which corporate law

permits shareholders to have a say—for

example, the election of directors or

ratification of auditors—are to mitigate

risk and assure prophylactic measures

are in place to avoid threats to their

share of capital over the long term. The

commenter questioned how a fiduciary

would determine that voting against a

company-proposed director for election

to the board who was clearly

unqualified and incompetent would

have an economic impact on the plan.

Another commenter explained that

some votes, such as those supporting

good corporate governance practices

(e.g., election of outside directors) may

not have an immediate measurable

economic effect, but still be in the

interest of plan investors. Another

commenter opined that a short-term

economic impact will be easier to prove

or disprove in terms of share price or

other similarly rudimentary indicators,

but questioned whether the rule should

encourage fiduciaries to think only in

terms of short-term economic gains. In

this regard, several commenters

requested that the Department confirm

that a fiduciary may take into

consideration the long-term nature of a

plan’s investment horizon. A

commenter also suggested that the

Department expand the criteria for

voting to include issuer risk-based

factors that ‘‘promote long-term growth

and maximize return on ERISA plan

assets.’’ Another commenter explained

that proposals that encourage greater

disclosure can result in enhancing

shareholder value or serve in a

prophylactic manner to prevent actions

that might serve to diminish

shareholder value. A commenter also

criticized the proposal as focusing on

the impact on individual plan

investments. Commenters explained

that modern portfolio theory focuses on

the role that an investment plays in the

context of an overall portfolio rather

than on a stand-alone basis, and

expressed the view that the roles that

proxy voting and shareholder voices

play in current portfolio risk

management practices should be

evaluated in the context of the long-term

and portfolio-wide strategy, with

consideration of the aggregate effects of

shareholder votes and voices.

After considering these comments, the

Department has modified paragraph

(e)(2)(ii)(A) and (B). An important goal

in proposing the rule was to ensure that

in making proxy voting decisions,

fiduciaries act for the exclusive purpose

of financially benefitting plan

participants and not subordinating the

interests of the plan and its participants

to goals and objectives unrelated to their

financial interests. Recent amendments

to the Investment Duties regulation,

which applies generally to fiduciary

decisions on investments and

investment courses of action, were

adopted for much the same purpose.

Paragraph (e)(2)(ii)(A) of the final rule

requires that, when deciding whether to

exercise shareholder rights and when

exercising shareholder rights, a

fiduciary must act solely in accordance

with the economic interest of the plan

and its participants and beneficiaries.

The proposed requirement to prudently

determine whether the economic value

of the plan’s investment will be affected

based on a determination of risk and

return over an appropriate investment

horizon has not been included in the

final rule in order to address commenter

concerns that the impact of proxy voting

may not be readily quantifiable and to

reduce potential compliance costs. In

the Department’s view, the final rule

provides sufficient flexibility for

fiduciaries to consider longer-term

consequences and potential economic

impacts. Further, removal of the

references to a plan’s investment

objectives and funding policy responds

to concerns that investment managers

responsible for only a portion of the

plan assets may have limited access and

visibility into those objectives and

funding policies and such

considerations may unnecessarily

increase compliance costs without a

commensurate benefit for the plan or its

participants.

The Department, however, cautions

fiduciaries from applying an overly

expansive view as to what constitutes

an economic interest for purposes of

paragraph (e)(2)(ii)(A) of the final rule.

As previously discussed, the costs

incurred by a corporation to delay a

shareholder meeting due to lack of a

quorum is an example of a factor that

can be appropriately considered as

affecting the economic interest of the

plan. However, vague or speculative

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notions that proxy voting may promote

a theoretical benefit to the global

economy that might redound, outside

the plan, to the benefit of plan

participants would not be considered an

economic interest under the final rule.

Paragraph (e)(2)(ii)(B) of the proposal

required consideration of the likely

impact on the investment performance

of the plan based on such factors as the

size of the plan’s holdings in the issuer

relative to the total investment assets of

the plan, and the plan’s percentage

ownership of the issuer. Similar to the

changes made to paragraph (e)(2)(ii)(A)

of the final rule, the Department has

removed this language to address

concerns that where portions of the

portfolio are managed by different

investment managers, a specific

manager may not know the plan’s

overall aggregate exposure to a single

issuer. Accordingly, paragraph

(e)(2)(ii)(B) of the final rule has been

revised only to require a fiduciary

consider the impact of any costs

involved. However, in the Department’s

view, where the plan’s overall aggregate

exposure to a single issuer is known, the

relative size of an investment within a

plan’s overall portfolio and the plan’s

percentage ownership of the issuer, may

still be relevant considerations in

appropriate cases in deciding whether

to vote or exercise other shareholder

rights.

Several commenters requested further

guidance or examples of costs that a

fiduciary would be required to consider.

In the view of the Department, for

purposes of paragraph (e)(2)(ii)(B) of the

final rule, the types of relevant costs

would depend on the particular facts

and circumstances. Such costs could

include direct costs to the plan,

including expenditures for organizing

proxy materials; analyzing portfolio

companies and the matters to be voted

on; determining how the votes should

be cast; and submitting proxy votes to

be counted. If a plan can reduce the

management or advisory fees it pays by

reducing the number of proxies it votes

on matters that have no economic

consequence for the plan that also is a

relevant cost consideration. In some

cases, voting proxies may involve out-

of-the-ordinary costs or unusual

requirements, such as may be the case

of voting proxies on shares of certain

foreign corporations. Opportunity costs

in connection with proxy voting could

also be relevant, such as foregone

earnings from recalling securities on

loan or if, as a condition of submitting

a proxy vote, the plan will be prohibited

from selling the underlying shares until

after the shareholder meeting.

Paragraph (e)(2)(ii)(C) of the proposal

provided that a fiduciary must not

subordinate the interests of the

participants and beneficiaries in their

retirement income or financial benefits

under the plan to any non-pecuniary

objective, or sacrifice investment return

or take on additional investment risk to

promote goals unrelated to these

financial interests of the plan’s

participants and beneficiaries or the

purposes of the plan. A commenter took

issue with this requirement, suggesting

that it was inconsistent with some client

expectations, as well as stewardship

codes outside the United States that do

not limit significant votes to economic

impact to the portfolio. The Department

disagrees and notes that the provision

reflects the fundamental fiduciary duty

of loyalty as set forth in ERISA section

404(a)(1)(A). The Department has

modified the final rule in order to avoid

suggesting that a fiduciary may exercise

proxy voting and other shareholder

rights with the goal of advancing non-

pecuniary goals unrelated to the

financial interests of the plan’s

participants and beneficiaries so long as

it does not result in increased costs to

the plan or a decrease in value of the

investment. Thus, paragraph (e)(2)(ii)(C)

of the final rule states that a fiduciary

must not subordinate the interests of the

participants and beneficiaries in their

retirement income or financial benefits

under the plan to any non-pecuniary

objective, or promote non-pecuniary

benefits or goals unrelated to these

financial interests of the plan’s

participants and beneficiaries.

Paragraph (e)(2)(ii)(D) of the proposal

provided that a fiduciary must

investigate material facts that form the

basis for any particular proxy vote or

other exercise of shareholder rights. The

provision further stated that the

fiduciary may not adopt a practice of

following the recommendations of a

proxy advisory firm or other service

provider without appropriate

supervision and a determination that

the service provider’s proxy voting

guidelines are consistent with the

economic interests of the plan and its

participants and beneficiaries, as

defined in paragraph (e)(2)(ii)(A) of the

proposal.

A commenter suggested the

provision’s requirement to investigate

material facts was overly broad, and

explained that there may be instances

when routine or recurring proxy votes,

such as annual proxy votes on the same

subject, may not require a separate and

distinct investigation in order for a

fiduciary to make a prudent

determination. A commenter indicated

that paragraph (e)(2)(ii)(D) is overly

burdensome, and that issues are

addressed in paragraphs (e)(2)(ii)(F) and

(e)(2)(iii) (relating to selection of service

providers and delegation to investment

managers). The commenter

recommended deletion of the provision.

On the other hand, another

commenter suggested that the

Department go further with the

fiduciary requirement to investigate

material facts by explicitly referencing

review of the issuer response statements

required by recently-adopted SEC proxy

solicitation rules. The commenter

indicated these filings may include

significant, material information that

could impact a voting decision

(including decisions about whether to

vote and how to vote) that by definition

would not be considered by the proxy

advisory firm in drafting its

recommendation. Additionally,

according to the commenter, recent SEC

guidance on the proxy voting

responsibilities of investment advisers

encourages investment advisers to have

policies and procedures in place to

consider the information available to

them about proxy advisory firms

themselves under the SEC’s new proxy

solicitation rules (e.g., disclosures of

proxy advisory firm conflicts of

interests) as well as any information that

comes to light after they have received

a proxy advisory firm’s voting

recommendations (e.g., additional

soliciting material setting forth an

issuer’s views on a recommendation).

The supplemental guidance further

states that, under certain circumstances,

an investment adviser would likely

need to consider such additional

information from an issuer prior to

exercising voting authority in order to

demonstrate that it is voting in its

client’s best interest, and that it should

disclose how its policies and procedures

address the use of automated voting in

cases where it becomes aware before the

submission deadline for proxies that an

issuer intends to file or has filed

additional soliciting materials regarding

a matter to be voted upon.

Several commenters raised a number

of concerns in connection with

paragraph (e)(2)(ii)(D) of the proposal

about proxy advisory firms, including

conflicts of interest resulting from

business relationships with companies

that are the subject of proxy

recommendations, a ‘‘one-size-fits-all’’

approach to corporate governance that

does not take into account differences in

companies’ business models, a lack of

transparency in the process by which

proxy advisory firm recommendations

are developed, errors in proxy advisory

firm reports and recommendations,

proxy advisory firms’ resistance to

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39

2020 SEC Supplemental Guidance, 85 FR at

55155–57. Fiduciaries may retain proxy advisory

firms and other service providers, subject to any

applicable requirements of paragraphs (e)(2)(ii)(F)

and (e)(2)(iii) and (iv), as part of satisfying the

fiduciaries’ obligations to evaluate material facts.

40

85 FR at 55224. The SEC 2019 Guidance for

Investment Advisers similarly cautioned that a

higher degree of analysis ‘‘may be necessary or

appropriate’’ for certain types of matters, including

corporate events such as mergers and acquisitions,

or matters that are ‘‘highly contested or

controversial.’’ Commission Guidance Regarding

Proxy Voting Responsibilities of Investment

Advisers, 84 FR 47420, 47423–24 (Sept. 10, 2019).

Release Nos. IA–5325; IC–33605, available at

www.govinfo.gov/content/pkg/FR-2019–09-10/pdf/

2019-18342.pdf.

41

See Dep’t of Labor Office of Inspector Gen.

Report No. 09–11–001–12–121 (March 31, 2011).

The commenter cited the EBSA response to OIG

conclusion that EBSA does not have adequate

assurances that fiduciaries or third parties voted

proxies solely for the economic benefit of plans.

engaging in a dialogue with issuers to

correct errors and misunderstandings,

automatic submission of votes for

clients, cutting plan managers out of the

decision-making process, and depriving

issuers of a chance to correct the record

or provide the market with additional

information.

After considering the comments, the

Department is modifying paragraph

(e)(2)(ii)(D) by requiring a fiduciary to

evaluate, rather than investigate,

material facts. This change is to remove

any implication that plan fiduciaries

would be expected to conduct their own

investigation of material facts, which

was not intended by the Department.

Instead, the intent of this provision was

to ensure that in making informed proxy

voting decisions, fiduciaries should

consider information material to a

matter that is known or that is available

to and reasonably should be known by

the fiduciary. In this regard, the

Department notes that, as described by

the commenter above, as a result of

recent SEC actions, clients of proxy

advisory firms may become aware of

additional information from an issuer

which is the subject of a voting

recommendation.

39

An ERISA fiduciary

would be expected to consider the

relevance of such additional

information if material. Paragraph

(e)(2)(ii)(D) of the final rule thus

provides that a fiduciary must evaluate

material facts that form the basis for any

particular proxy vote or other exercise

of shareholder rights.

Some commenters also suggested that

the Department strengthen the rule by

including specific regulatory text that

generally disallows ‘‘robovoting,’’ a term

some commenters describe as automatic

voting mechanisms relying on proxy

advisors. A commenter questioned

whether robovoting is consistent with

ERISA’s stringent standards. Another

commenter suggested that robovoting is

an abridgment of fiduciary

responsibility. Some commenters also

suggested that the Department should

prohibit robovoting for significant,

contested, and controversial proxy

votes. Commenters also suggested that

the Department consider placing

conditions on the use of robovoting,

such as allowing robovoting only if a

company that is the subject of a proxy

advisory firm’s recommendations has

not submitted a response to the

recommendation.

The Department intended that the

provisions in paragraph (e)(2)(ii)(D) of

the proposal address the sort of

concerns raised by these comments and

provide appropriate guidelines for

ERISA fiduciaries. The provision in the

proposal stated, in relevant part, that a

fiduciary may not adopt a practice of

following the recommendations of a

proxy advisory firm or other service

provider without appropriate

supervision and a determination that

the service provider’s proxy voting

guidelines are consistent with the

economic interests of the plan and its

participants and beneficiaries as defined

in paragraph (e)(2)(ii)(A) of the

proposal. The Department does not

dispute that proxy advisory firms can

play a role in providing information to

fiduciaries and economizing investors’

ability to exercise shareholder rights

and proxy voting. However, public

comments submitted in connection with

the proposal, and recent SEC actions in

this area described above, highlight

aspects of the proxy advisory firms’

recommendations and services that can

be problematic in a variety of ways. For

example, the Department acknowledges

some commenters noted that many

ERISA plans rely on proxy advisory

firms’ pre-population and automatic

submission mechanisms for proxy votes,

which can provide a cost-effective way

to exercise their shareholder voting

rights in cases where the proxy advisor

has processes which assure that its

voting recommendations conform to the

obligations that plan managers hold as

fiduciaries. However, adopting such a

practice for all proxy votes effectively

outsources their fiduciary decision-

making authority. Rather, as the

Department noted in the preamble to the

proposed rule, ‘‘certain proposals may

require a more detailed or particularized

voting analysis.’’

40

In light of other changes in paragraph

(e)(2) intended to adopt a more

principles-based approach in the final

rule, the Department has concluded that

it would be better to address these proxy

advisory firm issues in a separate

paragraph in the final rule, which is

described under paragraph (e)(2)(iv).

Paragraph (e)(2)(ii)(E) of the proposal

required a fiduciary to maintain records

on proxy voting activities and other

exercises of shareholder rights,

including records that demonstrate the

basis for particular proxy votes and

exercises of shareholder rights.

Recognizing that ERISA’s prudence

obligation carries with it a requirement

to maintain records and document

fiduciaries’ decisions, most commenters

did not seriously object to the proposal’s

general obligation to maintain records

on proxy voting activities and other

exercises of shareholder rights.

Commenters did, however, express

concern that the proposal included

particularized recordkeeping mandates

that were both unnecessary and costly.

One commenter suggested an alternative

that fiduciaries must make prudent

efforts to maintain accurate records that

include proxy voting activities and,

where authority is delegated, require the

same of that person. Other commenters

complained that the requirement to

maintain specific records demonstrating

the basis for particular votes was

unnecessary and costly. Some

commenters observed that such a level

of recordkeeping would exceed that

required for other potentially more

impactful investment decisions.

Another noted that the provision

appeared to require a level of

recordkeeping greater than described in

current guidance, and complained that

the Department did not adequately

explain the reason for this change. The

commenter noted that the Department

stated in 2011 that there was no basis to

impose more onerous documentation

requirements that treat proxy voting

differently from other fiduciary

activities.

41

Some commenters

requested general clarification on the

types of documents that would be

necessary to demonstrate the basis for a

vote. A commenter suggested a specific

clarification that proxy voting activity

that is consistent with an applicable

proxy voting policy does not require

additional explanation or

documentation. Further, as discussed

below, commenters expressed concern

that the requirement in paragraph

(e)(2)(ii)(E) of the proposal to maintain

documents demonstrating the basis for

particular votes, as well as a similar

requirement in paragraph (e)(2)(iii) of

the proposal (relating to delegation of

responsibilities to investment

managers), suggested that the proposal

would create new and heightened

monitoring obligations for fiduciaries

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42

See infra note 43 and accompanying text.

that delegate responsibilities to

investment managers.

It has long been the view of the

Department that compliance with the

duty to monitor necessitates proper

documentation of the activities that are

subject to monitoring. However, the

Department agrees that a less

prescriptive approach to recordkeeping

obligations is appropriate. The

Department is retaining the general

recordkeeping requirement, but is

removing the requirement to maintain

documents that would be necessary to

demonstrate the basis for a vote to avoid

any inferences related to responsibilities

in monitoring investment managers,

which are addressed in paragraph

(e)(2)(iii) of the final rule. Thus,

paragraph (e)(2)(ii)(E) of the final rule

requires fiduciaries to maintain records

on proxy voting activities and other

exercises of shareholder rights. In

general, the extent of the documentation

needed to satisfy the monitoring

obligation will depend on individual

circumstances, including the subject of

the proxy voting and its potential

economic impact on the plan’s

investment. For fiduciaries that are SEC-

registered investment advisers, the

Department intends that the

recordkeeping obligations under

paragraph (e)(2)(ii)(E) be applied in a

manner that aligns to similar proxy

voting recordkeeping obligations under

the Advisers Act.

42

Paragraph (e)(2)(ii)(F) of the proposal

required that fiduciaries exercise

prudence and diligence in the selection

and monitoring of persons, if any,

selected to advise or otherwise assist

with exercises of shareholder rights,

such as providing research and analysis,

recommendations regarding proxy

votes, administrative services with

voting proxies, and recordkeeping and

reporting services.

Various commenters supported the

Department’s effort to better regulate

proxy advisory firms and the proxy

advisory process and suggested

additional steps the Department should

take in a final rule. Some suggested

mandating disclosure of fees paid by

investment managers to proxy voting

advisors, prohibiting proxy advisory

firms from consulting with companies

when they also make recommendations

on voting issues for that company, and

establishing a baseline disclosure

standard to which all proxy voting

advice businesses must adhere. Others

suggested placing specific conditions on

a fiduciary’s ability to rely on a proxy

advisory firm’s voting recommendation,

such as requiring the proxy advisory

firm to demonstrate that it had

researched and analyzed evidence that

would support a conclusion contrary to

the proxy advisory firm’s conclusion. A

commenter suggested that the

Department should make more specific

reference to proxy advisory firm conflict

of interest disclosures required by the

recently amended SEC proxy

solicitation rules. According to the

commenter, the SEC rules require that

proxy advisory firms provide specific,

prominent disclosures of their conflicts

of interest and of any policies and

procedures designed to mitigate said

conflicts. Additionally, these

disclosures must be specific to the

company on which the proxy advisory

firm is issuing a report. The commenter

recommended that the fiduciaries

should be required to review a proxy

advisory firm’s conflicts disclosure, and

that the Department should caution

ERISA fiduciaries against relying on a

proxy advisory firm’s recommendations

if the disclosures reveal a conflict with

respect to an issuer that calls into

question the firm’s ability to provide

objective advice. Another commenter

suggested that the Department should

wait until implementation of the SEC’s

new regulations to determine if any

further action is necessary, and that the

Department’s approach to regulating

fiduciary use of proxy advisory firms

should align with the approach taken by

the SEC so that SEC-registered

investment advisers are subject to a

consistent standard regarding their use

of proxy advisory firms. On the other

hand, some commenters criticized the

Department’s focus on proxy advisory

firms as being based on unsupported

allegations of proxy advisory firm

critics, without the Department either

substantiating those criticisms or noting

the self-interest of the persons making

those allegations.

After considering the public

comments, the Department is adopting

paragraph (e)(2)(ii)(F) in the final rule

unmodified. It provides that fiduciaries

must exercise prudence and diligence in

the selection and monitoring of persons,

if any, selected to advise or otherwise

assist with exercises of shareholder

rights, such as providing research and

analysis, recommendations regarding

proxy votes, administrative services

with voting proxies, and recordkeeping

and reporting services. The provision is

essentially a restatement of the general

fiduciary obligations that apply to the

selection and monitoring of plan service

providers, articulated in the context of

fiduciary and other service providers

that advise or assist with exercises of

shareholder rights. Thus, as a general

matter, fiduciaries will be expected to

assess the qualifications of the provider,

the quality of services offered, and the

reasonableness of fees charged in light

of the services provided. The process

also must avoid self-dealing, conflicts of

interest or other improper influence. In

considering any proxy recommendation,

fiduciaries should assure that they are

fully informed of potential conflicts of

proxy advisory firms and the steps such

firms have taken to address them.

Furthermore, to the extent applicable,

fiduciaries will be expected to review

the proxy voting policies and/or proxy

voting guidelines and the implementing

activities of the person being selected. If

a fiduciary determines that the

recommendations and other activities of

such person are not being carried out in

a manner consistent with those policies

and/or guidelines, then the fiduciary

will be expected to take appropriate

action in response.

A commenter suggested deleting the

list of services related to proxy voting.

The commenter explained that the list is

incomplete, and that codifying it might

create confusion as to the types of

services that may be necessary or

appropriate for a particular voting

activity. The Department does not

believe it necessary to modify the

provision as it is clear that the provision

is not attempting to limit in any way the

types of services that a plan or plan

fiduciary may utilize in connection with

exercising shareholder rights. Also,

although the Department agrees that it

would be important for a fiduciary to

consider the proxy advisory conflict of

interest disclosure required under

recent SEC guidance, and that a

fiduciary should consider whether

potential conflicts may affect the quality

of services to be provided, the

Department does not believe it

appropriate to expressly require review

of such disclosure in paragraph

(e)(2)(ii)(F) of the final rule because the

provision could become outdated as

disclosure obligations change over time.

Rather, the Department believes that a

general principles-based provision is

adequate and would require ERISA

fiduciaries to review disclosures of

conflicts of interest required by SEC

rules or guidance.

Paragraph (e)(2)(iii)

Paragraph (e)(2)(iii) of the proposal

required that, where the authority to

vote proxies or exercise shareholder

rights has been delegated to an

investment manager pursuant to ERISA

section 403(a)(2), or a proxy voting firm

or other person performs advisory

services as to the voting of proxies, a

responsible plan fiduciary must require

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43

SEC Rule 204–2, 17 CFR 275.204–2; see also

SEC Rule 206(4)–6(b) and (c), 17 CFR 275.206(4)–

6(b) and (c) (relating to certain disclosures about

proxy voting by an investment adviser that must be

provided to, or may be requested by, a client of the

investment adviser).

such investment manager or proxy

advisory firm to document the rationale

for proxy voting decisions or

recommendations sufficient to

demonstrate that the decision or

recommendation was based on the

expected economic benefit to the plan,

and that the decision or

recommendation was based solely on

the interests of participants and

beneficiaries in obtaining financial

benefits under the plan. The preamble

explained that the proposal required

fiduciaries to require documentation of

the rationale for proxy-voting decisions

so that fiduciaries can periodically

monitor those decisions.

Commenters expressed concern that

paragraph (e)(2)(iii) of the proposal

appeared to require a delegating

fiduciary to, in effect, peer over the

shoulder of an investment manager and

supervise each voting decision to

confirm the voting decision was made

based on the economic impact on the

plan. Commenters noted that such a

monitoring obligation for proxy voting

would be higher than for other fiduciary

activities, and would be inconsistent

with ERISA’s general rules and prior

Department guidance related to

delegation of fiduciary responsibilities.

