[Federal Register: October 17, 2008 (Volume 73, Number 202)]
[Rules and Regulations]
[Page 61731-61734]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17oc08-9]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2509
RIN 1210-AB28
Interpretive Bulletin Relating to Exercise of Shareholder Rights
AGENCY: Employee Benefits Security Administration.
ACTION: Interpretive bulletin.
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SUMMARY: This document sets forth the views of the Department of Labor
concerning the legal standards imposed by sections 402, 403 and 404 of
Title I of the Employee Retirement Income Security Act (ERISA) with
respect to the exercise of shareholder rights and written statements of
investment policy, including proxy voting policies or guidelines. These
guidelines affect fiduciaries of employee benefit plans, including
trustees, investment managers and others responsible for the management
of employee benefit plan assets.
DATES: This interpretive bulletin is effective on October 17, 2008.
FOR FURTHER INFORMATION CONTACT: Office of Regulations and
Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll-free number.
SUPPLEMENTARY INFORMATION: On July 29, 1994, the Department of Labor
(the Department) issued guidance with respect to the duties of employee
benefit plan fiduciaries under sections 402, 403 and 404 of Title I of
the Employee Retirement Income Security Act (ERISA)
[[Page 61732]]
to vote proxies appurtenant to shares of corporate stock held by their
plans (29 CFR 2509.94-2). The guidance set forth in this document,
Interpretive Bulletin 08-2, includes clarifications of the earlier
guidance, as well as interpretive positions issued by the Department
since 1994 on shareholder activism and socially directed proxy voting
initiatives. The guidance modifies and supersedes the guidance set
forth in interpretive bulletin 94-2 (29 CFR 2509.94-2).
List of Subjects in 29 CFR Part 2509
Employee benefit plans, Pensions.
0
For the reasons set forth in the preamble, the Department is amending
Subchapter A, Part 2509 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
0
1. The authority citation for part 2509 continues to read as follows:
Authority: 29 U.S.C. 1135. Secretary of Labor's Order No. 1-
2003, (68 FR 5374 Feb. 3, 2003). Sections 2509.75-10 and 2509.75-2
are also issued under 29 U.S.C. 1052, 1053, 1054. Section 2509.75-5
is also issued under 29 U.S.C. 1002.
Sec. 2509.94-2 [Removed]
0
2. Part 2509 is amended by removing Sec. 2509.94-2.
0
3. Part 2509 is further amended by adding new Sec. 2509.08-2 to read
as follows:
Sec. 2509.08-2 Interpretive bulletin relating to the exercise of
shareholder rights and written statements of investment policy,
including proxy voting policies or guidelines.
This interpretive bulletin sets forth the Department of Labor's
(the Department) interpretation of sections 402, 403 and 404 of the
Employee Retirement Income Security Act of 1974 (ERISA) as those
sections apply to voting of proxies on securities held in employee
benefit plan investment portfolios and the maintenance of and
compliance with statements of investment policy, including proxy voting
policy. In addition, this interpretive bulletin provides guidance on
the appropriateness under ERISA of active monitoring of corporate
management by plan fiduciaries. The guidance set forth in this
interpretive bulletin modifies and supersedes the guidance set forth in
interpretive bulletin 94-2 (29 CFR 2509.94-2).
(1) Proxy Voting
The fiduciary act of managing plan assets that are shares of
corporate stock includes the management of voting rights appurtenant to
those shares of stock.\1\ As a result, the responsibility for voting or
deciding not to vote proxies lies exclusively with the plan trustee
except to the extent that either (1) the trustee is subject to the
direction of a named fiduciary pursuant to ERISA Sec. 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 Sec. 403(a)(2). Where the authority to manage plan
assets has been delegated to an investment manager pursuant to Sec.
403(a)(2), no person other than the investment manager has authority to
make voting decisions for proxies appurtenant to such plan assets
except to the extent that the 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 voting of proxies. In this
regard, a named fiduciary, in delegating investment management
authority to an investment manager, could reserve to itself the right
to direct a trustee with respect to the voting of all proxies or
reserve to itself the right to direct a trustee as to the voting of
only those proxies relating to specified assets or issues.
