In a newly proposed rule, the Department of Labor is seeking to address the widespread trend of proxy voting in ERISA-backed retirement fund decision making, narrowing the scope of such activity so that fund fiduciaries could cast proxy votes only when they would have an economic impact on the retirement plan. The rule, developed by the Department’s Employee Benefits Security Administration (EBSA), ultimately aims to ensure that plan fiduciaries must solely consider factors affecting the value of the plan’s investment rather than sidelining the security of beneficiaries’ retirement income to unrelated goals.
As noted by Secretary of Labor Eugene Scalia in an accompanying press release, “The proposed proxy rule would ensure that individuals responsible for the retirement savings of millions of American workers are voting proxies only where it is financially in the interest of the plan to do so. The proposal would provide clarity and further the prudent management of plan assets and resources.”
The Institute for Pension Fund Integrity applauds the Department’s effort to address the systemic issue of undue influence of proxy advisory firms in shareholder voting, and while the scope of this proposed regulation is limited to ERISA-backed pension funds, we believe that it serves as a key step toward much-needed reforms. As noted in a previous IPFI issue brief, proxy advisory firms play a critical role in determining how institutional investors, such as those who manage public pensions, vote on shareholder resolutions. As fiduciaries, these individuals are obligated to prioritize fiscal returns above all else. However, proxy advisory firms compromise that duty through a lack of transparency, conflicts of interest, and politically motivated voting.
According to IPFI President Christopher Burnham, “The existence of ‘automatic voting’ allows proxy ballots to immediately be cast before inaccuracies can be identified. ‘Automatic voting’ allows proxy votes to be cast on faulty information well before the inaccuracies have the opportunity to be identified. This ‘automatic voting’ prohibits pension beneficiaries from having full transparency on the proxy votes that affect them. The SEC rightfully issued guidance to restrict this mismanaged practice and the Labor Department should similarly issue new oversight to this end. A process for review and a rectifying flaws in the research and recommendations by proxy voters better legitimizes the proxy process and ensures that shareholders are voting with accurate information.”
The Department of Labor’s proposed rule will be open for public comment over the next thirty days. During this time, IPFI will continue to press for a re-commitment to fiduciary duty and the removal of political decision-making from pension fund investment.