Commenters asked for clarification that

fiduciaries would not be required to

monitor every proxy vote or second-

guess other fiduciaries’ specific proxy

voting decisions, unless the fiduciary

knows or should know the designated

fiduciary is violating ERISA with their

proxy voting procedures.

Another commenter recommended

removal of the requirement that a

fiduciary require its investment

managers and proxy advisory firms to

document each voting decision along

with the rationale for each decision,

indicating that it would create

unmanageable liability risk for

fiduciaries by suggesting an obligation

to review every voting decision made.

Commenters indicated that the

documentation requirement would be

costly for investment managers,

believing they would need to justify and

communicate their decisions regarding

the benefit of each proxy agenda item to

each plan client. Another commenter

suggested industry practice is that,

when votes are exercised in accordance

with approved proxy voting guidelines

generally, only votes contrary to

approved guidelines warrant specific

documentation. Other commenters,

however, believed documentation

would be beneficial in protecting plan

interests and suggested that further

access to information and analyses from

proxy advisory firms would help plan

fiduciaries understand how the advisory

firms developed their recommendations.

The Department did not intend to

create a higher standard for a fiduciary’s

monitoring of an investment manager’s

proxy voting activities than would

ordinarily apply under ERISA with

respect to the monitoring of any other

fiduciary or fiduciary activity. Thus, the

Department has revised the provision in

the final rule to eliminate the

requirement for documentation of the

rationale for proxy voting decisions, and

instead replaced it with a more general

monitoring obligation. Specifically,

paragraph (e)(2)(iii) of the final rule

provides that where the authority to

vote proxies or exercise shareholder

rights has been delegated to an

investment manager pursuant to ERISA

section 403(a)(2), a proxy voting firm or

other person who performs advisory

services as to the voting of proxies, a

responsible plan fiduciary shall

prudently monitor the proxy voting

activities of such investment manager or

proxy advisory firm and determine

whether such activities are consistent

with paragraphs (e)(2)(i)–(ii) and (e)(3)

of the final rule. The Department notes

that while the provision does not

contain a specific documentation

requirement, an SEC rule requires

investment advisers registered with the

SEC under the Advisers Act to maintain

a record of each proxy vote cast on

behalf of a client, retain documents

created by the adviser that were material

to a decision on how to vote or that

memorialize the basis for that decision,

and to maintain each written client

request for information on how the

adviser voted proxies on behalf of the

client and any written response by the

investment adviser to any (written or

oral) client request for information on

how the adviser voted proxies on behalf

of the requesting client.

43

These

requirements may be helpful to

responsible plan fiduciaries in fulfilling

monitoring requirements under

paragraph (e)(2)(iii).

Commenters also raised concerns

about the statement in the preamble to

the proposal that suggested uniform

proxy policies may sometimes

jeopardize responsible plan fiduciaries’

satisfaction of their duties under ERISA

as suggesting that ERISA plans should

require investment managers to use

customized policies. A commenter

explained that currently investment

managers with voting discretion may

vote consistently across client accounts

as appropriate (i.e., on those proposals

for which objectives of the accounts are

consistent and divergent economic

interests or client-specific preferences

are not present). Similarly, another

commenter indicated that many

investment advisers registered with the

SEC use consistent proxy voting policies

across client accounts, including

accounts held by ERISA plans and

pooled investment vehicles, because

they believe those policies are in the

best interest of clients.

Some commenters believed that

developing customized policies for

particular ERISA plans or collective

investment vehicles used by ERISA

plans would increase costs for plans and

investment managers without

incremental benefit to participants and

beneficiaries. A commenter noted that

investment managers might need to run

a parallel voting process for ERISA and

non-ERISA assets, which would create

additional administrative burden and

costs. A commenter also asserted that

due to increased risk, some managers

might move in the direction of not

undertaking voting responsibilities,

which would then require plans to make

their own assessments and invariably

result in increased costs.

A commenter suggested that the

proposal’s approach to regulating

fiduciary use of proxy advisory firms

should align with the approach taken by

the SEC so that SEC-registered

investment advisers are subject to a

consistent standard regarding their use

of proxy advisory firms. A commenter

noted similar concerns in the context of

proxy advisory services, indicating that

paragraph (e)(2)(iii) implied that proxy

advisors must tailor their rationale for

every recommendation to each specific

plan (and its participants) whose asset

manager uses its research. A commenter

believed such a requirement would be

unnecessarily plan specific and

unworkable. The commenter explained

that proxy advisory firms support their

clients, such as asset managers to

retirement plans, by providing

recommendations based on their chosen

proxy voting policy, which is usually a

custom policy the asset manager has

selected to serve the interest of its client

(e.g., a retirement plan and its

participants). According to the

commenter, the client’s decisions as to

what its policy should be and how it

should vote are at the sole discretion of

the asset manager.

With respect to uniform proxy

policies being utilized by investment

managers, it was not the Department’s

intention to suggest that plans must

require investment managers to vote

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according to custom policies. Rather,

the Department’s statement reflected a

general concern that responsible

fiduciaries might be accepting

investment managers’ proxy voting

policies without sufficient review as to

whether those policies comply with

ERISA and, if so, whether the

investment managers were complying

with those policies. The Department

believes that the revisions to the

recordkeeping requirement in the final

rule described above appropriately

address that issue.

Paragraph (e)(2)(iv)

In light of other changes in paragraph

(e)(2) intended to adopt a more

principles-based approach in the final

rule, some provisions related to proxy

advisory firms that were in paragraph

(e)(2)(ii)(D) of the proposal have been

moved to a new paragraph (e)(2)(iv) in

the final rule. Specifically, paragraph

(e)(2)(ii)(D) of the proposal stated that

the fiduciary may not adopt a practice

of following the recommendations of a

proxy advisory firm or other service

provider without appropriate

supervision and a determination that

the service provider’s proxy voting

guidelines are consistent with the

economic interests of the plan and its

participants and beneficiaries as defined

in paragraph (e)(2)(ii)(A) of the

proposal.

Paragraph (e)(2)(iv) of the final rule

generally includes the same fiduciary

obligations with respect to the use of

proxy advisory firms and other service

providers that were described in

paragraph (e)(2)(ii)(D) of the proposal,

with some modifications to strengthen

the oversight obligations of fiduciaries

who retain proxy advisory firms or other

service providers. In response to the

public comments that cited fiduciary

practices that carry a high risk of

noncompliance with ERISA, paragraph

(e)(2)(iv) of the final rule has been

modified so that a fiduciary that chooses

to follow the recommendations of a

proxy advisory firm or other service

provider must determine that the firm or

service provider’s proxy voting

guidelines are consistent with the five

factors set forth in paragraph

(e)(2)(ii)(A)–(E) of the final rule, rather

than only paragraph (e)(2)(ii)(A).

Because paragraph (e)(2)(ii)(F) of the

final rule covers the exercise of

prudence and diligence in the selection

and monitoring of proxy advisory firms

and other service providers, it would

not generally be applicable to the proxy

voting guidelines of a proxy advisory

firm or other service provider.

Paragraph (e)(2)(iv) of the final rule

removes the appropriate supervision

requirement since that requirement

duplicates the monitoring obligations

set forth in paragraph (e)(2)(ii)(F) of the

final rule. A fiduciary that retains a

proxy advisory firm or other service

provider, however, remains subject to

the prudence and diligence obligations

described in paragraph (e)(2)(ii)(F)

regarding the selection of that person

and, if the fiduciary adopts a practice of

following the recommendations of that

person, the fiduciary is subject to the

additional requirements of paragraph

(e)(2)(iv) of the final rule.

(iii) Paragraph (e)(3)

Paragraphs (e)(3)(i) and (ii) of the

proposal, which would have required

fiduciaries in certain circumstances to

vote or not to vote proxies, were

removed from the final rule, as

discussed above. Paragraph (e)(3)(iii) of

the proposal expressly acknowledged

the appropriateness of ERISA

fiduciaries’ adoption of proxy voting

policies to help them more cost-

effectively comply with their obligations

under the proposal. Paragraph (e)(3)(iii)

of the proposal provided for adoption of

general proxy voting policies or

procedures and provided three

examples of policies that could be

utilized by fiduciaries (sometimes

referred to as ‘‘permitted practices’’) in

paragraphs (e)(3)(iii)(A)–(C) of the

proposal. The proposed permitted

practices included conditions intended

to require a fiduciary to make prudence-

based judgments about the policies.

The Department received a number of

general comments on paragraph

(e)(3)(iii) of the proposal. Several

commenters supported use of proxy

voting policies to help fiduciaries

reduce costs and compliance burdens,

but suggested that the scope of relief for

fiduciaries under paragraph (e)(3)(iii) of

the proposal was unclear, noting that

clear ‘‘safe harbor’’ relief was not

afforded by the proposal. Commenters

also asked about the extent to which

fiduciaries following permitted

practices would still be required to

comply with particular provisions of the

proposal that seemed more directed as

evaluations of individual votes, e.g.,

some of the recordkeeping provisions in

the proposal. Commenters

recommended that the permitted

practices should be made clear safe

harbors indicating that fiduciaries are

deemed to satisfy their prudence and

loyalty obligations under ERISA.

Commenters argued that without such

treatment the permitted practices would

not offer effective options for easing

compliance burdens and associated

costs as intended by the Department.

Commenters also requested

confirmation that plan fiduciaries have

flexibility to adopt proxy voting policies

in addition to the specific examples

described in the rule. Other commenters

did not support paragraph (e)(3)(iii) of

the proposal, asserting that the proposal

would effectively compel ERISA plans

to adopt one of the permitted practices

by imposing the proposal’s burdensome

cost-benefit analysis requirements.

The Department has decided to retain,

with modifications, the framework for

adoption of proxy voting policies as set

forth in paragraph (e)(3)(iii) of the

proposal as paragraph (e)(3)(i) of the

final rule. The provision in the final rule

has been modified to more clearly

provide safe harbor relief. The safe

harbors apply to a fiduciary’s duties of

loyalty and prudence with respect to

decisions on whether to vote, but do not

apply to decisions on how to vote. Thus,

a fiduciary will not breach its fiduciary

responsibilities under sections

404(a)(1)(A) and 404(a)(1)(B) of ERISA

with respect to decisions on whether to

vote, provided such policies are

developed in accordance with a

fiduciary’s obligations under ERISA as

set forth in the applicable provisions of

paragraphs (e)(2)(i) and (ii) of the final

rule. Because the compliance burdens

under the rule should be significantly

reduced by other changes from the

proposal described elsewhere (e.g., the

principles-based approaches and

elimination of proposed paragraphs

(e)(3)(i) and (ii)), the Department does

not believe that fiduciaries will be

compelled to adopt the proxy voting

policies described in paragraph (e)(3)(i)

of the final rule but rather will use

them, as the Department intended, to

provide cost-effective options for

exercising shareholder rights in

compliance with their fiduciary

obligations under ERISA.

Thus, paragraph (e)(3)(i) of the final

rule provides that in deciding whether

to vote a proxy pursuant to paragraphs

(e)(2)(i) and (ii) of the final rule,

fiduciaries to plans may adopt proxy

voting policies under which voting

authority shall be exercised pursuant to

specific parameters prudently designed

to serve the plan’s economic interest.

The final rule further provides that

paragraphs (e)(3)(i)(A) and (B) set forth

optional means for satisfying the

fiduciary responsibilities under section

404(a)(1)(B) of ERISA, provided such

policies are developed in accordance

with a fiduciary’s prudence obligations

under ERISA as set forth in the

applicable provisions of paragraphs

(e)(2)(i) and (ii) of the final rule. These

safe harbors are intended to be applied

flexibly rather than in a binary ‘‘all or

none’’ manner, and may be used either

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44

The final rule uses the term ‘‘material effect’’

rather than ‘‘significant impact.’’ No substantive

change is intended by the revision as the

Department believes that ‘‘significant impact’’ is

generally equivalent to ‘‘material effect’’ in this

context. Use of the term materiality is intended to

align the terminology consistent with the rest of the

Investment Duties regulation. The Department

believes that fiduciaries and investment managers

are generally familiar with the concept of

materiality from its use in connection with both

ERISA and the Federal securities laws.

independently or in conjunction with

each other. The safe harbors are thus a

means of establishing general proxy

voting practices that allow plans to

efficiently operationalize and manage

shareholder rights consistent with the

applicable fiduciary principles in

paragraphs (e)(2)(i) and (ii). Paragraph

(e)(3)(i) also makes clear that paragraphs

(e)(3)(i)(A) and (B) are not intended to

set forth an exclusive list of the policies

that plans could adopt that would

satisfy their responsibilities under the

fiduciary principles in paragraphs

(e)(2)(i) and (ii).

Paragraph (e)(3)(i)(A) sets forth the

first of two safe harbor policies

contained in the final rule. It describes

a policy that voting resources will focus

only on particular types of proposals

that the fiduciary has prudently

determined are substantially related to

the issuer’s business activities or are

expected to have material effect on the

value of the investment. The provision

is substantively similar to the permitted

practice described in paragraph

(e)(3)(iii)(B) of the proposal. However,

the proposed provision listed types of

proposals that a fiduciary might

prudently consider focusing voting

resources on: Proposals relating to

corporate events (mergers and

acquisitions transactions, dissolutions,

conversions, or consolidations),

corporate repurchases of shares

(buybacks), issuances of additional

securities with dilutive effects on

shareholders, or contested elections for

directors. Commenters expressed

concern that the Department did not

provide any economic analysis for why

matters listed in proposed paragraph

(e)(3)(iii)(B) would be more material to

shareholders than other issues, and

argued that voting on a variety of issues

not included in that list would be in the

interest of ERISA plans. For example, a

commenter pointed out that mutual

fund proposals, which may present

difficulties for these funds in achieving

quorum as compared to solicitations

made by corporate issuers, and votes to

approve auditors were not included in

the list but could be considered material

to investors.

The list of matters included in the

proposal was not intended as an

exhaustive list of particular matters that

merit consideration by fiduciaries. Nor

was it intended to limit a fiduciary’s

flexibility to prudently consider other

matters. The Department continues to

believe that the listed issues are

examples of matters that generally

would be expected to have an economic

impact on the value of the investment.

Nonetheless, to avoid the potential for

such a misperception, the Department is

not including the list in paragraph

(e)(3)(i)(A) of the final rule.

The final provision slightly revises

the language used to describe the

fiduciary’s prudence determination to

reflect a pecuniary-based analysis. The

final rule also broadly references the

value of the investment rather than the

plan’s investment to make it clear that

the evaluation could be at the

investment manager level dealing with

a pool of investor’s assets or at the

individual plan level. Paragraph

(e)(3)(i)(A) of the final rule thus

describes a policy that voting resources

will focus only on particular types of

proposals the fiduciary has prudently

determined are substantially related to

the issuer’s business activities or are

expected to have a material effect on the

value of the investment.

44

Paragraph (e)(3)(i)(B) of the final rule

sets forth the second safe harbor policy

and is based on paragraph (e)(3)(iii)(C)

of the proposal. The proposal provided

that a fiduciary could adopt a policy of

refraining from voting on proposals or

particular types of proposals when the

plan’s holding of the issuer relative to

the plan’s total investment assets is

below quantitative thresholds that the

fiduciary prudently determines,

considering its percentage ownership of

the issuer and other relevant factors, is

sufficiently small that the matter being

voted upon is unlikely to have a

material impact on the investment

performance of the plan’s portfolio (or

investment performance of assets under

management in the case of an

investment manager). The proposal

indicated that the Department was

considering a specific quantitative

upper limit for the threshold (i.e., a cap)

under paragraph (e)(3)(iii)(C), and

solicited comments on setting this

upper limit, including whether a

maximum cap should be defined and, if

so, what factors should be considered in

setting a cap. In particular, the

Department solicited comments on

whether a five percent cap would be

appropriate, or some other percent level

of plan assets.

A commenter expressed the view that

the permitted practice described in

paragraph (e)(3)(iii)(C) to refrain from

proxy voting would violate the

requirement in ERISA section

404(a)(1)(B) that plan fiduciaries act

‘‘with the care, skill, prudence, and

diligence under the circumstances then

prevailing [as] a prudent man acting in

a like capacity and familiar with such

matters.’’ According to the commenter,

the overwhelming majority of prudent

experts—i.e., the expert professionals

who make up the investment

management community—have

determined that proxy voting is in their

clients’ interests. Another commenter

disagreed with the Department’s

statement that voting shares of plan

holdings that comprise a small portion

of total plan assets rarely advances

plans’ economic interests. The

commenter indicated that, depending

on the size of a plan, even small relative

positions can have a large dollar value.

Commenters also expressed concerns

about potential negative unintended

consequences of widespread adoption of

the permitted practice. According to a

commenter, if the majority of a plan’s

investments in portfolio companies fell

within the parameters described in the

permitted practice, this could leave the

majority of the plan’s portfolio un-

voted, which in the aggregate would

expose the plan investor to material risk

even if the risk associated with each

individual company was small.

Additionally, according to commenters,

non-voting by small plan investors

could result in concentrating proxy

votes in the hands of other investors

whose interests might not align with the

long-term interests of ERISA plans.

Furthermore, non-voting by plans could

result in companies with substantial

portions of un-voted shares, and could

also result in quorum requirements

going unmet.

With respect to the Department’s

request for input on whether a percent

cap would be appropriate, commenters

generally opposed such a provision and

suggested that the Department avoid

specifying a percentage cap on the

portion of the plan’s portfolio that must

be represented by an issuer for proxy

votes to be considered.

The Department is not persuaded that

the type of policy described in

paragraph (e)(3)(iii)(C) of the proposal

should be excluded from the final rule’s

safe harbor provision. The provision

was designed to provide a fiduciary

with flexibility to prudently tailor a

quantitative threshold for a plan’s

portfolio, below which the outcome of

the vote is unlikely to have a material

impact on the performance of the plan’s

portfolio or, in situations where only a

portion of the portfolio is being

managed by an investment manager, the

performance of the plan assets under

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45

The proposal referred to ‘‘the outcome of the

vote,’’ rather than ‘‘the matter being voted upon.’’

This final rule uses ‘‘the matter being voted upon’’

to make it clear that whether the fiduciary’s voting

power could sway the vote one way or the other is

not relevant to application of the safe harbor.

Rather, the point is that the plan’s holding would

be sufficiently small that any outcome of the vote

(and any consequent changes to the value of the

underlying asset) would have no material effect on

the investment performance of the plan.

management. The Department believes

that providing such an option in the

final rule may be helpful to plans in

reducing costs. The Department further

believes that it can be prudent for a

fiduciary to refrain from expending plan

resources to vote on matters pertaining

to a holding that makes up an

immaterial portion because a fiduciary

may prudently expect that voting on

such matters will not have a material

effect on performance. With respect to

setting a cap, the Department does not

believe it received sufficient

information from comments to establish

an upper limit in the final rule.

Paragraph (e)(3)(i)(B) of the final rule

thus describes as the second safe harbor

a policy of refraining from voting on

proposals or particular types of

proposals when holding in a single

issuer relative to the plan’s total

investment assets, or the portion of a

plan’s assets being managed by an

investment manager, is below a

quantitative threshold that the fiduciary

prudently determines, considering its

percentage ownership of the issuer and

other relevant factors, is sufficiently

small that the matter being voted upon

is not expected to have a material effect

on the investment performance.

45

The

final rule does not require a specific

performance period for determining

whether a material effect exists;

fiduciaries must therefore prudently

decide an appropriate performance

period for use in its proxy voting

policies under this safe harbor.

The Department notes that paragraph

(e)(3)(iii)(A) of the proposal is not being

incorporated in the final rule. Paragraph

(e)(3)(iii)(A) of the proposal described a

policy of voting proxies in accordance

with the voting recommendations of a

corporation’s management on proposals

or types of proposals that the fiduciary

prudently determined would be

unlikely to have a significant impact on

the value of the plan’s investment,

subject to any conditions determined by

the fiduciary as requiring additional

analysis because the matter being voted

upon concerns a matter that may

present heightened management

conflicts of interest or is likely to have

a significant economic impact on the

value of the plan’s investment.

Commenters expressed the view that

this permitted practice would be

unprecedented, indicating that the

Department has never previously

indicated that a fiduciary may assume

that another person is acting in the best

interest of the plan. Rather, according to

a commenter, the Department’s

consistent position is that a fiduciary

must prudently select and monitor both

fiduciary and non-fiduciary service

providers. The commenter questioned

this provision’s consistency with other

provisions of the proposal, noting that

under other provisions of the proposal

plan fiduciaries would be required to

increase their due diligence on proxy

advisory firms consistent with prudence

and loyalty obligations, but this

permitted practice would allow them to

follow corporate directors in deciding

what is in the best interest of the

fiduciaries’ plan participants without

undertaking similar due diligence.

A commenter specifically noted that

proxy advisory firms that are registered

with the SEC under the Advisers Act

owe their clients fiduciary duties of care

and loyalty and suggested that if the

permitted practice for management

recommendations under paragraph

(e)(3)(iii)(A) was adopted, then the

Department should create a permitted

practice for fiduciaries to rely on such

firms. Commenters also questioned the

safeguards offered by a permitted

practice that relies on fiduciary duties

that officers and directors owe to a

corporation based on state corporate

laws. A commenter stated that such a

standard is lower that the fiduciary

standard of care under ERISA. The

commenter further stated that Delaware

corporate law authorizes companies to

waive director liability for breaches of

the duty of care, and that corporate

conflicts of interest with the company

may also be waived upon approval of

non-interested directors. Another

commenter criticized reliance on

fiduciary duties under state corporate

law by noting that the law imposes

these duties because management’s

interests can and do differ from those of

the company’s shareholders, and state

corporate law requires shareholder votes

precisely because managers’ fiduciary

duties alone are not adequate to align

management’s and shareholders’

interests.

The Department notes that some of

the commenters may have misread

paragraph (e)(3)(iii)(A) as establishing

unconditional blanket reliance on

management recommendations. The

proposal expressly limited reliance on

management recommendations to

proposals or types of proposals that the

fiduciary had prudently determined

would be unlikely to have a significant

impact on the value of the plan’s

investment. Nonetheless, based on

concerns expressed by commenters, and

on the Department’s separate decision to

remove the requirement not to vote in

certain situations, the Department

decided to not adopt this permitted

practice in the final rule’s safe harbor

provisions.

Commenters also provided several

suggestions for additional permitted

practices, none of which the Department

has adopted. Several recommended a

policy based on a determination that

voting would not result in material

additional costs to the plan. There is no

need to include this permitted practice

(or safe harbor) because the final rule

does not have an express prohibition on

voting based on the balance of economic

effect and costs. Other commenters

suggested permitted practices for

following prudently designed and

applied proxy voting guidelines. The

Department does not believe it is

necessary or appropriate to include such

a safe harbor. Paragraph (e)(3)(i) already

states that fiduciaries may adopt proxy

voting policies providing that the

authority to vote a proxy shall be

exercised pursuant to specific

parameters prudently designed to serve

the plan’s economic interest. Another

commenter suggested that if the rule

retains a permitted practice that permits

a fiduciary to follow management

recommendations, then the Department

should add a permitted practice that

permits following recommendations of

the proxy advisory firm if the adviser

owes a fiduciary duty to its clients. The

Department has not retained the

permitted practice regarding following

management recommendations and

believes that proxy advisory firms are

adequately addressed in other

provisions of the final rule.