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\1\ See letter from the Department of Labor to Helmut Fandl,
Chairman of the Retirement Board of Avon Products, Inc., dated
February 23, 1988.
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If the plan document or investment management agreement provides
that the investment manager is not required to vote proxies, but does
not expressly preclude the investment manager from voting proxies, the
investment manager would have exclusive responsibility for proxy voting
decisions. Moreover, an investment manager would not be relieved of its
own fiduciary responsibilities by following directions of some other
person regarding the voting of proxies, or by delegating such
responsibility to another person. If, however, the plan document or the
investment management contract expressly precludes the investment
manager from voting proxies, the responsibility for voting proxies
would lie exclusively with the trustee. The trustee, however,
consistent with the requirements of ERISA Sec. 403(a)(1), may be
subject to the directions of a named fiduciary if the plan so provides.
The fiduciary duties described at ERISA Sec. 404(a)(1)(A) and (B),
require that, in voting proxies, regardless of whether the vote is made
pursuant to a statement of investment policy, 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. Votes shall only be cast in accordance with a plan's
economic interests. 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, or if the exercise of voting results in the
imposition of unwarranted trading or other restrictions, the fiduciary
has an obligation to refrain from voting.\2\ In making this
determination, objectives, considerations, and economic effects
unrelated to the plan's economic interests cannot be considered. The
fiduciary's duties under ERISA Sec. 404(a)(1)(A) and (B) also require
that the named fiduciary appointing an investment manager periodically
monitor the activities of the investment manager with respect to the
management of plan assets, including decisions made and actions taken
by the investment manager with regard to proxy voting decisions. The
named fiduciary must carry out this responsibility solely in the
participants' and beneficiaries' interest in the economic value of the
plan assets and without regard to the fiduciary's relationship to the
plan sponsor.
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\2\ See Advisory Opinion No. 2007-07A (December 21, 2007).
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It is the view of the Department that compliance with the duty to
monitor necessitates proper documentation of the activities that are
subject to monitoring. Thus, the investment manager or other
responsible fiduciary would be required to maintain accurate records as
to proxy voting decisions, including, where appropriate, cost-benefit
analyses.\3\ Moreover, if the named fiduciary is to be able to carry
out its responsibilities under ERISA Sec. 404(a) in determining whether
the investment manager is fulfilling its fiduciary obligations in
investing plans assets in a manner that justifies the continuation of
the management appointment, the proxy voting records must enable the
named fiduciary to review not only the investment manager's voting
procedure with respect to plan-owned stock, but also to review the
actions taken in individual proxy voting situations.
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\3\ See letter from the Department of Labor to Robert A.G.
Monks, Institutional Shareholder Services, Inc., January 23, 1990.
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[[Page 61733]]
The fiduciary obligations of prudence and loyalty to plan
participants and beneficiaries require the responsible fiduciary to
vote proxies on issues that may affect the economic value of the plan's
investment. However, fiduciaries also need to take into account costs
when deciding whether and how to exercise their shareholder rights,
including the voting of shares. Such costs include, but are not limited
to, expenditures related to developing proxy resolutions, proxy voting
services and the analysis of the likely net effect of a particular
issue on the economic value of the plan's investment. Fiduciaries must
take all of these factors into account in determining whether the
exercise of such rights (e.g., the voting of a proxy), independently or
in conjunction with other shareholders, is expected to have an effect
on the economic value of the plan's investment that will outweigh the
cost of exercising such rights. With respect to proxies appurtenant to
shares of foreign corporations, a fiduciary, in deciding whether to
purchase shares of a foreign corporation, should consider whether any
additional difficulty and expense in voting such shares is reflected in
their market price.
