Seyfarth Synopsis: In mid-December 2020, after a truncated comment period and without public hearings, the US Department of Labor (DOL) finalized its proposed regulations on a fiduciary’s responsibilities when exercising shareholder rights like proxy voting (summarized here). They were published in the Federal Register on December 16, 2020 (click here) and were designated as effective on January 15, 2021. However, given the new Administration, the future of that final rule is unclear.

As part of the DOL’s one-two punch to plan fiduciaries’ obligations regarding investment selection and management, the agency quickly finalized its proposed regulation on exercising shareholder rights. (See our other blogs here and here regarding the DOL regulations on ESG investing.) The DOL recognizes 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.” As we noted in our prior post, the DOL’s view on fiduciaries conducting proxy voting ties the obligation to their concern that voting proxies may relate to non-pecuniary interests. In that case, the DOL’s position in the proposed rule was that plan fiduciaries should actually refrain from voting the proxy.

After receiving a great deal of reaction (including written comments and submissions) from a variety of stakeholders, the DOL made significant changes to the proposed rule. Instead of requiring or prohibiting the voting of certain proxies, the DOL has adopted a principles-based approach under which fiduciaries must adopt a process for exercising shareholder rights that emphasizes their existing ERISA duties of prudence, acting solely in the interest of the plan participants and beneficiaries, and acting exclusively for the purpose of providing benefits to such plan participants and beneficiaries and defraying administrative costs.

The DOL also adjusted some of the other language in the proposed rule that was more prescriptive. This includes modifying the requirement to “investigate” facts surrounding an investment decision to one that requires an “evaluation” of the facts. Also, the obligation that fiduciaries require specific documentation of the rationale for proxy voting decisions from an investment manager who was delegated the proxy voting function has been removed in favor of a more general monitoring approach.

The fate of this final rule is unclear under the new Administration. This is in contrast to the final rule addressing investment selection and management, which was specifically identified in President Biden’s Executive Order “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” (See our blog here discussing that Executive Order and those DOL regulations.)

So, yet another reason to stay tuned!