Paragraph (e)(3)(ii) of the final rule

relates to the review of proxy voting

policies adopted under paragraph

(e)(3)(i). The corresponding provision at

paragraph (e)(3)(iv) of the proposal,

applicable to the proposal’s permitted

practices, required plan fiduciaries to

review any proxy voting policies

adopted pursuant to paragraph (e)(3)(iii)

of the proposal at least once every two

years. The Department explained that

the proposed requirement was

appropriate to ensure a plan’s proxy

voting policies remain prudent given

ongoing changes in financial markets

and the investment world, but solicited

comments on whether some other

maximum interval for review would be

appropriate.

Commenters suggested that a two-year

requirement would be unnecessary and

recommended removal. Commenters

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expressed the view that review of

permitted practices should be based on

facts and circumstances and left to the

fiduciary to decide. A commenter also

expressed concern that a specific review

requirement in the rule could create

potential liability for fiduciaries in their

ongoing monitoring of other plan

policies, such as investment policy

statements, fiduciary charters, plan

expenses and other policies, or in

connection with the frequency of

requests for proposals.

After considering comments, the

Department has decided to remove the

specific two-year requirement and

provide a general requirement for

periodic review of policies. The

Department understands that general

industry practice is to review

investment policy statements

approximately every two years and

expects that fiduciaries will review

proxy voting policies with roughly the

same frequency. Nevertheless, the

Department is persuaded that it is

unnecessary to set an exact deadline

and that doing so could create liability

based on a technical temporal violation

of the rule. As a result, paragraph

(e)(3)(ii) of the final rule provides that

plan fiduciaries shall periodically

review proxy voting policies adopted

pursuant to paragraph (e)(3)(i) of the

final rule.

Paragraph (e)(3)(iii) of the final rule

relates to the effect of proxy voting

policies adopted under the final rule’s

safe harbor provision. It is based on

paragraph (e)(3)(v) of the proposal,

which provided that no policies

adopted under paragraph (e)(3)(iii) of

the proposal would have precluded, or

imposed liability for, submitting a proxy

vote when the fiduciary prudently

determines that the matter being voted

upon would have an economic impact

on the plan after taking into account the

costs involved, or for refraining from

voting when the fiduciary prudently

determines that the matter being voted

upon would not have an economic

impact on the plan after taking into

account the costs involved.

A commenter indicated that

paragraph (e)(3)(v) of the proposal was

not sufficient to provide safe harbor

relief for fiduciaries following permitted

practices under the proposal. Another

commenter expressed the view that the

provision was not broad enough and

should expressly permit fiduciaries to

consider any prudent alternative

courses of action for any particular

proxy issue that may otherwise fall

within the description of a permitted

practice.

The Department believes that

paragraph (e)(3)(i) of the final rule

provides sufficient clarity with respect

to the Department’s intended safe

harbor treatment of proxy voting

policies adopted under paragraph (e)(3)

of the final rule. The Department also

believes that the principles-based

approach in the final rule provides

sufficient flexibility for fiduciaries to

exercise prudent judgment in making

proxy voting determinations. Changes

have been made to paragraph (e)(3)(iii)

of the final rule to reflect this

principles-based approach.

Paragraph (e)(3)(iii) of the final rule

provides that no proxy voting policies

adopted pursuant to paragraph (e)(3)(i)

of this section shall preclude, or impose

liability for, submitting a proxy vote

when the fiduciary prudently

determines that the matter being voted

upon is expected to have a material

effect on the value of the investment or

the investment performance of the

plan’s portfolio (or investment

performance of assets under

management in the case of an

investment manager) after taking into

account the costs involved, or refraining

from voting when the fiduciary

prudently determines that the matter

being voted upon is not expected to

have such a material effect after taking

into account the costs involved. In light

of the potentially large number of

individual proxy votes that may need to

be considered on an annual basis, the

safe harbor provisions are intended to

apply and operationalize the fiduciary

principles described in the final rule for

a particular plan in a cost-efficient

manner and provide an alternative to

retaining a proxy advisory firm to

provide advice on each vote. Paragraph

(e)(3)(iii) of the final rule shields a

fiduciary from liability to the extent that

the fiduciary deviates from policies

adopted pursuant to the safe harbors

based on the fiduciary’s conclusion that

a different approach in a particular case

is in the economic interests of the plan

considering the specific facts and

circumstances.

(iv) Paragraph (e)(4)

Paragraphs (e)(4)(i) and (ii) of the final

rule, like the proposal, reflect

longstanding interpretive positions

published in the Department’s prior

Interpretive Bulletins. Paragraph

(e)(4)(i)(A) of the proposal stated that

the responsibility for exercising

shareholder rights lies exclusively with

the plan trustee, except to the extent

that either (1) the trustee is subject to

the directions of a named fiduciary

pursuant to ERISA section 403(a)(1), or

(2) the power to manage, acquire, or

dispose of the relevant assets has been

delegated by a named fiduciary to one

or more investment managers pursuant

to ERISA section 403(a)(2). Paragraph

(e)(4)(i)(B) of the proposal provided that

where the authority to manage plan

assets has been delegated to an

investment manager pursuant to ERISA

section 403(a)(2), the investment

manager has exclusive authority to vote

proxies or exercise other shareholder

rights appurtenant to such plan assets,

except to the extent the plan or trust

document or investment management

agreement expressly provides that the

responsible named fiduciary has

reserved to itself (or to another named

fiduciary so authorized by the plan

document) the right to direct a plan

trustee regarding the exercise or

management of some or all of such

shareholder rights.

A commenter indicated that

paragraph (e)(4)(i) of the proposal was

unclear as to trustee responsibilities

with respect to voting directed by plan

participants pursuant to plan

provisions. As discussed below, a new

paragraph (e)(5) was added to the final

rule to address ‘‘pass-through’’ or

‘‘participant-directed’’ voting. Paragraph

(e)(4)(i)(A) in the final rule is unchanged

from the proposal, with a correction of

a typographical error. Paragraph

(e)(4)(i)(B) in the final rule is unchanged

from the proposal.

Paragraph (e)(4)(ii) of the proposal

described obligations of an investment

manager of a pooled investment vehicle

that holds assets of more than one

employee benefit plan. It stated that an

investment manager of a pooled

investment vehicle that holds assets of

more than one employee benefit plan

may be subject to an investment policy

statement that conflicts with the policy

of another plan. It also provided that

compliance with ERISA section

404(a)(1)(D) requires the investment

manager to reconcile, insofar as

possible, the conflicting policies

(assuming compliance with each policy

would be consistent with ERISA section

404(a)(1)(D)). In the case of proxy

voting, to the extent permitted by

applicable law, the investment manager

must vote (or abstain from voting) the

relevant proxies to reflect such policies

in proportion to each plan’s economic

interest in the pooled investment

vehicle. Such an investment manager

may, however, develop an investment

policy statement consistent with Title I

of ERISA and the Investment Duties

regulation, and require participating

plans to accept the investment

manager’s investment policy, including

any proxy voting policy, before they are

allowed to invest. In such cases, a

fiduciary must assess whether the

investment manager’s investment policy

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46

Specifically, IB 2016–01 stated: ‘‘An

investment manager of a pooled investment vehicle

that holds assets of more than one employee benefit

plan may be subject to a proxy voting policy of one

plan that conflicts with the proxy voting policy of

another plan. Compliance with ERISA section

404(a)(1)(D) would require the investment manager

to reconcile, insofar as possible, the conflicting

policies (assuming compliance with each policy

would be consistent with ERISA section

404(a)(1)(D)) and, if necessary and to the extent

permitted by applicable law, vote the relevant

proxies to reflect such policies in proportion to

each plan’s interest in the pooled investment

vehicle. If, however, the investment manager

determines that compliance with conflicting voting

policies would violate ERISA section 404(a)(1)(D) in

a particular instance, for example, by being

imprudent or not solely in the interest of plan

participants, the investment manager would be

required to ignore the voting policy that would

violate ERISA section 404(a)(1)(D) in that instance.

Such an investment manager may, however, require

participating investors to accept the investment

manager’s own investment policy statement,

including any statement of proxy voting policy,

before they are allowed to invest. As with

investment policies originating from named

fiduciaries, a policy initiated by an investment

manager and adopted by the participating plans

would be regarded as an instrument governing the

participating plans, and the investment manager’s

compliance with such a policy would be governed

by ERISA section 404(a)(1)(D).’’

47

See 59 FR 38860, 38863 (July 29, 1994)

(‘‘Nothing in ERISA, however, prevents such an

investment manager from maintaining a single

investment policy, including a proxy voting policy,

and requiring all participating investors to give

their asse[n]t to such policy as a condition of

investing.’’).

statement and proxy voting policy are

consistent with Title I of ERISA and the

Investment Duties regulation before

deciding to retain the investment

manager.

Commenters indicated that the

proposal’s requirement to reconcile

conflicting policies of investing plans

and engage in proportionate voting to

reflect conflicting policies would be

highly burdensome for investment

managers. A commenter noted that it is

sometimes not possible to instruct a

single client’s holding within the fund

differently than other clients, as ‘‘split-

voting’’ is not permitted practice in

certain markets or custodian banks.

Commenters also indicated that

paragraph (e)(4)(ii) of the proposal did

not reflect current industry standard

practice that investment in a plan asset

vehicle is generally conditioned on

acceptance of the investment objectives,

guidelines, and policies that apply to

the vehicle. Some commenters

recommended deletion of the proposed

requirement to reconcile conflicting

policies of ERISA plans. Other

commenters suggested deleting

paragraph (e)(4)(ii) of the proposal

entirely.

Commenters requested that the

language in paragraph (e)(4)(ii) of the

proposal addressing a plan’s acceptance

of an investment manager’s proxy voting

policy be modified to clarify that the

investment manager’s investment policy

statement or proxy voting policy must

be consistent with Title I of ERISA, but

are not required to be consistent with

the proposed rule. Commenters

indicated that investment managers

would have difficulties performing the

plan-specific evaluations required by

the proposal. These issues are discussed

more generally above. A commenter also

indicated that even if the rule were to

allow elimination of the plan-specific

evaluation, the task to make changes to

an investment manager’s policies would

still be enormous. According to the

commenter, the trust’s proxy voting

guidelines would likely require

revision, and once revised, would need

to be presented, explained, and

accepted by each participating plan,

including non-ERISA plans not subject

to the rule. Similarly another

commenter suggested that the subtle

differences between paragraph (e)(4)(ii)

of the proposal and the analogous

provision in IB 2016–01 might cause an

investment manager, in order to protect

all of its clients, to adopt a revised

investment policy statement that it

would require participating plans to

accept, and that the process would

involve both drafting that policy and

obtaining consent from investing plans.

The Department is not persuaded to

remove paragraph (e)(4)(ii) from the

final rule or change the language

regarding reconciliation of conflicting

policies of investing plans or

proportionate voting. Similar guidance

has been consistently part of the

Department’s prior Interpretive

Bulletins in this area. As to the

requirement that policies must be

consistent with Title I of ERISA and the

final rule and difficulties associated

with plan specific evaluations, the

Department believes that changes in

paragraph (e)(2)(i) and (ii) of the final

rule should address commenters’

concerns. With respect to the

commenter’s identification of subtle

differences between paragraph (e)(4)(ii)

of the proposal and the relevant portion

of IB 2016–01, the Department

acknowledges that the language is not

identical.

46

However, the Department

did not intend the language changes to

fundamentally alter that guidance. Like

IB 2016–01, paragraph (e)(4)(ii)

recognizes that there may be

circumstances under which an

investment manager of a pooled

investment vehicle that holds assets of

more than one plan may be subject to

conflicting policies of investing plans,

but that the manager may avoid

conflicting policies by requiring

investors to accept the investment

manager’s policies before they are

allowed to invest.

47

However, paragraph

(e)(4)(ii) adds language that describes

the associated obligations of plan

fiduciaries in making the decision to

accept the investment manager’s

policies. Commenters did not question

whether an ERISA fiduciary should

assess an investment manager’s

investment policy statement for

consistency with ERISA prior to

accepting it. To the extent that the

commenter’s concerns about differences

from the relevant portion of IB 2016–01

relate to the requirement that the

manager’s policies must be consistent

with the final rule, the Department

believes changes in paragraph (e)(2)(i) of

the final rule, as described above,

should address this concern. As a result,

paragraph (e)(4)(ii) of the final rule is

being adopted substantially as

proposed.

(v) Paragraph (e)(5)

A number of commenters indicated

that the proposal did not specifically

address proxy rights passed through to

plan participants. A commenter

explained that participants may invest

in publicly-traded companies, as well as

mutual funds and other securities,

through a self-directed brokerage

window offered by their plans.

According to the commenter, self-

directed brokerage windows involve the

broker passing voting rights through to

the participants. Further, participant-

directed plans, such as those structured

to meet ERISA section 404(c) and

related regulations, sometimes allow

participants to invest in company stock

and pass through voting to them.

According to the commenter, many

ERISA-covered plans have been drafted

to explicitly provide that plan

participants are deemed to be ‘‘named

fiduciaries’’ when they vote securities

held by their plan accounts.

Commenters argued that the structure

and provisions of the proposed

regulation did not account for such

‘‘pass-through’’ or ‘‘participant-

directed’’ voting activity, and requested

that the Department expressly exclude

such voting activity from the rule or

provide clarification as to application of

the proposed rule’s requirements in the

context of pass-through of voting rights,

including the responsibilities of trustees

in connection with the actual votes of

participants and whether participants

when exercising their proxy voting

rights would be treated as fiduciaries

under the rule.

The Department agrees that the

proposal was not intended to address

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48

See Letter from Deputy Assistant Secretary

Lebowitz to Thobin Elrod (Feb. 23, 1989); Letter

from Assistant Secretary Berg to Ian Lanoff (Sept.

28, 1995).

49

One commenter argued that the rule is a ‘‘major

rule’’ under the Congressional Review Act and thus

may not be effective earlier than 60 days after

publication in the Federal Register. As discussed in

the Regulatory Impact Analysis below, the Office of

Management and Budget has determined this rule

is not a ‘‘major rule’’ for Congressional Review Act

purposes and is therefore not subject to the delayed

60-day effective date.

50

Commenters pointed out that plan sponsors

and other fiduciaries would need to review, amend,

and possibly renegotiate existing contracts with

investment managers, proxy advisory firms, and

other service and investment providers. Some

commenters also expressed more specific concerns,

for example, that, with respect to pooled investment

vehicles, it may be necessary to obtain approval of

revised investment policy statements from

participating plans, which would be difficult to

obtain in only 30 days.

51

The final rule includes a technical language

change in paragraph (g) to conform paragraph (g) to

Federal Register drafting conventions regarding the

use of ‘‘effective date’’ versus ‘‘applicability date’’

terminology.

52

85 FR at 72872.

the sort of pass-through voting that the

commenters described. Accordingly, the

final rule includes an express provision

in new paragraph (e)(5) stating that the

final rule does not apply to voting,

tender, and similar rights with respect

to such securities that are passed

through pursuant to the terms of an

individual account plan to participants

and beneficiaries with accounts holding

such securities. That should not be read

as an indication that plan trustees and

other plan fiduciaries do not have

fiduciary obligations with respect to

such practices. Prior Department

guidance recognized that in certain

circumstances a trustee may follow the

instructions of participants in an

eligible individual account plan that

expressly states that a trustee is subject

to the direction of plan participants

with respect to certain decisions

regarding the management of their

account. In such a case, under section

403(a)(1) of ERISA, the trustee must

follow the direction of participants if

those directions are proper, made in

accordance with plan terms, and not

contrary to ERISA.

48

Plan trustees and

other fiduciaries would continue to

have to comply with ERISA’s prudence

and loyalty provisions with respect to

the pass through of votes to plan

participants and beneficiaries, and can

continue to rely on the Department’s

prior guidance with respect to such

participant-directed voting, including

29 CFR 2550.404c-1 implementing

ERISA section 404(c)(1) to participant-

directed pass through voting.

(vi) Paragraphs (g) and (h)

Paragraph (g) provides the

applicability dates for the final rule.

Under paragraph (g), the final rule will

be applicable thirty days after the date

this final rule is published in the

Federal Register.

49

One commenter

requested clarity with respect to

whether the proposed applicability date

applied only to paragraph (e) or to the

entirety of § 2550.404a–1. Paragraphs

(g)(1) and (g)(3) of the final rule state

that the applicability date for paragraph

(e) is thirty days after the date this final

rule is published in the Federal Register

and shall apply to exercises of

shareholder rights after such date. A

number of commenters on the proposal

stated that the proposed 30-day effective

date period would not accommodate the

essential and lengthy transition

processes that would be necessary for

plan fiduciaries to fully comply with the

rule.

50

These commenters requested

extensions up to 12 or 18 months after

publication of a final rule. Alternatively,

or in addition to extending the

applicability date, commenters

requested that if the Department retains

the 30-day provision, that the final rule

include guidance that would permit

affected parties a more reasonable

amount of time to comply with the rule.

Commenters proffered a variety of

suggestions that would help plan

fiduciaries and others manage this new

process, including a different

applicability date, a transition rule, a

grandfather rule for existing voting

arrangements, and a temporary non-

enforcement policy.

The Department is not extending the

applicability date, particularly given the

benefits this final rule affords to

participants and beneficiaries.

Furthermore, the Department believes

that the final rule does not represent so

significant a change from existing

guidance that fiduciaries can reasonably

claim impossibility in timely

implementing most of its requirements.

However, the Department agrees that for

certain portions of the final rule, a later

applicability date will address concerns

of some commenters with respect to

their ability to comply with the rule

within the 30-day effective period.

Paragraph (g)(3) grants fiduciaries until

January 31, 2022, to comply with the

requirements of paragraphs (e)(2)(ii)(D)

and (E), (e)(2)(iv), and (e)(4)(ii) of the

final rule. This delay gives fiduciaries

additional time in making any

modifications with respect to their use

of proxy advisory firms and other

service providers and for reviewing any

proxy voting policies of pooled

investment vehicles by investment

managers. However, fiduciaries that are

investment advisers registered with the

SEC must comply with the 30-day

effective date with respect to paragraphs

(e)(2)(ii)(D) and (E) as such provisions

are intended to be aligned with existing

obligations under the Advisers Act,

including Rules 204–2 and 206(4)-6

thereunder and the 2019 SEC Guidance

and 2020 SEC Supplemental

Guidance.

51

Finally, paragraph (h) of the final rule,

as proposed, continues to provide that

should a court of competent jurisdiction

hold any provision of the rule invalid,

such action will not affect any other

provision. Including a severability

clause describes the Department’s intent

that any legal infirmity found with part

of the final rule should not affect any

other part of the rule. The exact same

paragraph is included in the final rule

on Financial Factors in Selecting Plan

Investments.

4. Interpretive Bulletin 2016–01 (IB

2016–01) and Field Assistance Bulletin

2018–01 (FAB 2018–01)

The final rule also withdraws IB

2016–01 and removes it from the Code

of Federal Regulations. Accordingly, as

of publication of the final rule, IB 2016–

01 may no longer be relied upon as

reflecting the Department’s

interpretation of the application of

ERISA’s fiduciary responsibility

provisions to the exercise of shareholder

rights and written statements of

investment policy, including proxy

voting policies or guidelines.

FAB 2018–01 concerned both ‘‘ESG

Investment Considerations’’ and

‘‘Shareholder Engagement Activities.’’

The portion of FAB 2018–01 under the

heading of ‘‘ESG Investment

Considerations’’ was superseded by the

Department’s final rule on ‘‘Financial

Factors in Selecting Plan

Investments.’’

52

Similarly, the portion

of FAB 2018–01 under the heading

‘‘Shareholder Engagement Activities’’

will be superseded by this final rule and

this accompanying preamble. Since that

discussion is the sole remaining

substantive portion of FAB 2018–01, as

of the effective date of the final rule,

FAB 2018–01 will no longer be

considered current guidance issued by

the Department.

C. Miscellaneous Issues

Constitutional Issues

A number of commenters raised

concerns that the proposal, or specific

provisions of the proposal, may be

inconsistent with certain rights afforded

shareholders by the First and Fifth

Amendments in the Constitution’s Bill

of Rights. The Department disagrees

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53

U.S. Const., amend. I.

54

See Cent. Hudson Gas & Elec. Corp. v. Pub.

Serv. Comm’n of New York, 447 U.S. 557, 564

(1980). Commenters generally argued that Central

Hudson’s commercial speech test would apply.

55

Clark v. Community for Creative NonViolence,

468 U.S. 288, 293 (1984).

56

Church of the Lukumi Babalu Aye v. City of

Hialeah, 508 U.S. 520, 531 (1993) (‘‘In addressing

the constitutional protection for free exercise of

religion, our cases establish the general proposition

that [a law that is neutral and of general

applicability need not be justified by a compelling

governmental interest even if the law has the

incidental effect of burdening a particular religious

practice.], Employment Div., Dept. of Human

Resources of Ore. v. Smith, 495 U.S. 872 (1990)’’).

57

Fraternal Order of Police of Newark v. City of

Newark, 170 F.3d 359, 360 (3d Cir. 1999) (‘‘Because

the Department makes exemptions from its policy

for secular reasons and has not offered any

substantial justification for refusing to provide

similar treatment for officers who are required to

wear beards for religious reasons, we conclude that

the Department’s policy violates the First

Amendment’’).

58

See Fraternal Order of Police of Newark, 170

F.3d at 360; Smith, 495 U.S. at 878–79.

59

See 29 U.S.C. 1002(33).

with these constitutional arguments

and, further, believes that the lack of

merit of those arguments is even more

pronounced in light of modifications to

the proposed rule adopted in the final

rule. Rather, the final rule is designed to

help these ERISA fiduciaries meet

statutory standards, in particular the

requirement that ERISA fiduciaries must

carry out their duties relating to the

exercise of shareholder rights prudently

and solely for the economic benefit of

plan participants and beneficiaries. The

Department’s view of the scope of

factors to be considered by an ERISA

fiduciary when managing plans assets

was articulated as recently as 2014 by

the Supreme Court in Fifth Third

Bancorp v. Dudenhoeffer, 573 U.S. 409,

421 (2014) (the ‘‘benefits’’ to be pursued

by ERISA fiduciaries as their ‘‘exclusive

purpose’’ do not include ‘‘nonpecuniary

benefits’’).

First Amendment Free Speech and

Exercise of Religion

Some commenters asserted that the

proposal may violate the First

Amendment’s protection of free speech.

The decision to vote shares or engage in

shareholder activism is, they argued, a

form of speech, and they claimed that

the Department established strict

conditions and costly burdens on the

established mechanism by which

shareholders (and therefore their

representatives) are able to

communicate their interests and provide

for companies to take (or refrain from

taking) certain actions. They also argued

that the proposal was targeted at

preventing support of ESG-related

initiatives and, by increasing the costs

associated with determining whether it

is acceptable to vote, would force

fiduciaries to use a permitted practice

either to not support those initiatives or

to vote with corporate management;

thus, the commenters concluded that

the proposal was both a content- and

viewpoint-based restriction. The

proposal, according to these

commenters, could mandate that assets

are managed in a manner that is

inconsistent with the values and

interests of ERISA investors. Similarly,

a few commenters claimed that the

proposal also may violate the First

Amendment’s protections for freedom of

religion, because it would curtail the

rights of religious organizations to vote

in accordance with their beliefs.

The First Amendment bars the

government from abridging freedom of

speech or the right to assemble

peaceably and from prohibiting the free

exercise of religion.

53

The right of free

speech protects the open expression of

ideas without fear of government

reprisal. Some commenters stated that

the right to vote a proxy consistent with

the participants’ and beneficiaries’

values is protected speech, and argued

that the proposed rule’s requirements

would unconstitutionally limit this

right.