(2) Statements of Investment Policy
The maintenance by an employee benefit plan of a statement of
investment policy designed to further the purposes of the plan and its
funding policy is consistent with the fiduciary obligations set forth
in ERISA section 404(a)(1)(A) and (B). Because the fiduciary act of
managing plan assets that are shares of corporate stock includes the
voting, where appropriate, of proxies appurtenant to those shares of
stock, a statement of proxy voting policy would be an important part of
any comprehensive statement of investment policy. For purposes of this
document, the term ``statement of investment policy'' means a written
statement that provides the fiduciaries who are responsible for plan
investments with guidelines or general instructions concerning various
types or categories of investment management decisions, which may
include proxy voting decisions. A statement of investment policy is
distinguished from directions as to the purchase or sale of a specific
investment at a specific time or as to voting specific plan proxies.
In plans where investment management responsibility is delegated to
one or more investment managers appointed by the named fiduciary
pursuant to ERISA Sec. 402(c)(3), inherent in the authority to appoint
an investment manager, the named fiduciary responsible for appointment
of investment managers has the authority to condition the appointment
on acceptance of a statement of investment policy. Thus, such a named
fiduciary may expressly require, as a condition of the investment
management agreement, that an investment manager comply with the terms
of a statement of investment policy that sets forth guidelines
concerning investments and investment courses of action that the
investment manager is authorized or is not authorized to make. Such
investment policy may include a policy or guidelines on the voting of
proxies on shares of stock for which the investment manager is
responsible. Such guidelines must be consistent with the fiduciary
obligations set forth in ERISA Sec. 404(a)(1)(A) and (B) and this
Interpretive Bulletin, and may not subordinate the economic interests
of the plan participants to unrelated objectives. In the absence of
such an express requirement to comply with an investment policy, the
authority to manage the plan assets placed under the control of the
investment manager would lie exclusively with the investment manager.
Although a trustee may be subject to the direction of a named fiduciary
pursuant to ERISA Sec. 403(a)(1), an investment manager who has
authority to make investment decisions, including proxy voting
decisions, would never be relieved of its fiduciary responsibility if
it followed the direction as to specific investment decisions from the
named fiduciary or any other person.
Statements of investment policy issued by a named fiduciary
authorized to appoint investment managers would be part of the
``documents and instruments governing the plan'' within the meaning of
ERISA Sec. 404(a)(1)(D). An investment manager to whom such investment
policy applies would be required to comply with such policy, pursuant
to ERISA Sec. 404(a)(1)(D) insofar as the policy directives or
guidelines are consistent with titles I and IV of ERISA. Therefore, if,
for example, compliance with the guidelines in a given instance would
be imprudent, then the investment manager's failure to follow the
guidelines would not violate ERISA Sec. 404(a)(1)(D). Moreover, ERISA
Sec. 404(a)(1)(D) does not shield the investment manager from liability
for imprudent actions taken in compliance with a statement of
investment policy.
The plan document or trust agreement may expressly provide a
statement of investment policy to guide the trustee or may authorize a
named fiduciary to issue a statement of investment policy applicable to
a trustee. Where a plan trustee is subject to an investment policy, the
trustee's duty to comply with such investment policy would also be
analyzed under ERISA Sec. 404(a)(1)(D). Thus, the trustee would be
required to comply with the statement of investment policy unless, for
example, it would be imprudent to do so in a given instance.
Maintenance of a statement of investment policy by a named
fiduciary does not relieve the named fiduciary of its obligations under
ERISA Sec. 404(a) with respect to the appointment and monitoring of an
investment manager or trustee. In this regard, the named fiduciary
appointing an investment manager must periodically monitor the
investment manager's activities with respect to management of the plan
assets. Moreover, compliance with ERISA Sec. 404(a)(1)(B) would require
maintenance of proper documentation of the activities of the investment
manager and of the named fiduciary of the plan in monitoring the
activities of the investment manager. In addition, in the view of the
Department, a named fiduciary's determination of the terms of a
statement of investment policy is an exercise of fiduciary
responsibility and, as such, statements may need to take into account
factors such as the plan's funding policy and its liquidity needs as
well as issues of prudence, diversification and other fiduciary
requirements of ERISA.
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. If the investment manager determines that compliance
with one of the conflicting voting policies would violate ERISA Sec.
