Guest Article

(From the November 10, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

EBSA Clarifies Fiduciary Duties Regarding Proxy Voting

Emphasizing that a key consideration is whether the shareholder activity -- the proxy voting, the statement of investment policy, or shareholder activism -- seeks to enhance the economic value of the plan's investments (and does not subordinate the economic interest of the plan to unrelated objectives), the Employee Benefits Security Administration (EBSA) issued Interpretive Bulletin 08-2 to update its prior guidance on the duties of ERISA fiduciaries when exercising shareholder rights.

Background

The Interpretive Bulletin outlines the EBSA's interpretation of how the requirements of ERISA §§ 402, 403 and 404 -- regarding the establishment of the plan, establishment of the trust (and appointment of a trustee), and fiduciary duties -- impact the exercise of shareholder rights. The Bulletin addresses the obligations of the plan fiduciaries in three specific areas: proxy voting, investment policy statements, and shareholder activism. The Bulletin modifies and supersedes earlier guidance issued by EBSA in Interpretive Bulletin § 2509.94-2 (regarding the duties of fiduciaries to vote shares of corporate stock held by their plans), and clarifies other post-1994 guidance issued on shareholder activism and socially directed proxy voting. The Bulletin is effective as of the date of its publication, on October 17, 2008.

Proxy Voting

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, or (2) an investment manager has been appointed under ERISA § 403(a)(2) by a named fiduciary. If an investment manager has been appointed, it retains the authority to vote proxies unless the named fiduciary has reserved that right to itself (or to another fiduciary). If the plan document or investment management agreement does not require the investment manger to vote proxies -- but does not expressly preclude it from doing so -- the investment manager would have the exclusive responsibility for voting proxies. However, if the documents expressly preclude the investment manager from voting proxies, the responsibility would lie exclusively with the trustee (although, as indicated above, the trustee may be subject to the direction of a named fiduciary).

The responsible fiduciary may consider "only those factors that relate to the economic value of the plan's investment" in voting proxies. If the cost of voting (including the cost of research, if necessary, to determine how to vote) is likely to exceed the economic benefit of voting, the fiduciary has an obligation to refrain from voting.

In order to facilitate the monitoring required by a named fiduciary under ERISA §404(a), accurate records must be maintained regarding the proxy voting decisions made by the appointed fiduciary -- including, where appropriate, cost-benefit analyses. The records must enable the named fiduciary to monitor an appointed investment manager, and should enable review not only of the investment manager's voting procedure but also the actions taken in individual proxy voting situations.

Investment Policy Statements

Maintenance of a written investment policy, which is designed to further the purpose of the plan and its funding policy, is consistent with ERISA § 404. According to ESBA, a statement of proxy voting policy would be an important part of a comprehensive investment policy.

The named fiduciary responsible for appointing an investment manager has the authority to condition the appointment on the investment manager's acceptance of the investment policy. To the extent that the investment policy includes proxy voting guidelines, they must be consistent with the fiduciary obligations of ERISA, and may not subordinate the economic interest of the plan to unrelated objectives.

Statements of investment policy issued by a named fiduciary would be part of the documents governing the plan under ERISA § 404(a), and an investment manager would be required to comply with them to the extent they are consistent with ERISA. If compliance in a given instance would be imprudent, then the investment manager's failure to follow the guidelines would not violate ERISA § 404(a)(1)(D) (which requires the fiduciary to act in accordance with the plan documents). In fact, following the guidelines under circumstances where it is imprudent to do so will expose the investment manager to potential liability under ERISA § 404(a)(1)(B) (which requires the fiduciary to act prudently). Trustees are in a similar position. If they are subject to an investment policy, they are obligated to comply unless it would violate ERISA § 404(a) to do so.

The named fiduciary who appoints an investment manager is obligated to periodically monitor the investment manager. This requires the maintenance of proper documentation of the investment manager's activities.

The investment manager of a pooled investment vehicle that holds assets of more than one plan may be subject to conflicting proxy voting policies. If compliance with one plan's policy would violate ERISA § 404(a) as regards to another plan's policy (e.g., by being imprudent or not solely in the economic interest of the plan), the investment manager would be required to ignore the policy and vote in accordance with ERISA. However, if the conflicting policies do not violate ERISA, the investment manager would generally be required to vote the proxies in accordance with each plan's interest in the pooled investment vehicle.

Shareholder Activism

An investment policy that addresses activities intended to monitor or influence the management of companies in which the plan holds stock would be consistent with ERISA where the fiduciary reasonably expects that such activity -- by the plan alone or together with other shareholders -- will enhance the economic value of the plan's investment after taking into account the costs. The Interpretive Bulletin notes that a reasonable expectation may exist, for example, where an investment in the corporate stock is being held as a long-term investment, or where the particular investment is not easily liquidated. Activities would generally include monitoring the expertise of the board of directors, the appropriateness of executive compensation, the extent of debt financing, etc. The Interpretive Bulletin emphasizes, however, that:

Caution against Socially-Directed Actions

EBSA added a strong cautionary note to the Interpretive Bulletin essentially prohibiting the promotion of policy or political issues through proxy voting, investment policies or shareholder activism unless they are likely to enhance the economic value of the plan's investments. Where fiduciaries exercise their authority in an attempt to further legislative, regulatory, or public policy issues, they:

The Interpretive Bulletin is available via the EBSA web site.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.