These commenters relied

predominantly on the premise that the

proposal effectively would force

fiduciaries either to not vote or to vote

with management. As one commenter

argued, the proposal would ‘‘impose

unique and burdensome restrictions on

shareholder activities that may be

contrary to the interests of a favored

group, while removing those restrictions

when the expressive activity favors the

preferred group.’’ However, the

Department in this final rule has

removed the provisions that these

commenters argued would create a fait

accompli, allegedly stifling fiduciaries’

speech-through-proxy-vote. Because of

those changes, these arguments are

moot.

To the extent commenters would still

argue that the final rule might run afoul

of the Free Speech Clause, this

argument is overbroad and inconsistent

with Supreme Court precedent. ERISA

requires fiduciaries to manage plan

assets for the ‘‘exclusive purpose’’ of

providing benefits and defraying

expenses. Even if voting by a

shareholder speaking for herself could

be speech, as some commenters argued,

proxy voting by a plan, which holds its

shares in trust for its participants and

beneficiaries, should appropriately and

correctly be considered conduct.

Consistent with Dudenhoeffer, fiduciary

plan asset management activity must

focus exclusively on providing

‘‘benefits.’’ That term refers to financial

benefits (such as retirement income),

and not to non-pecuniary goals. The

final rule’s provisions require that any

proxy decision serves those financial

benefits of participants and

beneficiaries, a duty derived directly

from the ERISA statute.

To the extent proxy voting by a plan

is speech, ERISA’s requirements and the

final rule’s standards of diligence and

consideration of cost plainly satisfy the

independent scrutiny that is required

for regulations of commercial speech.

54

Moreover, the final rule is content- and

viewpoint-neutral. The final rule does

not require fiduciaries to say (or refrain

from saying) anything in particular or

take (or refrain from taking) any

particular position, nor does it require

fiduciaries to take action only on certain

topics. The final rule instead requires

that fiduciaries exercise authority over

their proxies with the same loyalty and

prudence applicable to all other aspects

of their management of plan assets. And

any restriction to express beliefs

imposed by the rule still leaves open

ample alternative channels to freely

express those same beliefs.

55

The Department also does not agree

that the final rule violates the First

Amendment’s Free Exercise clause. The

final rule is a neutral rule of general

applicability and does not target any

religious view.

56

The final rule’s

provisions aim solely to ensure that

fiduciaries base proxy decisions of any

kind exclusively on the financial

benefits of participants and

beneficiaries, as required by ERISA.

57

The impact on religion, if any, would be

incidental and not violate the First

Amendment.

58

Moreover, pursuant to

ERISA section 4(b)(2), church plans, as

defined in ERISA section 3(33), are not

subject to ERISA and this regulation.

59

Fifth Amendment Takings

A few commenters raised a different

Constitutional concern—that the

proposal may violate the Fifth

Amendment’s ‘‘takings’’ clause.

Characterizing the right to vote a proxy

as a plan asset, these commenters argue

that the proposed rule would require

ERISA plans to use their votes in a

specific way, or relinquish them. The

proposed rule’s requirements, the

commenters posited, are so burdensome

as to prevent fiduciaries from fully

exercising their voting rights.

The Department disagrees that the

provisions of the final rule violate the

Takings Clause. The Fifth Amendment

prohibits the government from taking

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U.S. Const. amend. V.

61

Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537

(2005).

62

Ruckelshaus v. Monsanto Co., 467 U.S. 986,

1000–01, 1005 (1984).

63

Id. at 1005 (quoting PruneYard Shopping Ctr.

v. Robins, 447 U.S. 74, 832 (1980)).

64

Avon Letter, supra note 6.

65

Penn Central Transp. Co. v. City of New York,

438 U.S. 104, 127 (1978) (finding historical

preservation law not a taking in part because it

permitted owner to obtain a reasonable return on

its investment.).

66

See, e.g., Ruckelshaus, 467 U.S. at 1007 (1984)

(noting that expectations are necessarily adjusted in

areas that ‘‘ha[ve] long been the source of public

concern and the subject of government regulation’’);

Franklin Mem’l Hosp. v. Harvey, 575 F.3d 121, 128

(1st Cir. 2009) (holding that a claimant’s

investment-backed expectations were ‘‘tempered by

the fact that it operate[d] in the highly regulated

hospital industry’’).

67

See Executive Order 13891, 84 FR 55235 (Oct.

15, 2019), promoting notice-and-comment

rulemaking for guidance.

private property for public use without

just compensation.

60

A ‘‘regulatory

taking’’ is one in which a government

regulation is ‘‘so onerous that its effect

is tantamount to a direct appropriation

or ouster.’’

61

The Government action

must (1) affect a property interest and

(2) go ‘‘too far’’ in so doing (i.e., amount

to a deprivation of all or most economic

use or a permanent physical invasion of

property).

62

How far is too far depends

upon several factors, including ‘‘the

character of the governmental action, its

economic impact, and its interference

with reasonable investment-backed

expectations.’’

63

At the outset, the Takings Clause

applies only when ‘‘property’’ is

‘‘taken.’’ The Department has stated that

the act of voting proxy shares is a

fiduciary act of managing plan assets.

64

The Department is not aware of any

judicial authority that has addressed

whether a shareholder right appurtenant

to a share of stock, as opposed to the

share of stock itself, is ‘‘property’’ for

purposes of the Takings Clause and

whether the ‘‘taking’’ analysis would

involve an evaluation of the regulation’s

impact on the overall value of the stock.

Nonetheless, even if the right to vote a

proxy itself constitutes a

constitutionally-protected property

interest, neither the proposal nor this

final rule ‘‘takes’’ that right or the

underlying shares. Instead, the rule fully

preserves the right to vote proxies in the

economic interests of the plan. It is

designed to protect, not diminish,

participants’ and beneficiaries’ interests

in their retirement benefits and the

plan’s economic interests by ensuring

proxy votes do not subordinate those

interests to non-pecuniary factors. The

fiduciary maintains discretion to vote or

not vote consistent with these interests.

Given the Department’s longstanding

position that the plan’s pecuniary

interests guide the exercise of

shareholder rights, there is no

reasonable expectation that plans can

make proxy voting decisions based on

anything but plans’ pecuniary

interests.

65

Further, both plans and

securities are already subject to

extensive regulation under state and

federal law.

66

Finally, the rule does not

‘‘take’’ property for public use, such as

for public safety or historical

preservation, but instead places

parameters around proxy voting

conduct that would fall outside of the

prudence and loyalty duties found in

the ERISA statute itself.

Administrative Procedure Act

A few commenters suggested that the

Department’s proposal was arbitrary and

capricious and, more specifically, failed

to comply with the Administrative

Procedure Act. Also, although not

necessarily framed in terms of the

Department’s compliance with the

Administrative Procedure Act, a number

of commenters asserted that the

Department lacked sufficient

evidentiary support for proposing the

rule. For example, commenters pointed

out that the Department suggested an

increase in shareholder proposals as

justification for the rule, which they

argued is not relevant to whether

fiduciaries are confused about their

fiduciary obligations with respect to

proxy voting, and that the Department

did not cite to any enforcement action

or other evidence that ERISA plan

participants have been harmed or that

ERISA plan fiduciaries are actually

confused about their responsibilities.

Other commenters disagreed and

believed that the Department

established sufficient evidence to

support its proposal—for example,

evidence that politically charged

shareholder proposals result in the

incursion of sometimes significant costs

but do not demonstrably enhance

shareholder value—and that the

Department, therefore, is correct to limit

voting on such proposals. Commenters

supporting the rule also discussed

evidence that proxy advisory firms,

which exert massive amounts of

influence over public companies, have

well-documented deficiencies,

including conflicts of interest, errors,

and a lack of transparency.

Some commenters also argued that

the proposal was a significant departure

from prior Departmental guidance on

shareholder rights without sufficiently

establishing the existence of a problem

to be solved, or otherwise providing a

reason why the rule otherwise is

necessary. Commenters also argued that

no further clarification of the existing

Interpretive Bulletin and Field

Assistance Bulletin regarding

fiduciaries’ ERISA obligations with

respect to proxy voting is necessary.

With respect to the arguments of

commenters concerning the

Administrative Procedure Act, the

Department believes that there are

sufficient reasons to justify the

promulgation of this final rule,

including the lack of precision and

consistency in the marketplace with

respect to ERISA fiduciary obligations

with respect to exercises of shareholder

rights, shortcomings in the rigor of the

prudence and loyalty analysis by some

fiduciaries and other market

participants, and perceived variation in

some aspects of the Department’s past

guidance. Further, the iterative

Interpretive Bulletins since 1994,

followed by the Field Assistance

Bulletin issued in 2018, and the number

of advisory opinions and information

letters historically issued on this topic

demonstrate the need for notice and

comment guidance issued under the

Administrative Procedure Act.

67

The

Department does not believe that there

needs to be specific evidence of

fiduciary misbehavior or demonstrated

injury to plans and plan participants in

order to issue a regulation addressing

the application of ERISA’s fiduciary

duties to the exercise of shareholder

rights, including proxy voting, the use

of written proxy voting policies and

guidelines, and the selection and

monitoring of proxy advisory firms.

The need for this regulation was also

demonstrated by the disagreements

among commenters on fundamental

aspects of the proposal, which itself

confirmed that a lack of clarity in fact

exists and that ERISA fiduciaries and

other market stakeholders would benefit

from the Department’s guidance in this

final rule, as well as the confusion

regarding the scope of fiduciaries’ duties

with respect to proxy voting and

shareholder rights evidenced by the

number of statements by stakeholders

and others expressing a belief that

fiduciaries are required by ERISA to

always vote proxies. Moreover, under

the Department’s authority to

administer ERISA, the Department may

promulgate rules that are preemptive in

nature and is not required to wait for

widespread harm to occur. The

Department can take steps to ensure that

plans and plan participants and

beneficiaries are protected prospectively

and has the ability to issue regulations

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In pursuing its consultations with other

regulators, the Department aimed to avoid conflict

with other federal laws and minimize duplicative

provisions between ERISA and federal securities

laws. However, the governing statutes do not permit

the Department to make obligations under ERISA

identical in all respects to duties under federal

securities laws.

to ensure that fiduciaries follow their

statutory duties and mitigate the

possibility of future violations.

The Department also believes that

proceeding through notice-and-

comment rulemaking rather than

promulgating further interpretive

guidance has other benefits, including

the benefit of public input and the

greater stability of codified rules.

Proceeding in this manner is also

consistent with the principles of

Executive Order 13891 and the

Department’s recently issued PRO Good

Guidance rule, which emphasize the

importance of public participation, fair

notice, and compliance with the

Administrative Procedure Act.

Tension With State Corporate Law

Some commenters argued that the

proposal, if finalized, would undermine

state corporate laws, which reflect the

inherent value of shareholder voting,

threaten good corporate governance, and

impede shareholders’ voting rights. The

Department is, according to these

commenters, overstepping its authority

and substituting its opinion for that of

shareholders, the owners of

corporations, as to what is important for

corporate management and business

affairs. Shareholders’ exercise of voting

rights is a critical ‘‘check’’ on the

principal-agent conflict that arises from

the separation of ownership and

management in modern corporate law.

Other commenters asserted that, in

addition to potentially conflicting with

corporate law, the Department’s rule

may conflict with corporations’ and

institutional investors’ existing policies

for shareholder voting, policies that

have evolved over time, in response to

real economic and financial

developments, to enhance the efficiency

and efficacy of the shareholder voting

process.

The Department disagrees with

commenters that this rulemaking creates

any real conflict with state corporate

laws. Although the rule will affect

ERISA plan fiduciaries as to whether

and how they exercise certain

shareholder rights, the rule will not

impact such rights themselves.

Commenters failed to provide specific

examples demonstrating any material

conflict or compliance issue concerning

these state laws.

Coordination With Other Federal Laws

and Policies

Some commenters expressed their

concern that the rule, if finalized, could

negatively impact the U.S. securities

markets to the extent the rule interferes

with other federal agencies’ objectives—

for example, by making it more difficult

for the SEC to perform its mission of

protecting securities markets and

investors. According to commenters, in

efficient markets shareholders are

assumed to exercise their voting rights

to ensure that investments are managed

in their best interests, and the proposed

rule would frustrate evolving market

efficiencies concerning when and how

shareholders vote proxies. Commenters

also alleged that potential conflicts

could arise for financial market

stakeholders who are subject to the laws

of other federal agencies, including the

SEC, the Office of the Comptroller of the

Currency, and the Commodity Futures

Trading Commission.

The Department believes that the

changes made to the final rule mitigate

any concerns with respect to potential

conflicts with other regulatory regimes.

For example, the final rule is intended

to align with comparable SEC

requirements imposed on investment

advisers with respect to

recordkeeping.

68

Both the proposed and

final rules were sent to the SEC and

other federal agencies as part of the

inter-agency review conducted by the

Office of Management and Budget

pursuant to Executive Order 12866.

Also, the final rule, as described above,

adopts a principles-based approach that

is fundamentally consistent with the

Department’s published interpretive

guidance in this area beginning in 1994.

Accordingly, the Department does not

agree that the final rule will make it

more difficult for the SEC or any other

federal agency to perform their missions

or that the final rule will have any

negative impact on the U.S. securities

markets. Rather, many public comments

welcomed the final rule as appropriately

describing the prudence and loyalty

obligations of ERISA fiduciaries in

connection with the exercise of

shareholder rights.

Consistency With International

Practices and Regulatory Trends

A few commenters also raised

concerns about how the proposal, if

finalized, would impact international

investment. For example, one

commenter, a financial services

provider, claimed that the rule’s

mandate that proxy voting be based

solely on an ERISA plan’s economic

interests is inconsistent with the

provider’s clients’ expectations, and

also with investment stewardship

standards outside of the United States.

The commenter claimed that asset

managers in the European Union and

other developed nations are increasingly

subject to standards exactly opposite to

those proposed by the Department,

which incorporate (and sometimes

require) consideration of ESG factors.

Further, some international securities

issuers require that investors vote

proxies, and commenters queried what

a plan fiduciary should do in such

cases.

This final rule reflects ERISA’s

requirements. Fiduciaries of ERISA-

covered pension and other benefit plans

are statutorily bound to manage those

plans, including shareholder rights

appurtenant to shares of stock, with a

singular goal of maximizing the funds

available to pay benefits under the plan.

The duties of prudence and loyalty

under ERISA may not be the same

investment standards the commenters

referenced under which international

regulation of proxy voting and other

exercises of shareholder rights is taking

place. Accordingly, international trends

or the actions of regulators in other

countries are not an appropriate gauge

for evaluating ERISA’s requirements as

they apply to fiduciary management of

investments, including the topics

covered by this final rule relating to the

exercise of shareholder rights, including

proxy voting, the use of written proxy

voting policies and guidelines, and the

selection and monitoring of proxy

advisory firms. Moreover, to the extent

foreign legal and financial standards

condone sacrificing returns to consider

non-pecuniary objectives, they are

inconsistent with the fiduciary

obligations imposed by ERISA.

As to commenters’ assertion that some

international securities issuers require

that investors vote proxies, as discussed

above, the final rule does not carry

forward the provision from the proposal

stating that a plan fiduciary must not

vote any proxy unless the fiduciary

prudently determines that the matter

being voted upon would have an

economic impact on the plan after

considering those factors described in

paragraph (e)(2)(ii) of the proposed rule,

taking into account the costs involved

(including the cost of research, if

necessary, to determine how to vote).

The Department also believes that such

a voting requirement by an issuer of

securities held by a plan would be a

relevant consideration for the plan

fiduciary when applying the more

principles-based approach adopted in

the final rule when deciding whether to

vote. However, the Department has

previously noted that in deciding

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See, e.g., 29 CFR 2509.2016–01 (last paragraph

in the section entitled ‘‘Proxy Voting’’).

70

ERISA section 404(a)(1). See also ERISA

section 403(c)(1) (‘‘[T]he assets of a plan shall never

inure to the benefit of any employer and shall be

held for the exclusive purposes of providing

benefits to participants in the plan and their

beneficiaries’’).

71

Regulatory Planning and Review, 58 FR 51735

(Oct. 4, 1993).

72

Improving Regulation and Regulatory Review,

76 FR 3821 (Jan. 18, 2011).

73

Reducing Regulation and Controlling

Regulatory Costs, 82 FR 9339 (Jan. 30, 2017).

74

5 U.S.C. 804(2) (1996).

75

44 U.S.C. 3506(c)(2)(A) (1995).

76

5 U.S.C. 601 et seq. (1980).

77

2 U.S.C. 1501 et seq. (1995).

78

Federalism, 64 FR 43255 (Aug. 10, 1999).

whether to purchase shares that may

involve out-of-the-ordinary costs or

unusual requirements—specifically

referencing as an example voting

proxies on shares of certain foreign

corporations—the responsible fiduciary

should consider whether the difficulty

and expense of voting the shares is

reflected in the market price.

69

Similarly, in the Department’s view, in

deciding whether to purchase or retain

shares, a fiduciary would have to

consider proxy voting requirements of

an issuer that conflict with the

fiduciary’s duties of prudence and

loyalty under ERISA or that interfere

with the fiduciary’s ability to comply

with those duties.

D. Regulatory Impact Analysis

This section analyzes the regulatory

impact of the Department’s final

regulation amendments to the

‘‘Investment Duties’’ regulation in 29

CFR 2550.404a–1 addressing the

application of the prudence and

exclusive purpose responsibilities under

ERISA with respect to the exercise of

shareholder rights, including proxy

voting, the use of written proxy voting

policies and guidelines, and the

selection and monitoring of proxy

advisory firms. As stated earlier in this

preamble, in connection with proxy

voting, the Department’s longstanding

position articulated in sub-regulatory

guidance that was first issued in the

1980s is that the fiduciary act of

managing plan assets includes the

management of voting rights (as well as

other shareholder rights) appurtenant to

shares of stock. In carrying out these

duties, ERISA mandates that fiduciaries

act ‘‘prudently’’ as well as ‘‘solely in the

interest’’ and ‘‘for the exclusive

purpose’’ of providing benefits to

participants and their beneficiaries.

70

This regulatory project was initiated

because the Department believes there is

a persistent misunderstanding among

some fiduciaries and other stakeholders

with respect to ERISA’s requirements

regarding proxy voting and the exercise

of shareholder rights. This

misunderstanding may be due in part to

varied statements the Department has

made on the consideration of non-

pecuniary or non-financial factors in

sub-regulatory guidance about those

activities. This final rule provides

certainty to plan administrators and

benefits ERISA plan participants by

eliminating the misunderstanding that

exists among some stakeholders that

ERISA fiduciaries are required to vote

all proxies rather than only proxies

determined to have a net positive

economic impact on the plan. The final

rule also supplements the Department’s

sub-regulatory guidance by specifying

actions fiduciaries can take to ensure

they are meeting their long-standing

obligation under ERISA to act

prudently, solely in the interests of

participants and beneficiaries, and for

the exclusive purpose of providing

benefits and defraying reasonable plan

expenses.

While the Department expects that

this final rule will benefit plans and

participants overall, it also will impose

some compliance costs to the extent that

fiduciaries do not currently meet

specific requirements found in the final

rule. However, as discussed in the cost

section below, the Department has made

significant modifications to the proposal

in the final rule by taking a less

prescriptive, principles-based approach

to the subject matter that focuses on

whether a fiduciary has a prudent

process for voting and other exercises of

shareholder rights. These changes will

significantly reduce the potential

compliance costs for fiduciaries.

The benefits, costs, and transfer

impacts associated with the final rule

depend on the number of plan

fiduciaries that are currently not

following or misinterpreting the

Department’s existing sub-regulatory

guidance. While the Department does

not have sufficient data to estimate the

number of such fiduciaries, the

Department expects the number is small

because the Department believes that

most fiduciaries largely comply with the

Department’s existing sub-regulatory

guidance in this area, which is

consistent with the principles-based

requirements of the final rule. The

Department expects that the benefits of

the rule will be appreciable for

participants and beneficiaries covered

by plans with noncompliant investment

fiduciaries. If the Department’s

assumption regarding the number of

noncompliant fiduciaries is understated,

the proposed rule’s benefits, costs, and

transfer impacts will be proportionately

higher; however, even in this instance,

the Department believes that the final

rule’s benefits still justify its costs.

1. Relevant Executive Orders

The Department has examined the

effects of this rule as required by

Executive Order 12866,

71

Executive

Order 13563,

72

Executive Order

13771,

73

the Congressional Review

Act,

74

the Paperwork Reduction Act of

1995,

75

the Regulatory Flexibility Act,

76

Section 202 of the Unfunded Mandates

Reform Act of 1995,

77

and Executive

Order 13132.

78

Executive Orders 12866 and 13563

direct agencies to assess the costs and

benefits of available regulatory

alternatives and, if regulation is

necessary, to select regulatory

approaches that maximize net benefits

(including potential economic,

environmental, public health and safety

effects; distributive impacts; and

equity). Executive Order 13563

emphasizes the importance of

quantifying both costs and benefits, of

reducing costs, of harmonizing rules,

and of promoting flexibility.

Under Executive Order 12866,

‘‘significant’’ regulatory actions are

subject to review by the Office of

Management and Budget (OMB).

Section 3(f) of the Executive order

defines a ‘‘significant regulatory action’’

as an action that is likely to result in a

rule (1) having an annual effect on the

economy of $100 million or more in any

one year, or adversely and materially

affecting a sector of the economy,

productivity, competition, jobs, the

environment, public health or safety, or

state, local or tribal governments or

communities (also referred to as

‘‘economically significant’’); (2) creating

a serious inconsistency or otherwise

interfering with an action taken or

planned by another agency; (3)

materially altering the budgetary

impacts of entitlement grants, user fees,

or loan programs or the rights and

obligations of recipients thereof; or (4)

raising novel legal or policy issues

arising out of legal mandates, the

President’s priorities, or the principles

set forth in the Executive order.

OMB has determined that this rule is

not economically significant within the

meaning of section 3(f)(1) of the

Executive Order 12866, but that it is

significant within the meaning of

section 3(f)(4) of the Executive order.

Therefore, the Department provides an

assessment of the potential costs,

benefits, and transfers associated with

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Department estimates are based on Form 5500

annual reports filed by plans with 100 or more

participants. These estimates include only stocks

held directly or through Direct Filing Entities, not

through mutual funds.

80

Department calculations are based on U.S.

Federal Reserve statistics. Board of Governors of the

Federal Reserve System, Financial Accounts of the

United States—Z.1 (Sept. 2020).

81

Morris Mitler, Dorothy Donohue & Sean

Collins, Proxy Voting by Registered Investment

Companies, 2017, Investment Company Institute

Research Perspective (July 2019), at 4 (hereinafter

‘‘ICI Proxy Voting Report’’).

82

Id., at 6; see also 15 U.S.C. 78n–1.

83

Procedural Requirements and Resubmission

Thresholds under Exchange Act Rule 14a–8, 84 FR

66458, 66491 (Dec. 4, 2019).

84

See 2019 ISS Proxy Voting Trends, supra note

20.

85

See John G. Matsusaka, Oguzhan Ozbas, & Irene

Yi, Can Shareholder Proposals Hurt Shareholders?

Evidence from SEC No-Action Letter Decisions,

U.S.C. CLASS Research Paper No. CLASS17–4

(2019), https://papers.ssrn.com/sol3/

papers.cfm?abstract_id=2881408, at 25; Joseph P.