404(a)(1), for example, by being imprudent or not solely in the
economic interest of plan participants, the investment manager would be
required to ignore the policy and vote in accordance with ERISA's
obligations. If, however, the investment manager reasonably concludes
that application of each plan's voting policy is consistent with
ERISA's obligations, such as when the policies reflect different but
reasonable judgments or when the plans have different economic
interests, ERISA Sec. 404(a)(1)(D) would generally require the manager,
to the extent permitted by applicable law, to vote the proxies in
proportion to each plan's interest in the pooled investment vehicle. An
investment manager may also require participating investors to accept
the investment manager's own investment policy statement, including
[[Page 61734]]
any statement of proxy voting policy, before they are allowed to
invest, which may help to avoid such potential conflicts. 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 Sec. 404(a)(1)(D).
(3) Shareholder Activism
An investment policy that contemplates activities intended to
monitor or influence the management of corporations in which the plan
owns stock is consistent with a fiduciary's obligations under ERISA
where the responsible fiduciary concludes that there is a reasonable
expectation that such monitoring or communication with management, by
the plan alone or together with other shareholders, will enhance the
economic value of the plan's investment in the corporation, after
taking into account the costs involved. Such a reasonable expectation
may exist in various circumstances, for example, where plan investments
in corporate stock are held as long-term investments or where a plan
may not be able to easily dispose such an investment. Active monitoring
and communication activities would generally concern such issues as the
independence and expertise of candidates for the corporation's board of
directors and assuring that the board has sufficient information to
carry out its responsibility to monitor management. Other issues may
include such matters as consideration of the appropriateness of
executive compensation, the corporation's policy regarding mergers and
acquisitions, the extent of debt financing and capitalization, the
nature of long-term business plans, the corporation's investment in
training to develop its work force, other workplace practices and
financial and non-financial measures of corporate performance that are
reasonably likely to affect the economic value of the plan. Active
monitoring and communication may be carried out through a variety of
methods including by means of correspondence and meetings with
corporate management as well as by exercising the legal rights of a
shareholder. In creating an investment policy, a fiduciary shall
consider only factors that relate to the economic interest of
participants and their beneficiaries in plan assets, and shall not use
an investment policy to promote myriad public policy preferences.\4\
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\4\ See Advisory Opinion No. 2008-05A (June 27, 2008) and letter
from Department of Labor to Jonathan P. Hiatt, General Counsel, AFL-
CIO (May 3, 2005).
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(4) Socially-Directed Proxy Voting, Investment Policies and Shareholder
Activism.
Plan fiduciaries risk violating the exclusive purpose rule when
they exercise their fiduciary authority in an attempt to further
legislative, regulatory or public policy issues through the proxy
process. In such cases, the Department would expect fiduciaries to be
able to demonstrate in enforcement actions their compliance with the
requirements of section 404(a)(1)(A) and (B). 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. Because of the
heightened potential for abuse in such cases, the fiduciaries must be
prepared to articulate a clear basis for concluding that the proxy
vote, the investment policy, or the activity intended to monitor or
influence the management of the corporation is more likely than not to
enhance the economic value of the plan's investment before expending
plan assets.
The use of pension plan assets by plan fiduciaries to further
policy or political issues through proxy resolutions that have no
connection to enhancing the economic value of the plan's investment in
a corporation would, in the view of the Department, violate the
prudence and exclusive purpose requirements of section 404(a)(1)(A) and
(B). For example, the likelihood that the adoption of a proxy
resolution or proposal requiring corporate directors and officers to
disclose their personal political contributions would enhance the
economic value of a plan's investment in the corporation appears
sufficiently remote that the expenditure of plan assets to further such
a resolution or proposal clearly raises compliance issues under section
404(a)(1)(A) and (B).\5\
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\5\ See Advisory Opinion No. 2007-07A (December 21, 2007).
Signed at Washington, DC, this 9th day of October, 2008.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E8-24552 Filed 10-16-08; 8:45 am]
BILLING CODE 4510-29-P