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Secretary of Labor Thomas E. Perez
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EBSA Final Rules

Interpretive Bulletin Relating to Exercise of Shareholder Rights   [10/17/2008]
[PDF]
FR Doc E8-24552
[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