Kalt, L. Adel Turki, Kenneth W. Grant, Todd D.

Kendall & David Molin, Political, Social, and

Environmental Shareholder Resolutions: Do They

Create or Destroy Shareholder Value?, National

Association of Manufacturers (June 2018),

www.shopfloor.org/wp-content/uploads/2018/06/

nam_shareholder_resolutions_survey.pdf.

86

DOL estimates from the 2018 Form 5500

Pension Research Files.

this final rule below. OMB has reviewed

the final rule pursuant to the Executive

order. Pursuant to the Congressional

Review Act, OMB has determined that

this final rule is not a ‘‘major rule,’’ as

defined by 5 U.S.C. 804(2).

1. Introduction

ERISA plan assets comprise a

substantial stake of the shares of public

companies. In 2018, pension plan assets

contained stock holdings of $1.7 trillion;

such holdings made up 27 percent of

large defined benefit plan assets and 25

percent of large defined contribution

plan assets.

79

However, ERISA pension

holdings represent a decreasing share of

all corporate equity. ERISA defined

benefit and defined contribution plans

held just 5.5 percent of total corporate

equity in 2019, down from a high of 22

percent in 1985.

80

Prior to its annual meeting, a publicly

traded company sets a record date and

sends out a list of proposals on which

shareholders will vote. A shareholder

must hold shares as of the record date

in order to vote at a shareholder

meeting. There are two types of

proposals: Management proposals and

shareholder proposals. Management

proposals—including director elections,

audit firm ratification proposals, and

proposals regarding the company’s

executive compensation program (also

known as ‘‘say-on-pay’’ proposals)—

account for 98 percent of proposals and

are largely mandated by law or

exchange listing requirements. From

2011 to 2017, shareholder proposals

accounted for about two percent of

proposals but often were more

controversial and thus received more

attention than management proposals.

81

Shareholder votes on some proposals,

such as director elections, are binding.

Votes on many other proposals,

including shareholder proposals and

say-on-pay proposals, are not binding

and serve only as shareholder

recommendations for the company’s

board.

82

1.1. Need for Regulation

As discussed above in section A,

Background and Purpose of Regulatory

Action, the Department believes that

this final rule is necessary to provide

clarity and certainty regarding the

application of fiduciary obligations of

loyalty and prudence with respect to

exercises of shareholder rights,

including proxy voting. Despite past

efforts to make clear fiduciary

obligations in this regard, the

Department is concerned that its

existing sub-regulatory guidance may

have inadvertently created the

perception that fiduciaries must vote

proxies on every shareholder proposal

to fulfill their obligations under ERISA.

This belief may have caused some

fiduciaries to pursue proxy proposals

that have no connection to increasing

the value of investments used to pay

benefits or defray reasonable plan

administrative expenses.

For example, some fiduciaries may

feel obligated to vote proxies for non-

pecuniary proposals related to

environmental, social, or public policy

agendas. The situation is concerning

due to the recent increase in the number

of environmental and social shareholder

proposals introduced. From 2011

through 2017, shareholders submitted

462 environmental proposals and 841

social shareholder proposals, and

resubmitted at least once 41 percent of

environmental and 51 percent of social

proposals.

83

These proposals

increasingly call for disclosure, risk

assessment, and oversight, rather than

for specific policies or actions, such as

phasing out products or activities.

84

The

Department believes it is likely that

many of these proposals have little

bearing on share value or other relation

to plan financial interests.

85

The

Department also has reason to believe

that responsible fiduciaries may

sometimes rely on third-party proxy

voting advice without taking sufficient

steps to ensure that the advice is

impartial and rigorous.

The Department’s objective in issuing

this final rule is to ensure that plan

fiduciaries act solely in accordance with

the economic interest of the plan and its

participants and beneficiaries and

consider only pecuniary factors when

deciding whether to vote proxies or

exercise shareholder rights. The

Department believes that addressing

these issues in the final rule will help

safeguard the interests of participants

and beneficiaries in their plan benefits.

1.2. Affected Entities

This final rule would affect ERISA-

covered pension, health, and other

welfare plans that hold shares of

corporate stock. It would affect plans

with respect to stocks they hold

directly, as well as with respect to

stocks they hold through ERISA-covered

intermediaries, such as common trusts,

master trusts, pooled separate accounts,

and 103–12 investment entities. The

final rule would not affect plans with

respect to stock held through registered

investment companies, because the final

rule does not apply to such funds’

internal management of such underlying

investments. The final rule also does not

apply to voting, tender, and similar

rights with respect to securities that are

passed through pursuant to the terms of

an individual account plan to

participants and beneficiaries with

accounts holding such securities.

ERISA-covered plans with 100 or

more participants (large plans) annually

report data on their stock holdings on

Form 5500 Schedule H (see Table 1).

Approximately 27,000 defined

contribution plans and 5,000 defined

benefit plans, with approximately 84

million participants, either hold

common stocks or are an Employee

Stock Ownership Plan (ESOP).

Additionally, 573 health and other

welfare plans file the schedule H and

report holding common stocks either

directly or indirectly. In total, large

pension plans and welfare plans hold

approximately $1.7 trillion in stock

value. Common stocks constitute about

25 percent of total assets of those

pension plans that are not ESOPs and

hold common stock. Out of the 25,400

pension plans that hold common stock

and are not ESOPs, about 20,000 plans

hold common stock through an ERISA-

covered intermediary and

approximately 3,500 plans hold

common stock directly. A smaller

number of plans hold stock both

directly and indirectly.

86

In total, there

are approximately 32,000 plans holding

either common stock or employer stock,

comprised of large plans, welfare plans,

and ESOPs. In addition to the large

pension plans, approximately 629,000

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87

The Form 5500 does not require these plans to

categorize the assets as common stock, so the

Department does not know if they hold stock.

88

DOL estimates are derived from the 2018 Form

5500 Schedule C.

89

One commenter pointed out that in a

proprietary survey of the largest pension funds and

defined contribution plans, approximately 92

percent of the respondents indicated that they have

formally delegated proxy voting responsibilities to

another named fiduciary (e.g., an Investment

Manager), and approximately 42 percent of

respondents engage a proxy advisory firm (directly

or indirectly) to help with voting some or all

proxies.

90

Glassman, James K., and J.W. Verret, ‘‘How to

Fix our Broken Proxy Advisory System.’’ Arlington,

VA: Mercatus Center (2013).

91

Exemptions from the Proxy Rules for Proxy

Voting Advice, 85 FR 55082 (Sept. 3, 2020) (2020

SEC Proxy Voting Advice Amendments).

92

Dimson, Elroy, Og

˘uzhan Karakas

¸, and Xi Li.,

Active Ownership, 28 The Review of Financial

Studies 12 (2015).

small pension plans hold assets and

some may invest in stock.

87

T

ABLE

1—N

UMBER OF

P

ENSION AND

W

ELFARE

P

LANS

H

OLDING

C

OMMON

S

TOCKS OR

ESOP

BY

T

YPE OF

P

LAN

, 2018

a

Common Stock

(no employer securities) Defined

benefit Defined

contribution Total

pension plans Welfare plans Total all plans

Direct Holdings Only ............................................................ 1,272 2,286 3,558 569 4,127

Indirect Holdings Only .......................................................... 2,792 17,591 20,383 3 20,386

Both Direct and Indirect ....................................................... 941 586 1,527 1 1,528

Total .............................................................................. 5,005 20,463 25,468 573 26,041

ESOP (No Common Stock) ................................................. ........................ 5,809 5,809 ........................ 5,809

Common Stock and ESOP .................................................. ........................ 591 591 ........................ 591

Total All Plans Holding Stocks ..................................... 5,005 26,863 31,868 573 32,441

a

DOL calculations from the 2018 Form 5500 Pension Research Files.

While this final rule would directly

affect ERISA-covered plans that possess

the relevant shareholder rights, the

activities covered under the final rule

would be carried out by responsible

fiduciaries on plans’ behalf. Many plans

hire asset managers to carry out

fiduciary asset management functions,

including proxy voting. In 2018, large

ERISA plans reportedly used

approximately 17,800 different service

providers, some of whom provide

services related to the exercise of plans’

shareholder rights. Such service

providers include trustees, trust

companies, banks, investment advisers,

and investment managers.

88

In addition, this final rule will

indirectly affect proxy advisory firms.

89

Currently, this market is dominated by

two firms: Institutional Shareholder

Services, Inc. (ISS) and Glass, Lewis &

Co., LLC (Glass Lewis). It has been

estimated that in 2013, the combined

market share of these two firms was 97

percent (61 percent for ISS and 36

percent for Glass Lewis).

90

Each year,

ISS covers approximately 44,000

shareholder meetings and executes 10.2

million ballots on behalf of clients

holding 4.2 trillion shares. Glass Lewis

covers about 20,000 shareholder

meetings annually and provides services

to more than 1,300 clients that

collectively manage more than $35

trillion in assets.

91

ERISA plans’ demand for proxy

advice might decline if fiduciaries

refrain from voting shares under the

provisions of this final rule or under

proxy voting policies adopted pursuant

to the safe harbors provided in

paragraphs (e)(3)(i)(A) and (B). Plan

fiduciaries may want customized

recommendations about which

particular proxy proposals would have

a material effect on the investment

performance of their particular plan and

how they should cast their vote. Plans’

preferences for proxy advice services

could shift to prioritize services offering

more rigorous and impartial

recommendations. These effects may be

more muted, however, if the SEC rule

amendments enhance the transparency,

accuracy, and completeness of the

information provided to clients of proxy

voting firms in connection with proxy

voting decisions.

1.3. General Comments on the Proposed

Regulatory Impact Analysis

Comments on the proposed regulatory

impact analysis included comments that

supported the proposal and others that

challenged the Department’s analytical

approach, assumptions, and

conclusions, including criticizing the

Appendix A ‘‘illustrative’’ analysis as a

fundamentally flawed approach to the

measurement of possible costs, benefits,

and transfers associated with the

proposed rule.

As noted, a few commenters agreed

with the Department’s conclusion that

the rule would provide certainty to plan

administrators and benefits ERISA plan

participants by eliminating the

misunderstanding that exists among

some stakeholders that ERISA

fiduciaries are required to vote all

proxies rather than only proxies

determined to have a net positive

economic impact on the plan analysis.

One commenter stated that outside of

clear cases of economic gain, the

benefits of proxy voting ‘‘are dubious at

best.’’ Another commenter dismissed

the argument that the benefits of

shareholder engagement may include

realizing gains over the long term and

asserted that short-term costs are non-

trivial and long-term future benefits are

highly speculative. A commenter stated

that the rule will add elements of

transparency and accountability to the

proxy voting process.

Many commenters, however,

challenged the Department’s proposed

Regulatory Impact Analysis and

criticized the Department’s analysis of

the relevant literature.

With respect to the literature,

commenters criticized DOL’s assertion

that the evidence on the effectiveness of

and benefits from proxy voting is

‘‘mixed.’’ The Department continues to

believe that the research studies have a

wide range of findings. Some studies

have found that the adoption of

shareholder proposals has a positive

effect on financial performance. For

example, Dimson, Karakas, and Li’s

research, which examines U.S. public

companies, finds that the adoption of

ESG shareholder proposals increases the

returns of companies.

92

Flammer’s

research, which examines shareholders

proposals of U.S. publicly traded

companies, also finds that the adoption

of shareholder proposals related to

corporate social responsibility improves

the financial performance of

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93

Flammer, Caroline, Does Corporate Social

Responsibility Lead to Superior Financial

Performance? A Regression Discontinuity

Approach, 61 Management Science 11 (2015).

94

Martins, Fernando, Corporate Social

Responsibility, Shareholder Value, and

Competition. (2020).

95

Cun

˜at, Vicente, Mireia Gine

´, and Maria

Guadalupe, Say Pays! Shareholder Voice and Firm

Performance, 20 Review of Finance 5 (2016).

96

Cai, Jie, and Ralph A. Walkling., Shareholders’

Say on Pay: Does it Create Value?, Journal of

Financial and Quantitative Analysis (2011).

97

Prevost, Andrew K., and Ramesh P. Rao, Of

What Value are Shareholder Proposals Sponsored

by Public Pension Funds, 73 Journal of Business 2

(2000).

98

Larcker, David F., Allan L. McCall, and Gaizka

Ormazabal, Outsourcing Shareholder Voting to

Proxy Advisory Firms, 58 Journal of Law and

Economics 18 (2015).

99

Woidtke, Tracie, Agents Watching Agents?:

Evidence from Pension Fund Ownership and Firm

Value, 63 Journal of Financial Economics 1 (2002).

100

Karpoff, Jonathan M., Paul H. Malatesta, and

Ralph A. Walkling, Corporate Governance and

Shareholder Initiatives: Empirical Evidence, 42

Journal of Financial Economics 3 (1996).

101

Wahal, Sunil, Pension Fund Activism and

Firm Performance, Journal of Financial and

Quantitative Analysis (1996).

102

Id.

103

Del Guercio, Diane, and Jennifer Hawkins, The

Motivation and Impact of Pension Fund Activism,

52 Journal of Financial Economics 3 (1999).

104

Smith, Michael, Shareholder Activism by

Institutional Investors: Evidence from CalPERS, 51

Journal of Finance 1 (1996).

105

Vicente Cun

˜at & Mireia Gine

´& Maria

Guadalupe, 2012. ‘‘The Vote Is Cast: The Effect of

Corporate Governance on Shareholder Value,’’

Journal of Finance; Vicente Cun

˜at & Mireia Gine

´&

Maria Guadalupe, 2016. ‘‘Say Pays! Shareholder

Voice and Firm Performance,’’ Review of Finance,

European Finance Association, vol. 20(5), at 1799–

1834.

106

Data on abstentions not tipping votes is

suggestive, but not definitive. Figure 9 of the ICI’s

2017 research on proxy voting (www.ici.org/pdf/

per25-05.pdf), indicates that the percentage of

shares voting ‘‘for’’ various proposals (the

overwhelming number of which were management

proposals) as 95.2% in favor of management

proposals and 29.2% in favor of shareholder

proposals. The data is aggregated for all votes and

not focused on specific proposals, which could

indicate that there are no close votes or at least

some close votes which could be tipped. Based on

this uncertainty, the Department cannot quantify

the number of close votes that could be tipped

based on the available data, especially for

shareholder proposals. While the Department

received multiple comments expressing concern

that the rule would make it more difficult to reach

a quorum, the commenters did not include any data

supporting this assertion, and the Department is not

aware of any data sources that would support a

qualitative or quantitative analysis of the final rule’s

impact on reaching a quorum.

107

For the CFA Institute Code of Ethics and

Standards of Professional Conduct and the CFA

Institute Corporate Governance Manual, please see

www.cfainstitute.org/en/ethics-standards/ethics/

code-of-ethics-standards-of-conduct-guidance.

108

Some commenters cited a 2015 survey by the

CFA Institute that reported that 73 percent of global

investors take ESG factors into account in their

investment analysis and decisions. They also refer

to a McKinsey study that reports that ESG

Continued

companies.

93

In addition, Martin’s

research finds that the adoption of

shareholder proposals relating to

corporate social responsibility increases

the returns and market share of

companies.

94

Finally, Cun

˜at, Gine

´, and

Guadalupe’s research, which examines

shareholder proposals filed with the

SEC, finds that adoption of shareholder

proposals relating to executive pay

improves the market value and the long-

term profitability of firms.

95

In contrast,

other studies have found shareholder

proposals to have a negative effect on

financial performance. Cai and

Walking’s research finds that the

announcement of labor-sponsored

shareholder proposals results in a

negative market reaction.

96

Prevost and

Rao’s research finds that firms that

receive shareholder proposals for the

first time experience transitory declines

in market returns, while firms that

repeatedly receive shareholder

proposals experience permanent

declines in market returns.

97

In

addition, Larcker, McCall, and

Ormazabal’s research, which examines

Russell 3000 companies, finds that

changes in compensation contracts

made to comply with proxy advisor

voting policies results in a negative

stock market reaction.

98

Finally,

Woidtke’s research, which examines

Fortune 500 companies, finds that an

increase in shareholder activism by

public pension funds is negatively

associated with stock returns.

99

Furthermore, there are studies with

inconclusive results. Karpoff, Malatesta,

and Walking’s research finds that

shareholder proposals have a negligible

effect on the share values and operating

returns of firms.

100

Wahal’s research,

which examines firms targeted by

pension funds with a social agenda,

finds that firms that receive proxy

proposals do not experience significant

abnormal returns.

101

Wahal’s research

also finds no evidence of long-term

improvement in the performance of the

firm.

102

Similarly, Del Guercio and

Hawkins’ research, which examines

firms that received shareholder

proposals from large pension funds,

finds no evidence of significant

abnormal long-term returns.

103

Smith’s

research, which also examines firms

targeted by CalPERS, finds that there is

no statistically significant change in the

operating performance.

104

With respect to the Department’s

analysis, assumptions, and conclusions,

although several commenters noted that

the costs and benefits associated with a

proxy vote are highly uncertain and

difficult to quantify, commenters argued

that the Department’s analysis

overstated the current costs of proxy

voting, understated the new costs that

ERISA plans will incur if the proposal

were finalized, and neglected to account

for benefits to proxy voting that the

proposal would appear to classify as

non-economic in nature yet have been

linked to better financial performance.

One commenter cited the research of a

team of academics that found benefits of

shareholder voting for the market value

of shares.

105

Many commenters asserted that the

proposed rule will discourage voting,

and some suggested that less proxy

voting by ERISA investors will increase

the influence of non-ERISA investors.

Several of the commenters expressed

concerns that the costs imposed by the

rule would cause fiduciaries not to vote

proxies, even when economically

beneficial, or to adopt the permitted

practices described in the proposal

which they argued would benefit

corporate management at the expense of

plan participants and beneficiaries. A

commenter asserted that because

abstentions may have the effect of a

‘‘no’’ or ‘‘yes’’ vote, the rule may tip

votes one way or the other.

106

Some

commenters argued that having proxy

votes cast by individuals who are not

experts, for example by activists or

hedge fund managers rather than by

stable, expert, fiduciary shareholders,

would not be in the interests of ERISA

beneficiaries. Several commenters stated

that the rule could lead to a

concentration of voting power among a

few large firms whose proxy votes are

large enough to make an economic

impact on the plan’s investment.

Several commenters noted that proxy

voting serves as an important vehicle for

checks and balances to keep corporate

management accountable, focused on

long-term value creation, and to prevent

opportunistic behavior.

107

Another

commenter suggested that there is

significant uncertainty with respect to

the economic impact of any proxy vote

and that the proposal’s requirement to

determine the economic impact of

voting proxies requires a level of

precision that is inconsistent with the

way fiduciaries operate. Other

commenters expressed concern about

determining whether to vote proxies in

relation to ESG issues; many criticized

the rule for ignoring academic evidence

supporting the pecuniary impact of

issues the proposal deemed to be non-

economic, such ESG concerns that

involve significant risks to companies—

such as litigation, reputational harm, or

stranded assets—and business activities

that cause adverse impacts to

individuals, employees, and

communities.

108

They argued such

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companies create value disproportionate to their

peers. Similarly, by citing many studies made by

the investment industry, some commenters asserted

that there is a substantial, and growing, body of

empirical research that has identified meaningful

links between a company’s ESG characteristics and

financial performance. These include studies

produced by MSCI, Bank of America Merrill Lynch,

Allianz Global Investors, Nordea Equity Research,

Goldman Sachs, Morningstar, and Deutsche Asset &

Wealth Management. Some commenters cited an

academic study that uses ISS and FactSet data to

present evidence of a positive causal effect of the

passing of corporate social responsibility

shareholder proposals, the ones that are presumably

tied to ESG investing motives, to the correspondent

shareholder returns. Martins, Fernando, Corporate

Social Responsibility, Shareholder Value, and

Competition (July 1, 2020). Available at SSRN:

https://ssrn.com/abstract=3651240 or http://

dx.doi.org/10.2139/ssrn.3651240. The same

commenter cited an observational study that

reaches the same conclusion: www.hbs.edu/faculty/

conferences/2013-sustainability-and-corporation/

Documents/Active_Ownership_-_Dimson_Karakas_

Li_v131_complete.pdf. One commenter referred to a

meta-study showing that there is a correlation

between sustainability business practices and

economic performance. Clark, Gordon L. and

Feiner, Andreas and Viehs, Michael, From the

Stockholder to the Stakeholder: How Sustainability

Can Drive Financial Outperformance (March 5,

2015). Available at SSRN: https://ssrn.com/

abstract=2508281 or http://dx.doi.org/10.2139/

ssrn.2508281.

matters are critical to performing due

diligence risk analysis and have become

increasingly germane to assessing

company strategy and long-term

financial viability. One commenter

criticized the Department for allowing

the permitted practice of voting with

management but not allowing a similar

permitted practice of voting with proxy

advisors. The commenter asserted that

voting with proxy advisors costs less

and that proxy advisors are subject to

fewer and less severe conflicts than

management.

Finally, some commenters focused

specifically on proxy advisory firms.

Some commenters disagreed with the

Department’s expectation that the rule

may reduce plans’ demand for proxy

advice. A commenter pointed to a report

from the Manhattan Institute that

suggested that some ERISA fiduciaries

are using proxy advisors as a low-cost

way of meeting their own fiduciary

voting obligations, despite the fact that

the proxy advisor firms themselves are

not held to a fiduciary standard. One

commenter argued that proxy advisors

are in a resource-constrained

environment that adversely affects the

advice they provide. In support, the

commenter cites a study suggesting that

ISS provides lower quality advice

during the proxy season, when the firm

is at its busiest, and higher quality

advice during other times. This result

suggests that during the busy proxy

season, when proxy advisor firms’

resources are most constrained, such

firms are unable to maintain the same

quality of service as provided during

other periods.

After reviewing the public comments,

the Department agrees that there is

uncertainty regarding the costs and

benefits of proxy voting activities of

ERISA plans, both currently and under

the terms of the proposed regulation.

The Department presented an

illustration of an analytical approach to

evaluating the possible impacts of the

proposed rule. The Department

presented the data it had to estimate the

impacts of the rule and also highlighted

places where it lacked data to accurately

measure key parameters. In so doing,

the Department solicited comments and

data to allow the accurate estimation of

the impact of the rule’s requirement and

the permitted practices. The Department

received comments on the illustration

and its assumptions that sought to

estimate the costs of the proposed rule.

Commenters did not provide explicit

data or estimates for a per vote burden

to conduct research or required

documentation, nor did they provide

alternative estimates of the number of

proxies that would be impacted by the

proposal. Thus, notwithstanding the

solicitation of such data, the Department

still lacks critical information that

would allow it to use or modify the

model to try to produce a more accurate

measure of the cost of the final rule’s

requirements.

The Department included the

illustration to solicit public input on

one possible way to envision and

quantify the potential cost burden and

costs savings that could be associated

with the proposal. The Department

emphasized that the illustration was

based on speculative assumptions due

to insufficient data, and, as noted above,

many of the commenters criticized its

basis. Based on the public comments

and the fact that commenters did not

provide data or estimates that would

support continued use of the illustration

as part of this final regulatory impact

analysis, the Department has concluded

that the illustrative analysis that was

presented for public comment as part of

the proposal does not represent a

reliable construct for evaluating the

costs, benefits, and transfers associated

with the final rule. Perhaps more

importantly, however, as discussed

above and below, the Department has

made substantial changes to the

proposed rule that have reduced much

of the cost burden associated with the

final rule and thus the illustrative

analysis, even with its challenges

identified by the commenters, no longer

reflects the potential burdens associated

with the rule.

1.4. Benefits

This final rule would benefit plans by

providing improved guidance regarding

how ERISA’s fiduciary duties apply to

proxy voting. As discussed above, sub-

regulatory guidance that the Department

has previously issued over the years

may have led to a misunderstanding

among some that fiduciaries are

required to vote on all proxies presented

to them. This misunderstanding may

have led some plans to expend plan

assets unnecessarily to research and

vote on proxy proposals not likely to

have a pecuniary impact on the value of

the plan’s investments. The final rule is

intended to eliminate that confusion

and includes specific language in

paragraph (e)(2)(ii) clearly stating that

plan fiduciaries do not have an

obligation to vote all proxies. The rule

also includes a ‘‘safe harbor’’ provision

under which plan fiduciaries may adopt

proxy voting policies and parameters

prudently designed to serve the plan’s

economic interest. This will encourage

ERISA fiduciaries to execute

shareholder rights in an appropriate and

cost-efficient manner.

The final rule clarifies the duties of

fiduciaries with respect to proxy voting

and the monitoring of proxy advisory

firms. Specifically, in order to meet

their fiduciary obligations to manage

shareholder rights, plan fiduciaries must

(i) act solely in accordance with the

economic interest of the plan and its

participants and beneficiaries

considering the impact of any costs

involved; (ii) not subordinate the

interests of the participants and

beneficiaries in their retirement income

or financial benefits under the plan to

any non-pecuniary objective, or promote

non-pecuniary benefits or goals; and (iii)

prudently monitor the proxy voting

activities of investment managers or

proxy advisory firms to whom that

authority to vote proxies or exercise

shareholder rights has been delegated.

Accordingly, plan fiduciaries will be

better positioned to conserve plan assets

by having clear direction and the option

to prudently adopt voting policies that

(i) focus voting resources only on

particular types of proposals that the

fiduciary has prudently determined are

substantially related to the issuer’s

business activities or are expected to

have a material effect on the value of the

investment; and (ii) refrain from voting

on proposals or particular types of

proposals when the plan’s holding in a

single issuer relative to the plan’s total

investment assets is below a

quantitative threshold that the fiduciary

prudently determines, considering its

percentage ownership of the issuer and

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109

David Yermack, Shareholder Voting and

Corporate Governance, 2 Ann Rev. Fin. Econ. 2.1,

2.15 (2010); Frederick Alexander, The Benefit

Stance: Responsible Ownership in The Twenty-First

Century, 36 Oxford Rev. Econ Policy 341, 355

(2020); Robert G. Hansen and John R. Lott,

Externalities and Corporate Objectives in a World

with Diversified Shareholder/Consumers, Journal Of

Financial And Quantitative Analysis, 1996, vol. 31,

issue 1, 43–68.

other relevant factors, is sufficiently

small that the matter being voted upon

is not expected to have a material effect

on the investment performance of the

plan’s portfolio. Thus, votes will be cast

that more frequently advance plans’

economic interests. Cost savings and

other benefits to plans would flow to

plan participants and beneficiaries and

plan sponsors.

The final rule will replace existing

guidance on fiduciary responsibilities

for exercising shareholders’ rights. The

final rule will provide more certainty

than the existing sub-regulatory

guidance, and unlike such guidance, the

final rule sets forth binding, specific

requirements.

The final regulation could increase

investment returns on plan assets by

specifying when plan fiduciaries should

or should not exercise their shareholder

rights to vote proxies. Plan fiduciaries

are responsible for maximizing the

economic benefits to the plan, including

in their management of proxy voting

rights, which may involve voting

proxies or declining to vote them. If the

cost of obtaining information that

informs the vote exceeds the likely

economic benefits to the plan of voting,

then fiduciaries should not vote. This

course of action will save resources and

increase societal benefits.

The resources freed for other uses due

to voting fewer proxies (minus potential

upfront transition costs) would

represent benefits of the rule. To the

extent that the final regulation increases

the investment return on plan assets, it

would enhance participants’ and

beneficiaries’ retirement security,

thereby strengthening a central purpose

of ERISA. For the plans and participants

that would be affected by the final rule,

the benefits they would experience from

higher investment returns, compounded

over many years, could be considerable.

The increased returns would be

associated with investments generating

higher pre-fee returns, which means the

higher returns qualify as benefits of the

rule. However, to the extent that there

are any externalities, public goods, or

other market failures, those might

generate costs to society on an ongoing

basis. For example, a fiduciary may vote

for a proposal on a corporate merger or

acquisition transaction to maximize

shareholder value even though

implementation of the proposal would

bring about impacts in an affected

geographic area that would be adverse

for local businesses or residents.

Finally, some portion of the increased

returns would be associated with

transactions in which there is an

opposite party experiencing a decreased

return of equal magnitude. This portion

of the rule’s impact would, from a

society-wide perspective, be

appropriately categorized as a transfer

as discussed further in the Transfers

section below (though it should be

noted that, if there is evidence of wealth

differing across the transaction parties,

it would have implications for marginal

utility of the assets).

1.5. Costs

The Department received several

comments regarding estimated costs for

the proposed rule. Commenters were

divided in their opinions about whether

the illustration over or under estimated

the proposed rule’s total costs.

Several commenters expressed

concern that the rule will increase plan

costs. One commenter said that

conducting a cost-benefit analysis for

each vote is ‘‘unworkable’’ and will

‘‘create a dramatic cost burden.’’ Some

commenters asserted that the proposed

rule would substantially increase costs

because the commenters claimed that

the current cost to vote proxies was

small, with one commenter even

suggesting it was approaching zero.

Other commenters argued that the

Department’s cost estimates were

suspect because the Department

estimates that saving resulting from

adopting the proposal’s permitted

practices were significantly larger than

the entire revenues of the proxy

advisory market. One commenter

suggested their cost to provide services

would increase by 10 to 20 times their

current rate. Other commenters pointed

out that although the model showed

large costs, actual costs would be even

larger, approaching $13 billion a year.

A few of the commenters criticized

that the rule places a higher emphasis

on short-term costs and performance, as

the short-term economic impact is often

easier to quantify with less uncertainty.

The commenters argued that this would

lead fiduciaries to focus on short-term

economic implications at the expense of

long-term value, which some

commenters argued would be in

violation of a fiduciary’s duty.

One commenter stated the proposal

was onerous and that it may not even

be possible for a plan fiduciary to do the

proposal’s mathematical exercises to

determine the economic impact, let

alone defend the determination, of every

proxy vote in a detailed way and

document it. The commenter felt this

would raise the costs of even routine

proxy votes. The commenter also said

plans may need to hire additional

service providers to help determine the

economic impact on the plan of each

vote. The need to have additional

reviews and recordkeeping procedures

would increase costs for voting analysis.

Several commenters noted that the

Department’s economic analysis

overlooked costs associated with the

proposed rule, such as the cost of

analyzing whether to abstain from a vote

and the overhead costs of voting with

management.

A commenter said plans do not have

the expertise nor the desire to vote the

proxies themselves but instead rely on

asset managers. The commenter

suggested the proposed rule would

make proxy advisory services more

expensive, and the need to

independently investigate the basis of

the proxy advisor’s recommendation

will be costly. Another commenter

reported that they would need to charge

a rate 10 to 20 times the firm’s current

rate due to the proposal. The commenter

stated that such a high cost to vote

would force plans to either not vote or

defer to management.

Another commenter expressed the

view that the cost to use ERISA 3(38)

investment managers will increase as

they will have to bifurcate their

processes, policies, and voting to

accommodate ERISA and non-ERISA

accounts. Additionally, the commenter

argued that institutional investors

already approach their proxy voting

methodically and professionally.

Several commenters noted that the

analysis failed to address opportunity

costs or externalities. With reference to

externalities, one commenter referred to

academic research on corporate voting

and elections that highlights the voters’

motivation of communication with the

board of directors.

109

According to this

research, voting can be used as a

channel of communication with boards

of directors, and protest voting can lead

to significant changes in corporate

governance and strategy. In such

scenarios, voting success would not

only be assessed by examining the

returns to individual targeted firms’

stocks, but also by the impact on the

behavior of other companies throughout

their portfolios. Another commenter

noted, as an example of a negative

externality, a study by Arjuna Capital

that emphasized the negative

environmental effects of carbon

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110

See http://arjuna-capital.com/wp-content/

uploads/2016/07/Climate_Change_from_the_

Investor_s_Perspective.pdf.

111

The burden is estimated as follows: (63,911

plans * 4 hours) = 255,644 hours. A labor rate of

$138.41 is used for a lawyer. The cost burden is

estimated as follows: (63,911 plans * 4 hours *

$138.41) = $34,309,915.

112

29 CFR 2509.2016–01 (81 FR 95879, Dec. 29,

2016).

113

The burden is estimated as follows: 63,911

plans * 0.5 hours = 31,955.4 hours for both a plan

fiduciary and clerical staff. A labor rate of $134.21

is used for a plan fiduciary and a labor rate of

$55.14 for clerical staff (31,955.4 * $134.21 =

$4,288,739 and 31,955.4 * $55.14 = $1,762,023).

114

The burden is estimated as follows: 63,911

plans * 2 hours = 127,821.8. A labor rate of $134.21

emissions, which could potentially be

addressed through proxy voting.

110

One commenter stated they currently

incur minimal costs to execute proxy

votes in a way that they believe best

protects the interests of participants and

beneficiaries. Another commenter said

that any increased costs would be

minimal and suggested that to ensure

the rule imposes a minimal burden on

plan managers and proxy advisory

firms, the Department could allow these

firms to make the data used for voting

shareholder decisions publicly available

for external economic analysis, allowing

academics, think tanks, and concerned

citizens to provide additional economic

analysis.

Finally, commenters expressed

concern that by requiring plan

fiduciaries to determine economic

materiality and to document that

determination, the proposed rule would

increase litigation risk for plan

fiduciaries. A few of the commenters

specifically alluded to increased

litigation risk from plan participants,

alleging improper voting activity. Some

of the commenters stated that this risk

would discourage plan fiduciaries to

vote proxy votes.

After carefully considering such

comments, the Department made several

modifications to the proposed rule. The

most significant adjustment from the

proposal results from the Department’s

agreement with the recommendation of

some commenters that the final rule

take a more principles-based approach

to this subject matter. The Department

estimates that the more principles-based

approach will reduce much of the cost

burden associated with the proposed

rule. As discussed earlier in this

preamble, the most significant revision

in the final rule eliminates paragraphs

(e)(3)(i) and (ii) from the proposal.

Paragraph (e)(3)(i) of the proposal

provided that a plan fiduciary must vote

any proxy where the fiduciary

prudently determines that the matter

being voted upon would have an

economic impact on the plan, after

considering those factors described in

paragraph (e)(2)(ii) of the proposal and

taking into account the costs involved

(including the cost of research, if

necessary, to determine how to vote).

Paragraph (e)(3)(ii) of the proposal

provided that a plan fiduciary must not

vote any proxy unless the fiduciary

prudently determines that the matter

being voted upon would have an

economic impact on the plan after

considering those factors described in

paragraph (e)(2)(ii) of the proposal and

taking into account the costs involved.

As stated above, commenters

criticized these provisions of the

proposal as requiring a fiduciary to

undertake an economic impact analysis

in advance of each issue that is the

subject of a proxy vote in order to even

consider voting. A commenter further

noted that a fiduciary may not discover

until after the analysis is performed that

the cost involved in determining

whether to vote outweighs the economic

benefit to the plan.

The Department is persuaded by the

comments that the requirements

contained in paragraphs (e)(3)(i) and (ii)

of the proposal should not be

incorporated in the final rule. The

Department recognizes the concerns

expressed regarding potential increased

costs and liability exposure, as well as

potential risks to plan investments that

could result from fiduciaries not voting

when prudent to do so. Due to this and

other changes the Department has made

in the final rule that are discussed

above, the Department expects that the

incremental costs of the final rule

provisions will be minimal on a per-

plan basis.

The Department recognizes that plans

will need to spend time reviewing the

final rule, evaluating how it affects their

proxy voting practices, and

implementing any necessary changes.

The Department estimates that this

review process will require a lawyer to

spend approximately four hours to

complete, resulting in a cost burden of

approximately $34.3 million.

111

The

Department believes that these

processes will likely be performed for

most plans by a service provider that

likely oversees multiple plans.

Therefore, the Department’s estimate

likely represents an upper bound,

because it is based on the number of

affected plans. The Department does not

have sufficient data that would allow it

to estimate the number of service

providers acting in such a capacity for

these plans.

The Department believes that many

fiduciaries already are compliant with

the final rule, because they are meeting

the requirements of the Department’s

sub-regulatory guidance and prudently

conducting their business operations to

satisfy their fiduciary obligations as

required by ERISA.

112

The Department

acknowledges that such practices are

not universal. In the course of its

enforcement activity, the Department

sometimes encounters instances where

documentation is absent or does not

meet the requirements of this final rule.

The Department additionally believes

that the availability of economies of

scale limits the costs of this final rule.

The Department understands that under

the final rule, most of the relevant

fiduciary duties will reside with, and

most of the required activities will be

performed by, third-party asset

managers, as is already common

practice. Such asset managers are often

large and provide the relevant fiduciary

services for a large number of plans. The

Department estimates that plan

fiduciaries or investment managers will

require a half hour annually and a half

hour of help from clerical staff to

maintain or document the required

information, resulting in an annual cost

burden estimate of $6.05 million.

113

For

a more in-depth discussion on the costs

for maintaining the required

documentation, please refer to the

Paperwork Reduction Act section of this

document below.

Several of the commenters noted that

the Department failed to recognize the

additional costs associated with

developing or updating policies or

procedures to reflect the requirements of

the proposed rule. One commenter,

however, asserted that most fiduciaries

have thoughtful proxy policies. Another

commenter stated that, contrary to the

DOL assumption that there are ‘‘cost

savings’’ because of the provisions in

the rule that allow the adoption of proxy

voting policies, proxy voting policies

already exist and the rule would impose

additional costs because such policies

will need to be reviewed on an initial

and ongoing basis. After further

deliberation, the Department agrees that

plans are likely to incur such costs,

particularly plans that choose to adopt

the safe harbors contained in paragraphs

(e)(3)(i)(A) and (B) of the final rule. The

Department believes that the final rule

largely comports with industry practice

for ERISA fiduciaries; therefore the

Department estimates that on average, it

will take a legal professional two hours

to update policies and procedures for

each of the estimated 63,911 plans

affected by the rule. This results in a

cost of $17.2 million in the first year.

114

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is used for a plan fiduciary: (127,821.8 * $134.21

= $17,154,957).

115

The SEC’s rule amendments require proxy

advisory firms engaged in a solicitation to provide

conflicts of interest disclosure, to adopt and

publicly disclose policies and procedures

reasonably designed to ensure that the company

subject of the proxy voting advice has such advice

made available to it at or prior to the time the

advice is disseminated, and to provide a

mechanism by which its clients can become aware

of any written statements by the company in

response to the proxy advice. The SEC also

modified its proxy solicitation antifraud rule to

specifically include material information about the

proxy advisor’s methodology, sources of

information, or conflicts of interest, as examples of

when the failure to disclose could, depending upon

the particular facts and circumstances, be

considered misleading. See 2020 SEC Proxy Voting

Advice Amendments, at 242–246.

116

The costs would be $101.58 million over 10-

year period with an annualized cost of $11.91

million, applying a three percent discount rate.

117

The annualized costs in 2016 dollars would be

$6.31 million applying a three percent discount

rate.

The requirement in paragraph (e)(3)(ii)

to periodically review proxy voting

policies already is required for

fiduciaries to meet their obligations

under ERISA; therefore, the Department

does not expect that plans will incur

additional cost associated with the

periodic review.

The Department generally does not

expect that this final rule will change

the costs associated with plans’

remaining voting activity. Provisions

requiring responsible fiduciaries to

monitor and document voting policies

and activities would generally be

satisfied by current best practices that

satisfy earlier Departmental guidance.

Neither does the Department expect

plans to incur substantial costs from

proxy advisory firms’ potential efforts to

help fiduciaries meet the final rule’s

requirements. If they do not already

meet the standards detailed in the final

regulation, plans that currently exercise

shareholder rights, including proxy

voting activities, will incur the costs

associated with deciding whether to

exercise shareholder rights pursuant to

this final rule. The Department,

however, does not have sufficient

information to document such costs.

It is possible that proxy advisory firms

would take steps to avoid or mitigate

conflicts of interest, strengthen factual

and analytic rigor, better match their

research and recommendations with

ERISA plans’ interests, or increase

transparency as a result of the final rule.

The Department notes, however, that

proxy advisory firms are likely to take

at least some of these steps in response

to recent SEC policy initiatives and

spread their related costs across all of

their clients, not just ERISA plans.

115

At

the same time, the final rule may reduce

plans’ demand for proxy advice.

However, this reduction in demand is

beneficial to plans as they previously

were purchasing more advice than they

would have otherwise chosen due to

their misunderstanding that they were

required to vote all proxies. This

reduced demand will lower the market

price and the amount of advice

purchased. Consequently, any

compliance costs passed on from proxy

advisory firms to ERISA plans are likely

to be at least partially offset by plans’

cost savings from purchasing a smaller

amount of advice. It should be noted

that proxy advisory firms will see a

reduction in revenues as a result of the

decreased demand for their services. In

addition, proxy advisory firms’ efforts to

satisfy any SEC requirements might ease

responsible fiduciaries’ efforts to

comply with this final rule. For

example, it may be easier to monitor

proxy advisory firms if those firms

provide additional disclosure about

their conflicts of interest and their

policies and procedures to address such

conflicts.

The Department estimates that the

final rule would impose incremental

costs of approximately $57.52 million in

the first year and $6.05 million in

subsequent years. Over 10 years, the

associated costs would be

approximately $90.6 million with an

annualized cost of $12.90 million, using

a seven percent discount rate.

116

Using

a perpetual time horizon (to allow the

comparisons required under Executive

Order 13771), the annualized costs in

2016 dollars are $6.76 million at a seven

percent discount rate.

117

1.6. Transfers

Proxy advisory firms that respond

best to this final rule will likely gain a

relative competitive advantage. Firms

that limit or eliminate conflicts of

interest and modify their services to

better align with the guidance of these

final regulations could gain market

share relative to firms that do not. Firms

that are willing to tailor their voting

guidelines, strategies, and costs

according to each plan’s investment

guidelines could gain market share

relative to firms that do not.

The final rule may reduce plans’

demand for proxy advice, lowering the

market price, the amount of advice

purchased, and revenues. This

represents a transfer from proxy

advisory firms to plans, who will benefit

as they previously were purchasing

more advice than they would have

chosen to due to their misunderstanding

that plan fiduciaries were required to

vote all proxies.

The Department also notes, however,

that the market for proxy advisors could

also change as a result of the final rule.

Such changes could lead to increased

competition among proxy advisory

firms. In such a scenario, it is possible

that the rule will result in a reduction

in the expenses plans incur to purchase

proxy advisory services. Although the

Department does not have sufficient

data to quantify this possibility, it

would result in a transfer from proxy

advisory firms to plans.

Moreover, as noted previously, if

some portion of rule-induced increases

in returns would be associated with

transactions in which the opposite party

experiences decreased returns of equal

magnitude, then this portion of the final

rule’s impact would, from a society-

wide perspective, be appropriately

categorized as a transfer.

1.7. Regulatory Alternatives

As discussed above, the Department

considered retaining paragraphs (e)(3)(i)

and (ii) of the proposal. Paragraph

(e)(3)(i) of the proposal provided that a

plan fiduciary must vote any proxy

where the fiduciary prudently

determines that the matter being voted

upon would have an economic impact

on the plan, after considering those

factors described in paragraph (e)(2)(ii)

of the proposal and taking into account

the costs involved (including the cost of

research, if necessary, to determine how

to vote). Paragraph (e)(3)(ii) of the

proposal provided that a plan fiduciary

must not vote any proxy unless the

fiduciary prudently determines that the

matter being voted upon would have an

economic impact on the plan after

considering those factors described in

paragraph (e)(2)(ii) of the proposal and

taking into account the costs involved.

After carefully considering comments,

the Department was persuaded to

eliminate paragraphs (e)(3)(i) and (ii)

and adopt a more principles-based, less

prescriptive approach in the final rule

that will reduce much of the cost

burden associated with the proposed

rule. Commenters criticized these

provisions of the proposal as requiring

a fiduciary to undertake an economic

impact analysis in advance of each issue

that is the subject of a proxy vote in

order to even consider voting. A

commenter further noted that a

fiduciary may not discover until after

the analysis is performed that the cost

involved in determining whether to vote

outweighed the economic benefit to the

plan. The Department recognizes the

concerns expressed regarding potential

increased costs and liability exposure

associated with these provisions, as well

as potential risks to plan investments

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118

Department calculations based on U.S. Federal

Reserve statistics, Financial Accounts of the United

States—Z.1.

119

See Commission Interpretation Regarding

Standard of Conduct for Investment Advisers, 84 FR

33669, 33673 (July 12, 2019) (discussing an

adviser’s obligation to make a reasonable inquiry

into its client’s financial situation, level of financial

sophistication, investment experience and financial

goals and have a reasonable belief that the advice

it provides is in the best interest of the client based

on the client’s objectives); Commission Guidance

Regarding Proxy Voting Responsibilities of

Investment Advisers, Release No. IA–5325 (Aug. 21,

2019) (82 FR 47420 (Sep. 10, 2019) (clarifying

investment advisers’ duties when voting

shareholder proxies). See also Rule 206(4)–6 under

the Investment Advisers Act of 1940, 17 CFR

275.206(4)–6 (Under rule 206(4)–6, it is a

fraudulent, deceptive, or manipulative act, practice

or course of business within the meaning of section

206(4) of the Investment Advisers Act for an

investment adviser to exercise voting authority with

respect to client securities, unless the adviser (i) has

adopted and implemented written policies and

procedures that are reasonably designed to ensure

that the adviser votes proxies in the best interest of

its clients, which procedures must include how the

investment adviser addresses material conflicts that

may arise between the adviser’s interests and

interests of their clients; (ii) discloses to clients how

they may obtain information from the investment

adviser about how the adviser voted with respect

to their securities; and (iii) describes to clients the

investment adviser’s proxy voting policies and

procedures and, upon request, furnishes a copy of

the policies and procedures to the requesting client.

that could result from fiduciaries not

voting when prudent to do so.

1.8. Uncertainty

The Department’s economic

assessment of this final rule’s effects is

subject to uncertainty. Specific areas of

uncertainty are discussed below:

Cost Savings—As noted earlier, the

Department lacks complete data on

plans’ exercise of their shareholder

rights appurtenant to their stock

holdings, including proxy voting

activities, and on the attendant costs

and benefits. Many of the commenters

criticized that the Department lacks data

and evidence to support its cost-benefit

analysis and remarked that the

Department should not move forward

with the rule until the associated costs

and benefits are more certain. The

Department firmly disagrees and

believes that the impact of the rule has

been reasonably assessed based on the

best available data.

Demand for New Services—The

Department solicited comments

regarding whether the final rule would

create a demand for new services, and

if so, what alternate services or

relationships with service providers

might result and how overall plan

expenses could be impacted. The

Department did not receive comments

that specifically addressed this

question.

Other Securities—The final rule will

generally govern plans’ exercise of

shareholder rights appurtenant to their

stock holdings of individual companies,

but not to their holdings of other

securities. The Department cannot

determine whether some plans

nonetheless would modify their

practices with respect to other securities

because of this final rule. As noted

earlier, ERISA pensions held just 5.5

percent of total corporate equity in

2019, down from a high of 22 percent

in 1985. Mutual funds, in contrast, held

22 percent of all corporate equity in

2019, up from 6 percent in 1985.

118

As

ERISA-covered pensions have shifted

from defined benefit to defined

contribution plans, both the proportion

of pension assets invested in mutual

funds and the proportion of all mutual

fund shares owned by pensions have

increased dramatically. In 2019, ERISA-

covered pensions held 25 percent of all

mutual fund shares, up from 8 percent

in 1985. ERISA would apply to any

proxy votes for mutual fund shares and

shares of other funds registered with the

SEC for which the plan fiduciary is

responsible. ERISA does not govern the

management of the portfolio internal to

a fund registered with the SEC,

including such fund’s exercise of its

shareholder rights appurtenant to the

portfolio of stocks it holds, though

ERISA would apply to similar funds

organized as collective investment

trusts. One commenter stated that if

plans do not participate in the proxy

process, it may prevent issuers from

reaching quorum for their shareholder

meetings, and this would impose costs

on plans.

Non-ERISA Investors—Many asset

managers serve both ERISA plans and

other investors. The Department

believes such uniform voting for ERISA

and non-ERISA clients may sometimes

jeopardize responsible fiduciaries’

satisfaction of their duties under ERISA.

However, as noted earlier in the

preamble, this concern may be mitigated

in the case of investment managers

subject to the SEC’s jurisdiction by the

fact that federal securities law requires

investment advisers to make the

determination in their client’s best

interest and not to place the investment

adviser’s own interests ahead of their

client’s.

119

Where an SEC registered

investment adviser has assumed the

authority to vote on behalf of its client,

the SEC has stated that the investment

adviser, among other things, must have

a reasonable understanding of the

client’s objectives and must make voting

determinations that are in the client’s

best interest.

Under this final rule, responsible

fiduciaries might increase their

demands for asset managers to

implement separate policies customized

for particular ERISA plans or for ERISA

plans generally, such as policies that

align with the proposed permitted

practices in paragraph (e)(3)(iii). One

commenter noted that policies would

increase costs for plans and investment

without an incremental benefit to

participants and beneficiaries. The

Department discusses the impact of

updating policies and procedures in the

cost section above.

Asset Allocation—This final rule

could exert influence on a plan’s asset

allocation. For example, the quantitative

threshold provision in paragraph

(e)(3)(i)(B) would permit responsible

fiduciaries, after prudently considering

the relevant factors, to adopt proxy

voting policies allowing them to refrain

from voting on proposals or particular

types of proposals when the plan’s

holding in a single issuer is sufficiently

small relative to the plan’s total

investment that the outcome of the vote

is not expected to have a material

impact on the investment performance

of the plan’s portfolio. This provision

might produce additional economic

benefits by promoting fuller and more

optimal diversification where it may

otherwise have been lacking. That is,

the quantitative threshold could prompt

a fiduciary to diversify what otherwise

would have been a concentration of

more than the specified threshold

amount of a plan’s portfolio in a single

stock.

Vote Categories—Proxy votes can be

tallied in four ways: For, against/

withhold, abstain, and not voted. The

vast majority of outstanding shares are

held in ‘‘street name’’ by intermediaries,

such as broker-dealers. Broker-dealers

may have discretionary authority to vote

proxies without receiving voting

instructions from the owner of the

shares for routine and noncontroversial

matters, such as the ratification of a

company’s independent auditors. For

matters in which a broker-dealer does

not have discretionary authority to vote,

a broker non-vote is required. For

matters that require approval of a

majority of shares present and voting,

abstentions (which are cast neither for

nor against a proposal) and broker non-

votes are not counted in the final tally.

For matters that require approval of a

majority of the shares issued and

outstanding, abstentions or broker non-

votes are treated as votes against the

proposal. If an investor is unsure about

a matter or unsure whether her interests

and management’s interests are aligned,

the investor arguably should abstain.

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120

29 CFR 2509.2008–2 (73 FR 61731 (Oct. 17,

2008)).

121

EBSA estimates using 2018 Form 5500 filing

data.

1.9. Conclusion

The final rule would benefit ERISA-

covered plans, as it provides guidance

regarding how ERISA’s fiduciary duties

apply to proxy voting and in particular

when fiduciaries should refrain from

voting. Plan fiduciaries will be able to

conserve plan assets as they refrain from

researching and voting on proposals that

are unlikely to have a material effect on

the investment performance of the

plan’s portfolio, and thereby increase

the return on plan assets. The

Department estimates that the final

rule’s cost impact is substantially less

than the proposal due to significant

revisions to the required actions of a

plan fiduciary that were made in the

final rule in response to comments on

the proposal.

2. Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995 (PRA 95) (44

U.S.C. 3506(c)(2)(A)), the Department

solicited comments concerning the

information collection request (ICR)

included in the Fiduciary Duties

Regarding Proxy Voting and

Shareholder Rights ICR (85 FR 55219).

At the same time, the Department also

submitted an information collection

request (ICR) to the Office of

Management and Budget (OMB), in

accordance with 44 U.S.C. 3507(d).

The Department received comments

that specifically addressed the

paperwork burden analysis of the

information collection requirement

contained in the proposed rule. The

Department took into account such

public comments in developing the

revised paperwork burden analysis

discussed below.

In connection with publication of this

final rule, the Department is submitting

an ICR to OMB requesting approval of

a new collection of information under

OMB Control Number 1210–0165. The

Department will notify the public when

OMB approves the ICR.

A copy of the ICR may be obtained by

contacting the PRA addressee shown

below or at www.RegInfo.gov. PRA

ADDRESSEE: G. Christopher Cosby,

Office of Regulations and

Interpretations, U.S. Department of

Labor, Employee Benefits Security

Administration, 200 Constitution

Avenue NW, Room N–5718,

Washington, DC 20210; cosby.chris@

dol.gov. Telephone: 202–693–8410; Fax:

202–219–4745. These are not toll-free

numbers.

It has long been the view of the

Department that the duty to monitor

necessitates proper documentation of

the activities that are subject to

monitoring.

120

Accordingly, the

Department’s final rule requires that

plan fiduciaries maintain records on

proxy voting activities and other

exercises of shareholder rights. This

requirement applies to all pension plans

with investments, including those that

have shareholder rights and proxy votes

that may need to be exercised.

The Department believes that most

plan fiduciaries have followed the

Department’s prior sub-regulatory

guidance or already are performing most

if not all of the documentation

requirements of the final rule as a

prudent practice in their normal course

of business. While the incremental

burden of the final rule is generally

small, perhaps even de minimis, the

Department discussed the full burden of

such requirements below to allow for

full evaluation of the requirements in

the information collection.

According to the most recent Form

5500 data there are 721,876 pension

plans (92,480 large plans and 629,396

small plans) and 8,475 health or welfare

plans (5,626 large plans filing a

schedule H, and 2,849 small plans filing

a schedule I).

121

While the Schedule H

collects information on a plan’s stock

holdings, Schedule I lacks the

specificity to determine if small plans

hold stocks. As shown in Table 1,

31,868 pension plans hold stocks and

would have shareholder rights they may

need to exercise. Additionally, 573

health and other welfare plans file the

schedule H and report holding either

common stocks or employer stocks. The

Department lacks information on the

number of small plans that hold stock.

Small plans are significantly less likely

to hold stock than larger plans. For

purposes of estimating the burden, five

percent of small plans are presumed to

hold stock resulting in 31,470 small

plans needing to comply with the

information collection. Therefore, a total

of 63,911 plans will need to comply

with this information collection.

2.1. Maintain Documentation

The final rule requires that the named

plan fiduciary must maintain records on

proxy voting activities and other

exercises of shareholder rights. Where

the authority to vote proxies or exercise

shareholder rights has been delegated to

an investment manager pursuant to

ERISA section 403(a)(2), or a proxy

voting firm or another person performs

advisory services as to the voting of

proxies, plan fiduciaries must prudently

monitor the proxy voting activities of

such investment manager or proxy

advisory firm and determine whether

such activities are consistent with

paragraphs (e)(2)(i) and (ii) and (e)(3) of

this section.

Much of the information needed to

fulfill these requirements is generated in

the normal course of business. Plans

may need additional time to maintain

the proper documentation, but this

burden is likely to be reduced by the

adoption of policies by plan fiduciaries

that incorporate one or more of the final

rule’s safe harbors.

Commenters expressed concerns that

the proposed rule would be onerous,

since it would not be feasible for plan

fiduciaries to determine the economic

impact of every proxy vote in a detailed

way and document it. Thus,

commenters suggested that the

Department underestimated the amount

of time that fiduciaries and clerical staff

would spend documenting and

maintaining documentation for votes.

As discussed above in Section 1.5, after

carefully considering these comments,

the Department was persuaded to adopt

a more principles-based, less

prescriptive approach in the final rule

that does not carry forward specific

documentation and recordkeeping

provisions in the proposal that were

identified by commenters as

burdensome and unnecessary. The

Department believes that with this

revision, the final rule’s documentation

and recordkeeping requirements should

result in less burden than the proposal’s

requirements, because the final rule

requirements mirror previous guidance

and align with existing fiduciary duty of

documentation.

However, in light of the public

comments that argued that the

Department underestimated the

recordkeeping burden and because of

the uncertainty involved in determining

which plans will need to change

recordkeeping practices to comply with

the final rule, the Department is

retaining the documentation time

estimate from the proposal. This is

responsive to the commenters’ assertion

and is a step intended to avoid

underestimating the average time

required for plan fiduciaries to comply

with the final rule.

The Department estimates that plan

fiduciaries or investment managers will

require a half hour annually and a half

hour of help from clerical staff to

maintain or document the required

information. This is likely an

overestimate, because many, if not most,

plans use investment managers. These

investment managers provide similar

services for many plans. This results in

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The burden is estimated as follows: 63,911

plans * 0.5 hours = 31,955.4 hours for both a plan

fiduciary and clerical staff. A labor rate of $134.21

is used for a plan fiduciary and a labor rate of

$55.14 for clerical staff (31,955.4 * $134.21 =

$4,288,739 and 31,955.4 * $55.14 = $1,762,023).

123

5 U.S.C. 601 et seq. (1980).

124

5 U.S.C. 551 et seq. (1946).

125

5 U.S.C. 604 (1980).

126

The Department consulted with the Small

Business Administration Office of Advocacy in

making this determination, as required by 5 U.S.C.

603(c) and 13 CFR 121.903(c) in a memo dated June

4, 2020.

127

13 CFR 121.201 (2011).

128

15 U.S.C. 631 et seq. (2011).

an annual cost burden estimate of

$6,050,762.

122

These paperwork burden estimates

are summarized as follows:

Type of Review: New collection.

Agency: Employee Benefits Security

Administration, Department of Labor.

Title: Fiduciary Duties Regarding

Proxy Voting and Shareholder Rights.

OMB Control Number: 1210–0165.

Affected Public: Businesses or other

for-profits.

Estimated Number of Respondents:

63,911.

Estimated Number of Annual

Responses: 63,911.

Frequency of Response: Occasionally.

Estimated Total Annual Burden

Hours: 0.

Estimated Total Annual Burden Cost:

$6,050,762.

3. Regulatory Flexibility Act

The Regulatory Flexibility Act

(RFA)

123

imposes certain requirements

with respect to federal rules that are

subject to the notice and comment

requirements of section 553(b) of the

Administrative Procedure Act

124

and

are likely to have a significant economic

impact on a substantial number of small

entities. Unless the head of an agency

certifies that a final rule is not likely to

have a significant economic impact on

a substantial number of small entities,

section 604 of the RFA requires the

agency to present a final regulatory

flexibility analysis of the final rule.

125

For purposes of analysis under the

RFA, the Employee Benefits Security

Administration (EBSA) considers

employee benefit plans with fewer than

100 participants to be small entities.

126

The basis of this definition is found in

section 104(a)(2) of ERISA, which

permits the Secretary of Labor to

prescribe simplified annual reports for

plans that cover fewer than 100

participants. Under section 104(a)(3) of

ERISA, the Secretary may also provide

for exemptions or simplified annual

reporting and disclosure for welfare

benefit plans. Pursuant to the authority

of section 104(a)(3), the Department has

previously issued (see 29 CFR

2520.104–20, 2520.104–21, 2520.104–

41, 2520.104–46, and 2520.104b–10)

simplified reporting provisions and

limited exemptions from reporting and

disclosure requirements for small plans,

including unfunded or insured welfare

plans, that cover fewer than 100

participants and satisfy certain

requirements. While some large

employers have small plans, small plans

are maintained generally by small

employers. Thus, the Department

believes that assessing the impact of this

final rule on small plans is an

appropriate substitute for evaluating the

effect on small entities. The definition

of small entity considered appropriate

for this purpose differs, however, from

a definition of small business based on

size standards promulgated by the Small

Business Administration (SBA)

127

pursuant to the Small Business Act.

128

The Department solicited comments on

this assumption in the proposed rule;

however, no comments were received.

The Department has determined that

this final rule could have a significant

impact on a substantial number of small

entities during the first year. Therefore,

the Department has prepared a Final

Regulatory Flexibility Analysis that is

presented below.

3.1. Need for and Objectives of the Rule

The Department believes that this

final rule is an appropriate way to

provide clarity and certainty regarding

the application of fiduciary obligations

of loyalty and prudence with respect to

exercises of shareholder rights,

including proxy voting. Despite past

efforts to make clear fiduciary

obligations in this regard, the

Department is concerned that its

existing sub-regulatory guidance may

have inadvertently created the

perception that fiduciaries must vote

proxies on every shareholder proposal

to fulfill their obligations under ERISA.

This belief may have caused some

fiduciaries to pursue proxy proposals

that have no connection to increasing

the value of investments used to pay

benefits or defray the reasonable plan

administrative expenses.

Both of these concerns point to the

risk that a plan’s proxy voting activity

will sometimes impair rather than

advance participants’ economic interest

in their benefits. This final rule aims to

ensure that the costs plans incur to vote

proxies and exercise other shareholder

rights are economically justified, and

that responsible fiduciaries’ use of third-

party advice supports rather than

jeopardizes their adherence to ERISA’s

fiduciary requirements.

The Department is monitoring other

federal agencies whose statutory and

regulatory requirements overlap with

ERISA. In particular, the Department is

monitoring SEC rules and guidance to

avoid creating duplicate or overlapping

requirements with respect to proxy

voting.

3.2. Significant Issues Raised by Public

Comments in Response to the IFRA and

Changes Made to the Proposed Rule in

Response

One of the most significant issue

raised by commenters was that

paragraphs (e)(3)(i) and (ii) of the

proposal require a fiduciary to

undertake an economic impact analysis

in advance of each issue that is the

subject of a proxy vote in order to even

consider voting. A commenter further

noted that a fiduciary may not discover

until after the analysis is performed that

the cost involved in determining

whether to vote outweighed the

economic benefit to the plan. The

Department recognizes the concerns

expressed regarding potential increased

costs and liability exposure associated

with these provisions, as well as

potential risks to plan investments that

could result from fiduciaries not voting

when prudent to do so. Therefore, after

carefully considering comments, the

Department was persuaded to eliminate

paragraphs (e)(3)(i) and (ii) and adopt a

more principles-based, less prescriptive

approach in the final rule that reduces

the cost burden associated with the

proposed rule. This revision to the

proposal is further discussed in Section

3.5 below.

In the proposal, the Department

included an illustration to try to capture

the cost burden on service providers

from the rule. This illustration was

based on certain assumptions the

Department described as speculative in

the proposal, and many of the

commenters criticized its basis. In

response to the commenters and

changes made to the rule since the

proposal, the Department has removed

this illustration. For a more detailed

description about the Department’s

decision, please refer to the Cost section

above.

Some commenters were concerned

that the rule would be burdensome on

small plan sponsors. One commenter

expressed concern that the requirements

of the regulation will have a significant

impact on small entities because of their

limited staff resources. The Department

acknowledges this concern as well as

the concern that smaller plans may not

be able to absorb the additional burden

of the regulation as easily as larger

plans. As described in the Cost section

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129

To capture the number of potentially affected

service providers, the Department looked at the

number of small entities with the following North

American Industry Classification System (NAICS)

Codes: 523110 Investment Banking and Securities

Dealing; 523920 Portfolio Management; 523930

Investment Advice; 523991 Trust, Fiduciary, and

Custody Activities; and 525910 Open-End

Investment Funds. Small entities were identified

based on their revenue and the size standards from

the SBA. According to data provided by the SBA,

the Department estimates there are 8,616 small

entities in these industries with revenues less than

$100,000. This accounts for 7.5 percent of all firms

in these industries. The calculation of the number

of firms by industry is based on: NAICS. Businesses

by NAICS, https://www.naics.com/business-lists/

counts-by-company-size/.

130

Labor costs are based on statistics from Labor

Cost Inputs Used in the Employee Benefits Security

Administration, Office of Policy and Research’s

Regulatory Impact Analyses and Paperwork

Reduction Act Burden Calculation, Employee

Benefits Security Administration (June 2019),

www.dol.gov/sites/dolgov/files/EBSA/laws-and-

regulations/rules-and-regulations/technical-

appendices/labor-cost-inputs-used-in-ebsa-opr-ria-

and-pra-burden-calculations-june-2019.pdf.

above, the Department has amended the

proposed rule’s requirements and

adopted a less prescriptive, principles-

based approach in the final rule that

mirrors and supplements requirements

contained in the Department’s prior sub-

regulatory guidance and industry best

practices. These changes will

substantially reduce the Department’s

estimate of the proposed rule’s cost

impact.

Another commenter expressed

concern that the Department

substantially underestimated costs for

small plans, as many small plans would

need to hire a service provider to

produce additional documentation to

supplement existing investment policy

statements. The Department recognizes

that plans may need to make various

changes to compliance policies and

procedures to respond to the rule, so it

has added an additional cost for the

time it takes to develop or update such

policies and procedures in the final

rule.

3.2. Affected Small Entities

This final rule will affect ERISA-

covered pension, health, and welfare

plans that hold stock either through

common stock or employer securities.

This includes plans that indirectly hold

stocks through collective trusts, master

trusts, pooled separate accounts, and

other similar plan asset investment

entities. Plans that only hold their assets

in registered investment companies,

such as mutual funds, will be unaffected

by the final rule.

There is minimal data available about

small plans’ stock holdings. The

primary source of information on assets

held by pension plans is the Form 5500.

Schedule H, which reports data on stock

holdings, is filed almost exclusively by

large plans. While the majority of

participants and assets are in large

plans, most plans are small plans (plans

with fewer than 100 participants). It is

likely that many small defined benefit

plans hold stock. Many small defined

contribution plans hold stock only

through mutual funds, and

consequently would not be affected by

this final rule. In 2018, there were

39,142 small defined benefit plans and

590,254 small defined contribution

plans. The Department lacks sufficient

data to estimate the number of small

plans that hold stock, but it assumes

that small plans are significantly less

likely to hold stock than larger plans.

The Department did not receive any

comments or additional data from

commenters regarding the number of

small plans that hold stock directly or

indirectly. As discussed elsewhere,

while the Department assumes that

small affected entities will spend some

time familiarizing themselves with the

rule, it expects that even in the case of

small plans that hold stock directly or

indirectly, these costs will be small,

because the required activities are

reflected in common practice.

Therefore, for purposes of determining

whether a substantial number of small

plans are affected, the Department

presumes that five percent of small

plans hold stock resulting in as assumed

31,470 affected small plans.

The Department recognizes that

service providers, including small

service providers who act as asset

managers, could also be impacted by

this rule, if they provide compliance

assistance to the plans they serve. The

Department does not have complete

information on the number of affected

small service providers. However, the

Department does not believe that there

will be more service providers than the

63,911 affected plans. The Department

assumes the number of service

providers who will experience a

substantial impact from the final rule

will be significantly smaller as only

about 7.5 percent of service providers in

the NAICS categories that could be

affected have revenues below

$100,000.

129

As discussed in Table 2,

below, the Department estimates that

compliance costs in the first year are

less than $900. Therefore, only service

providers with revenues less than

$100,000 could experience a cost that is

more than one percent of revenues. If

service providers incur compliance

costs, they could pass some of these

costs onto plans and experience a

smaller impact.

3.4. Estimate Cost Impact of the Final

Rule on Affected Small Entities

This final rule will benefit small

plans, by providing guidance regarding

how ERISA’s fiduciary duties apply to

proxy voting and the monitoring of

proxy advisory firms, and in particular,

when fiduciaries should refrain from

voting. Plan fiduciaries will be able to

better conserve plan assets by having

clear direction to refrain from

researching and voting on proposals that

they prudently determine have no

material effect on the investment

performance of the plan’s portfolio (or

investment performance of assets under

management in the case of an

investment manager). The final rule also

will benefit plans by improving the

frequency with which voting resources

are expended on matters that the

fiduciary has prudently determined are

substantially related to the issuer’s

business activities or are expected to

have a material effect on the value of the

investment. Cost savings and other

benefits to small plans will flow to plan

participants and beneficiaries in the

form of more secure retirement income.

As discussed under the Costs section

above, while the Department assumes

that small affected entities will spend

some time familiarizing themselves with

the rule, it expects that these

familiarization costs will be small,

because the required activities are

reflected in common practice. The

Department estimates it will take four

hours for an in-house attorney to review

the rule, at an hourly labor cost of

$138.41,

130

resulting in an average cost

of $536.84. The Department believes

small plans are likely to rely on service

providers to monitor regulatory changes

and make necessary changes to the plan,

so this is likely an overestimate of the

costs incurred by small plans to

familiarize themselves with the rule.

Fiduciaries of plans must ensure that

all investments are prudently

monitored. The final rule provides that

fiduciaries responsible for the exercise

of shareholder rights must maintain

records on proxy voting activities and

other exercises of shareholder rights in

order to demonstrate compliance with

ERISA’s fiduciary provisions. The

Department assumes that, because the

documentation of fiduciary decision-

making is a common practice,

responsible fiduciaries are likely already

recording and maintaining

documentation related to their own and

investment managers’ actions, including

voting proxies and exercising other

shareholder rights.

The final rule will have a small

impact on plans that are not currently

in full compliance, because their

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131

Labor costs are based on statistics from Labor

Cost Inputs Used in the Employee Benefits Security

Administration, Office of Policy and Research’s

Regulatory Impact Analyses and Paperwork

Reduction Act Burden Calculation, Employee

Benefits Security Administration (June 2019),

www.dol.gov/sites/dolgov/files/EBSA/laws-and-

regulations/rules-and-regulations/technical-

appendices/labor-cost-inputs-used-in-ebsa-opr-ria-

and-pra-burden-calculations-june-2019.pdf.

132

This cost is estimated as: 0.5 hours * $134.21

+ 0.5 hours * $55.14 = $94.68.

133

Deloitte. ‘‘2019 Defined Contribution

Benchmarking Survey Report: the Retirement

Landscape has Changed—Are Plan Sponsors

Ready?’’ www2.deloitte.com/us/en/pages/human-

capital/articles/annual-defined-contribution-

benchmarking-survey.html.

134

Manganaro, John. ‘‘Recordkeeping Fees Under

the Microscope Retirement Plans of All Sizes are

Seeing Their Recordkeeping Fee Schedules

Questioned, Especially When Those Fees are

Expressed as a Percentage of Assets.’’ Planadviser.

(November 2019). www.planadviser.com/

recordkeeping-fees-microscope/.

135

Deloitte Consulting and Investment Company

Institute, ‘‘Inside the Structure of Defined

Contribution/401(k) Plan Fees, 2013: A Study

Assessing the Mechanics of the ‘All-in’ Fee’’ (Aug.

2014).

136

BrightScope, ICI. ‘‘The BrightScope/ICI

Defined Contribution Plan Profile: a Close Look at

401(k) Plans, 2017.’’ (August 2020).

137

BrightScope, ICI. ‘‘The BrightScope/ICI

Defined Contribution Plan Profile: a Close Look at

401(k) Plans, 2017.’’ (August 2020).

fiduciaries will be required to maintain

records or document decisions related

to voting proxies or exercising other

shareholder rights. Much of the

information required to comply with

this requirement is generated by affected

entities in the normal course of

business; however, additional time may

be required to maintain the proper

documentation. The Department

estimates that compliance with this

final regulation will require 30 minutes

of a plan fiduciary’s time and 30

minutes of a clerical worker’s time. The

Department assumes an hourly rate of

$134.21 for a plan fiduciary and an

hourly rate of $55.14 for a clerical

worker,

131

resulting in an estimated per-

entity annual cost of $94.68.

132

Additionally, the Department

estimates that to comply with the rule,

many plans will need to either develop

or update proxy-voting policies and

procedures. This is particularly true for

plans choosing to adopt one of the final

rule’s safe harbors. The Department

estimates that it will take two hours for

a legal professional to develop or update

relevant policies and procedures. The

Department assumes an hourly rate of

$134.21 for a legal professional,

resulting in an estimate per-entity cost

of $268.42 in the first year.

Under these assumptions, the

Department estimates the additional

requirements of the rule will increase

costs by $899.94 per plan in the first

year and $94.68 per plan in subsequent

years, on average. This is illustrated in

Table 2 below.

T

ABLE

2—C

OSTS FOR

P

LANS

T

O

C

OMPLY

W

ITH

R

EQUIREMENTS

Affected entity Labor rate Hours Year 1 cost Year 2 cost

Documentation: Plan Fiduciary ........................................................................ $134.21 0.5 $67.11 $67.11

Documentation: Clerical workers ..................................................................... 55.14 0.5 27.57 27.57

Rule Familiarization: Plan Fiduciary ................................................................ 134.21 4 536.84 0

Develop or Update Proxy-Voting Policies and Procedures ............................. 134.21 2 268.42 0

Total .......................................................................................................... ........................ ........................ 899.94 94.68

Source: DOL calculations based on statistics from Labor Cost Inputs Used in the Employee Benefits Security Administration, Office of Policy

and Research’s Regulatory Impact Analyses and Paperwork Reduction Act Burden Calculation, Employee Benefits Security Administration (June

2019), www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-

ria-and-pra-burden-calculations-june-2019.pdf.

To put these costs in perspective, the

Department looked at how the

additional cost from the proposed rule

would compare to the average total plan

cost of 401(k) plans by assets. Plan costs

include investment fees as well as

administrative and recordkeeping fees.

The way plan costs are paid vary by

plan. A 2019 survey of 240 plan

sponsors found that 33 percent of

defined contribution (DC) plans paid all

recordkeeping and administrative fees

through investment revenue, while 52

percent of DC plans paid recordkeeping

and administrative fees through a direct

fee.

133

Accounts from the industry

purport that per-participant

recordkeeping fees are becoming the

best practice standard; this trend has

been driven by digital recordkeeping

technology that requires the same

amount of resources for large accounts

as small accounts.

134

Fees paid by plans also vary by firm

size. A survey of 361 defined

contribution plans for the Investment

Company Institute calculated an ‘‘all-

in’’ fee that included both

administrative and investment fees paid

by the plan and the participant. They

found that small plans with 10

participants pay approximately 50 basis

points more than plans with 1,000

participants. Further, small plans with

10 participants are paying about 90

basis points more than large plans with

50,000 participants.

135

Another study

documented the same trend, noting that

larger plans tend to have lower fees

because larger plans tend to have a

greater share of assets invested in index

funds, which tend to have lower

expenses. Additionally, large 401(k)

plans are able to spread the fixed costs

across more participants, lowering the

per participant fee.

136

For this analysis, the Department

relies on data from BrightScope to

establish a baseline of total plan fees,

before the implementation of this rule.

In August of 2020, BrightScope released

updated total plan costs based on 2017

data. Their total plan cost includes

asset-based investment management

fees, asset-based administrative and

advice fees, and other fees from the

Form 5500 and audited financial

statements of ERISA-covered 401(k)

plans.

137

This data does not include

plans with fewer than 100 participants,

the standard set for a small plan in this

analysis. However, the Department

believes that the median total plan

costs, provided by BrightScope, serves

as a helpful reference point when

considering the additional burden from

this rule.

Table 3 shows total plan costs from

BrightScope; plan cost information is

based on categories of plans with assets

less than $1 million, between $1 million

and $10 million, and between $10

million and $50 million. The

Department provides as the impact of

the rule the additional cost plans will

incur as a percent of plan assets, using

the median asset value of each category,

to illustrate how the rule is likely to

affect plans with different amounts of

assets. As seen in the table below, the

estimated burden in the first year will

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2 U.S.C. 1501 et seq. (1995).

increase the costs significantly for small

plans with minimal assets. The cost in

subsequent years is negligible—less

than one percent of plan assets for even

the smallest size category and for most plans less than 0.25 percent of plan

assets.

T

ABLE

3—T

OTAL

F

IRST

Y

EAR

P

LAN

C

OST AS A

P

ERCENT OF

P

LAN

A

SSETS FOR

P

LANS

W

ITH

L

ESS

T

HAN

100

P

ARTICIPANTS

Plan assets

Number of plans

a

Beginning

median total

plan cost

b

(percent)

Additional

plan cost

from the rule

c

Defined

benefit Defined

contribution Percent of

mid-point in

asset range

$1–24K ............................................................................................................. 12 1,750 1.24

d

7.500

$25–49K ........................................................................................................... 8 1,072 1.24

d

2.368

$50–99K ........................................................................................................... 37 1,716 1.24

d

1.200

$100–249K ....................................................................................................... 188 3,638 1.24

d

0.514

$250–499K ....................................................................................................... 300 4,124 1.24

d

0.240

$500K–999K .................................................................................................... 433 5,095 1.24

d

0.120

$1 Million to $10 Million ................................................................................... 547 6,458 1.05 0.018

$10 Million to $50 Million ................................................................................. 202 2,818 0.78 0.003

a

Calculated as five percent of plans in each asset range, based on data from the 2018 Form 5500 for the distribution of pension plans with

fewer than 100 participants by type of plan and plan assets. As the Form 5500 does not allow a determination of which small plans has stock,

the actual size distribution is unknown. The population distribution is used.

b

Total plan cost is BrightScope’s measure of the total cost of operating the 401(k) plan and includes asset-based investment management

fees, asset-based administrative and advice fees, and other fees (including insurance charges) from the Form 5500 and audited financial state-

ments of ERISA-covered 401(k) plans. Total plan cost is computed only for plans with sufficiently complete information. The sample is 53,856

plans with $4.4 trillion in assets. BrightScope audited 401(k) filings generally include plans with 100 participants or more. Plans with fewer than

four investment options or more than 100 investment options are excluded from BrightScope audited 401(k) filings for this analysis. The data

does not include DB plans, but due to lack of comparable data it is applied to DB plans as a proxy for their plan costs. Source: BrightScope, ICI.

‘‘The BrightScope/ICI Defined Contribution Plan Profile: a Close Look at 401(k) Plans, 2017.’’ (August 2020).

c

The Department estimates that additional plan cost from the rule will be $899.94. The Department applied this fixed cost as a percent of mid-

point in each asset range.

d

BrightScope did not differentiate between plans with less than $1 million in assets; however, as most of the small plans have less than $1

million in assets, the Department applied this broader estimate to smaller sub-sets of assets to illustrate how small plans are likely to affected by

the rule.

The Department believes that this is

likely an overestimate of the costs faced

by small plans, as small plans are likely

to rely on service providers. The

Department believes these service

providers offer economies of scale in

meeting the requirements of the final

rule; however, the Department does not

have data that would allow it to

estimate the number of service

providers acting in such a capacity for

these plans.

The time required to make necessary

changes to compliance policies and

procedures in response to the rule may

vary widely between plans, the

Department believes the requirements in

the final rule closely resemble existing

prior guidance and industry best

practices. The Department believes that,

on average, the marginal cost to meet

the additional requirements regulation,

outside of existing fiduciary duties, will

be small because the required activities

are reflected in common practice and

the requirements are similar to prior

guidance. Further, plan fiduciaries

would be able to conserve plan assets by

refraining from researching and voting

on proposals that they prudently

determine do not have a material effect

on the value of the plan’s investment.

Thus, the final rule would result in cost

savings and other benefits for small plan

sponsors.

3.5. Steps the Agency Has Taken To

Minimize the Significant Economic

Impact on Small Entities

As discussed above, the Department’s

longstanding position is that the

fiduciary duties of prudence and loyalty

under ERISA sections 404(a)(1)(A) and

404(a)(1)(B) apply to the exercise of

shareholder rights, including proxy

voting, proxy voting policies and

guidelines, and the selection and

monitoring of proxy advisory firms.

These duties apply to all affected

entities–large and small. Accordingly,

no special actions were taken into

consideration for small entities.

As discussed above, after carefully

considering comments, the Department

was persuaded to eliminate paragraphs

(e)(3)(i) and (ii) and adopt a more

principle-based, less prescriptive

approach in the final rule that will

reduce much of the cost burden

associated with the proposed rule.

Paragraph (e)(3)(i) of the proposal

provided that a plan fiduciary must vote

any proxy where the fiduciary

prudently determined that the matter

being voted upon would have an

economic impact on the plan after

considering those factors described in

paragraph (e)(2)(ii) of the proposal and

taking into account the costs involved

(including the cost of research, if

necessary, to determine how to vote).

Paragraph (e)(3)(ii) of the proposal

provided that a plan fiduciary must not

vote any proxy unless the fiduciary

prudently determined that the matter

being voted upon would have an

economic impact on the plan after

considering those factors described in

paragraph (e)(2)(ii) of the proposal and

taking into account the costs involved.

This is a significant adjustment from the

proposal that results in a less

prescriptive, more principles-based

approach that will reduce much of the

cost burden associated with the

proposed rule for all plans, including

small plans. See the section above

entitled ‘‘Elimination of Paragraphs

(e)(3)(i) and (ii) from the Proposal’’ for

a more detailed discussion of this

change.

4. Unfunded Mandates Reform Act

Title II of the Unfunded Mandates

Reform Act of 1995

138

requires each

federal agency to prepare a written

statement assessing the effects of any

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federal mandate in a proposed or final

agency rule that may result in an

expenditure of $100 million or more

(adjusted annually for inflation with the

base year 1995) in any one year by state,

local, and tribal governments, in the

aggregate, or by the private sector. For

purposes of the Unfunded Mandates

Reform Act, as well as Executive Order

12875, this final rule does not include

any federal mandate that the

Department expects would result in

such expenditures by state, local, or

tribal governments, or the private sector.

This final rule will not result in an

expenditure of $100 million or more in

any one year, because the Department is

simply restating and modernizing

fiduciary practices related to voting

rights and aligning its regulations to the

extent possible with guidance issued by

the SEC.

5. Federalism Statement

Executive Order 13132 outlines

fundamental principles of federalism

and requires federal agencies to adhere

to specific criteria when formulating

and implementing policies that have

‘‘substantial direct effects’’ on the states,

the relationship between the national

government and states, or on the

distribution of power and

responsibilities among the various

levels of government. Federal agencies

promulgating regulations that have

federalism implications must consult

with state and local officials and

describe the extent of their consultation

and the nature of the concerns of state

and local officials in the preamble to the

final rule.

In the Department’s view, this final

rule does not have federalism

implications because it does not have

direct effects on the states, the

relationship between the national

government and the states, or the

distribution of power and

responsibilities among various levels of

government. The final rule describes

requirements and permitted practices

related to the exercise of shareholder

rights under ERISA. While ERISA

generally preempts state laws that relate

to ERISA plans, and preemption

typically requires an examination of the

individual law involved, it appears

highly unlikely that the provisions in

this final regulation would have

preemptive effect on general state

corporate laws.

Statutory Authority

This regulation is adopted pursuant to

the authority in section 505 of ERISA

(Pub. L. 93–406, 88 Stat. 894; 29 U.S.C.

1135) and section 102 of Reorganization

Plan No. 4 of 1978 (43 FR 47713,

October 17, 1978), effective December

31, 1978 (44 FR 1065, January 3, 1979),

3 CFR 1978 Comp. 332, and under

Secretary of Labor’s Order No. 1–2011,

77 FR 1088 (Jan. 9, 2012).

List of Subjects in 29 CFR Parts 2509

and 2550

Employee benefit plans, Employee

Retirement Income Security Act,

Exemptions, Fiduciaries, investments,

Pensions, Prohibited transactions,

Reporting and recordkeeping

requirements, Securities.

For the reasons set forth in the

preamble, the Department amends parts

2509 and 2550 of subchapters A and F

of chapter XXV of title 29 of the Code

of Federal Regulations as follows:

Subchapter A—General

PART 2509—INTERPRETIVE

BULLETINS RELATING TO THE

EMPLOYEE RETIREMENT INCOME

SECURITY ACT OF 1974

■1. The authority citation for part 2509

continues to read as follows:

Authority: 29 U.S.C. 1135. Secretary of

Labor’s Order 1–2003, 68 FR 5374 (Feb. 3,

2003). Sections 2509.75–10 and 2509.75–2

issued under 29 U.S.C. 1052, 1053, 1054. Sec.

2509.75–5 also issued under 29 U.S.C. 1002.

Sec. 2509.95–1 also issued under sec. 625,

Pub. L. 109–280, 120 Stat. 780.

§ 2509.2016–01 [Removed]

■2. Remove § 2509.2016–01.

Subchapter F—Fiduciary Responsibility

Under the Employee Retirement Income

Security Act of 1974

PART 2550—RULES AND

REGULATIONS FOR FIDUCIARY

RESPONSIBILITY

■3. The authority citation for part 2550

continues to read as follows:

Authority: 29 U.S.C. 1135 and Secretary

of Labor’s Order No. 1–2011, 77 FR 1088

(January 9, 2012). Sec. 102, Reorganization

Plan No. 4 of 1978, 5 U.S.C. App. at 727

(2012). Sec. 2550.401c–1 also issued under

29 U.S.C. 1101. Sec. 2550.404a–1 also issued

under sec. 657, Pub. L. 107–16, 115 Stat 38.

Sec. 2550.404a–2 also issued under sec. 657

of Pub. L. 107–16, 115 Stat. 38. Sections

2550.404c–1 and 2550.404c–5 also issued

under 29 U.S.C. 1104. Sec. 2550.408b–1 also

issued under 29 U.S.C. 1108(b)(1). Sec.

2550.408b–19 also issued under sec. 611,

Pub. L. 109–280, 120 Stat. 780, 972. Sec.

2550.412–1 also issued under 29 U.S.C. 1112.

■4. Section 2550.404a–1 is amended by

adding paragraph (e), revising paragraph

(g), and republishing paragraph (h) to

read as follows:

§ 2550.404a-1 Investment duties.

* * * * *

(e) Proxy voting and exercise of

shareholder rights. (1) The fiduciary

duty to manage plan assets that are

shares of stock includes the

management of shareholder rights

appurtenant to those shares, such as the

right to vote proxies.

(2)(i) When deciding whether to

exercise shareholder rights and when

exercising such rights, including the

voting of proxies, fiduciaries must carry

out their duties prudently and solely in

the interests of the participants and

beneficiaries and for the exclusive

purpose of providing benefits to

participants and beneficiaries and

defraying the reasonable expenses of

administering the plan.

(ii) The fiduciary duty to manage

shareholder rights appurtenant to shares

of stock does not require the voting of

every proxy or the exercise of every

shareholder right. In order to fulfill the

fiduciary obligations under paragraph

(e)(2)(i) of this section, when deciding

whether to exercise shareholder rights

and when exercising shareholder rights,

plan fiduciaries must:

(A) Act solely in accordance with the

economic interest of the plan and its

participants and beneficiaries;

(B) Consider any costs involved;

(C) Not subordinate the interests of

the participants and beneficiaries in

their retirement income or financial

benefits under the plan to any non-

pecuniary objective, or promote non-

pecuniary benefits or goals unrelated to

those financial interests of the plan’s

participants and beneficiaries;

(D) Evaluate material facts that form

the basis for any particular proxy vote

or other exercise of shareholder rights;

(E) Maintain records on proxy voting

activities and other exercises of

shareholder rights; and

(F) Exercise prudence and diligence

in the selection and monitoring of

persons, if any, selected to advise or

otherwise assist with exercises of

shareholder rights, such as providing

research and analysis, recommendations

regarding proxy votes, administrative

services with voting proxies, and

recordkeeping and reporting services.

(iii) Where the authority to vote

proxies or exercise shareholder rights

has been delegated to an investment

manager pursuant to ERISA section

403(a)(2), or a proxy voting firm or other

person who performs advisory services

as to the voting of proxies, a responsible

plan fiduciary shall prudently monitor

the proxy voting activities of such

investment manager or proxy advisory

firm and determine whether such

activities are consistent with paragraphs

(e)(2)(i) and (ii) and (e)(3) of this section.

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(iv) A fiduciary may not adopt a

practice of following the

recommendations of a proxy advisory

firm or other service provider without a

determination that such firm or service

provider’s proxy voting guidelines are

consistent with the fiduciary’s

obligations described in paragraphs

(e)(2)(ii)(A) through (E) of this section.

(3)(i) In deciding whether to vote a

proxy pursuant to paragraphs (e)(2)(i)

and (ii) of this section, fiduciaries may

adopt proxy voting policies providing

that the authority to vote a proxy shall

be exercised pursuant to specific

parameters prudently designed to serve

the plan’s economic interest. Paragraphs

(e)(3)(i)(A) and (B) of this section set

forth optional means for satisfying the

fiduciary responsibilities under sections

404(a)(1)(A) and 404(a)(1)(B) of ERISA

with respect to decisions whether to

vote, provided such policies are

developed in accordance with a

fiduciary’s obligations under ERISA as

set forth in the applicable provisions of

paragraphs (e)(2)(i) and (ii) of this

section. Paragraphs (e)(3)(i)(A) and (B)

of this section do not establish

minimum requirements or the exclusive

means for satisfying these

responsibilities. A plan may adopt

either or both of the following policies:

(A) A policy to limit voting resources

to particular types of proposals that the

fiduciary has prudently determined are

substantially related to the issuer’s

business activities or are expected to

have a material effect on the value of the

investment.

(B) A policy of refraining from voting

on proposals or particular types of

proposals when the plan’s holding in a

single issuer relative to the plan’s total

investment assets is below a

quantitative threshold that the fiduciary

prudently determines, considering its

percentage ownership of the issuer and

other relevant factors, is sufficiently

small that the matter being voted upon

is not expected to have a material effect

on the investment performance of the

plan’s portfolio (or investment

performance of assets under

management in the case of an

investment manager).

(ii) Plan fiduciaries shall periodically

review proxy voting policies adopted

pursuant to paragraph (e)(3)(i) of this

section.

(iii) No proxy voting policies adopted

pursuant to paragraph (e)(3)(i) of this

section shall preclude submitting a

proxy vote when the fiduciary

prudently determines that the matter

being voted upon is expected to have a

material effect on the value of the

investment or the investment

performance of the plan’s portfolio (or

investment performance of assets under

management in the case of an

investment manager) after taking into

account the costs involved, or refraining

from voting when the fiduciary

prudently determines that the matter

being voted upon is not expected to

have such a material effect after taking

into account the costs involved.

(4)(i)(A) The responsibility for

exercising shareholder rights lies

exclusively with the plan trustee except

to the extent that either:

(1) The trustee is subject to the

directions of a named fiduciary

pursuant to ERISA section 403(a)(1); or

(2) The power to manage, acquire, or

dispose of the relevant assets has been

delegated by a named fiduciary to one

or more investment managers pursuant

to ERISA section 403(a)(2).

(B) Where the authority to manage

plan assets has been delegated to an

investment manager pursuant to section

403(a)(2), the investment manager has

exclusive authority to vote proxies or

exercise other shareholder rights

appurtenant to such plan assets in

accordance with this section, except to

the extent the plan, trust document, or

investment management agreement

expressly provides that the responsible

named fiduciary has reserved to itself

(or to another named fiduciary so

authorized by the plan document) the

right to direct a plan trustee regarding

the exercise or management of some or

all of such shareholder rights.

(ii) An investment manager of a

pooled investment vehicle that holds

assets of more than one employee

benefit plan may be subject to an

investment policy statement that

conflicts with the policy of another

plan. Compliance with ERISA section

404(a)(1)(D) requires the investment

manager to reconcile, insofar as

possible, the conflicting policies

(assuming compliance with each policy

would be consistent with ERISA section

404(a)(1)(D)). In the case of proxy

voting, to the extent permitted by

applicable law, the investment manager

must vote (or abstain from voting) the

relevant proxies to reflect such policies

in proportion to each plan’s economic

interest in the pooled investment

vehicle. Such an investment manager

may, however, develop an investment

policy statement consistent with Title I

of ERISA and this section, and require

participating plans to accept the

investment manager’s investment policy

statement, including any proxy voting

policy, before they are allowed to invest.

In such cases, a fiduciary must assess

whether the investment manager’s

investment policy statement and proxy

voting policy are consistent with Title I

of ERISA and this section before

deciding to retain the investment

manager.

(5) This section does not apply to

voting, tender, and similar rights with

respect to such securities that are passed

through pursuant to the terms of an

individual account plan to participants

and beneficiaries with accounts holding

such securities.

* * * * *

(g) Applicability date. (1) Except for

paragraph (e) of this section, this section

shall apply in its entirety to all

investments made and investment

courses of action taken after January 12,

2021.

(2) Plans shall have until April 30,

2022, to make any changes to qualified

default investment alternatives

described in § 2550.404c–5, where

necessary to comply with the

requirements of paragraph (d)(2) of this

section.

(3) Paragraph (e) of this section

applies on January 15, 2021.

Fiduciaries, other than investment

advisers subject to 17 CFR 275.206(4)–

6, shall have until January 31, 2022, to

comply with the requirements of

paragraphs (e)(2)(ii)(D) and (E) of this

section. All fiduciaries shall have until

January 31, 2022 to comply with the

requirements of paragraphs (e)(2)(iv)

and (e)(4)(ii) of this section.

(h) Severability. If any provision of

this section is held to be invalid or

unenforceable by its terms, or as applied

to any person or circumstance, or stayed

pending further agency action, the

provision shall be construed so as to

continue to give the maximum effect to

the provision permitted by law, unless

such holding shall be one of invalidity

or unenforceability, in which event the

provision shall be severable from this

section and shall not affect the

remainder thereof.

Signed at Washington, DC.

Jeanne Klinefelter Wilson,

Acting Assistant Secretary, Employee Benefits

Security Administration, Department of

Labor.

[FR Doc. 2020–27465 Filed 12–15–20; 8:45 am]

BILLING CODE 4510–29–P

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Fiduciary Duties Regarding Proxy Voting and Shareholder Rights

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Published date	16 December 2020
Record Number	2020-27465
Section	Rules and Regulations
Court	Employee Benefits Security Administration