On September 4, 2020, the Department of Labor (“DOL”) published a proposed rule (the “Proposed Rule”) that would confirm its position that ERISA’s fiduciary duties of prudence and loyalty apply to an ERISA plan fiduciary’s exercise of shareholder rights, including proxy voting, proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms.

The Proposed Rule reflects the DOL’s attempt at clarifying its prior proxy voting guidance that “may have led to some confusion or misunderstandings.”  In particular, the DOL acknowledged that there is a view among some that ERISA plan fiduciaries are required to vote all proxies – the Proposed Rule makes clear that is not the case.  The Proposed Rule instead provides that an ERISA plan fiduciary is permitted to vote proxies only when it prudently determines that the matter being voted upon would have an economic impact on the plan after the costs of research and voting are taken into account, and that a fiduciary is prohibited from voting proxies otherwise.  The DOL expressly states in the preamble that there is no presumption that abstaining from voting proxies is a per se fiduciary breach; rather, fiduciaries are required to vote proxies in a manner that is in the best interests of the plan, which requires a consideration of the likely impact on the plan’s investment performance in light of the size of the plan’s holdings in the issuer relative to the total investment assets of the plan, the plan’s percentage ownership in the issuer, and the costs involved.

Consistent with the DOL’s recent ESG guidance (summarized here) relating to the investment of plan assets, the Proposed Rule would amend the DOL’s “investment duties” regulation at 29 C.F.R. 2550.404a-1 and provide that, when exercising a plan’s shareholder rights (including proxy voting), an ERISA plan fiduciary is prohibited from subordinating the financial interests of the plan to any non-pecuniary objective or from sacrificing investment returns or taking on additional risks in order to promote non-financial goals.  In addition, the Proposed Rule would require a plan fiduciary to:

  • investigate material facts that form the basis for exercising such shareholder rights (e.g., a plan fiduciary may not adopt a practice of following the recommendations of a proxy advisory firm without appropriate supervision and a determination that the firm’s guidelines are consistent with the economic interests of the plan);
  • maintain records on exercises of shareholder rights, including records that demonstrate the basis for such decisions (in particular, it is the DOL’s stated view that fiduciaries must be prepared to articulate the anticipated economic benefit of proxy-vote decisions in the event they decide to vote); and
  • exercise prudence and diligence in the selection and monitoring of persons selected to advise or otherwise assist with exercises of shareholder rights (and where the authority to vote proxies or exercise other shareholder rights has been delegated to an investment manager or proxy advisory firm, a responsible plan fiduciary shall require such manager or firm to document the rationale for proxy voting decisions or recommendations sufficient to demonstrate that the action was “based on expected economic benefit to the plan”).

The Proposed Rule specifically provides that:

  • a plan fiduciary “must vote” any proxy where the fiduciary prudently determines that the matter being voted on would have an economic impact on the plan after considering the factors described above and costs involved in voting; and
  • a plan fiduciary “must not vote” any proxy unless it prudently determines that the matter would have an economic impact on the plan after considering such factors and costs.

However, recognizing that determining whether or not to vote proxies may be resource-intensive and often will exceed the potential economic benefits to the plan, the DOL has proposed examples of permitted policies that fiduciaries may adopt that are intended to reduce the need for fiduciaries to consider proxy votes that are unlikely to have an economic impact on the plan, including:

  • a policy of voting proxies in accordance with the recommendations of management (provided that fiduciaries may retain the right to “override” such a general policy if prudence so dictates in a particular situation);
  • a policy to focus voting resources only on particular types of proposals that the fiduciary has prudently determined are substantially related to the corporation’s business activities or likely to have a significant impact on the value of the plan’s investment, such as proposals relating to corporate events, repurchases of shares, issuances of additional securities with dilutive effects on shareholders, or contested director elections; and
  • a policy of refraining from voting on proposals or particular types of proposals when the size of the plan’s holdings in the issuer relative to its total investment assets is below a quantitative threshold that the fiduciary prudently determines, considering the plan’s percentage ownership of the issuer and other relevant factors, is sufficiently small that the outcome of the vote is unlikely to have a material impact on the investment performance of the plan’s portfolio (or plan assets under management in the case of an investment manager).

The Proposed Rule would require that these policies be reviewed at least every two years.

The Proposed Rule further provides that the DOL’s Interpretive Bulletin 2016-01, which may be interpreted to permit consideration of a broader set of factors when making determinations regarding proxy voting, no longer reflects the view of the DOL and would be removed from the Code of Federal Regulations if the Proposed Rule is finalized.

The DOL has invited comments on all aspects of the Proposed Rule, which are due by October 5, 2020.

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In the meantime, ERISA plan fiduciaries should carefully review their proxy voting policies and practices – including those applicable to investment managers and proxy advisory firms that exercise these rights on behalf of the plan – and be prepared to make any necessary changes in the event the Proposed Rule is finalized.

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Photo of Ira G. Bogner Ira G. Bogner

Ira G. Bogner is Managing Partner of the Firm. He is the immediate former chair of the Firm’s Tax Department. He is a member of the Employee Benefits & Executive Compensation Group and the Firm’s Executive Committee. Ira represents a varied list of…

Ira G. Bogner is Managing Partner of the Firm. He is the immediate former chair of the Firm’s Tax Department. He is a member of the Employee Benefits & Executive Compensation Group and the Firm’s Executive Committee. Ira represents a varied list of clients, including financial service companies, entertainment industry clients, and tax-exempt organizations, and also actively represents individual executives in executive compensation matters.

Ira counsels clients with respect to the tax, securities law disclosure, corporate governance, stock exchange and other requirements relevant to executive compensation arrangements. Ira also provides advice regarding equity arrangements, employment agreements, change in control agreements and all other types of executive compensation arrangements, including guidance regarding “409A,” “162m,” “457A,” and “280G.”

Ira frequently is called on to structure and analyze alternative investments for pension trusts and other exempt organizations. He also works with the Firm’s corporate and real estate lawyers in structuring and maintaining investment funds that include participation by pension plans. Through his work in the investment fund area Ira has obtained substantial experience in applying the rules provided under the “plan asset” regulations, including the operation of venture capital operating companies and real estate operating companies. He has assisted in the formation of private equity, real estate, infrastructure and hedge funds, including “fund of funds.” Ira also has advised clients on both avoiding ERISA “plan asset” status and operating an investment fund in accordance with ERISA.

Areas of Concentration

Ira has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including:

  • investment of plan assets
  • implementation of employee benefit plans

  • employee benefit issues in mergers and acquisitions

  • awarding of equity-based compensation

  • negotiation and drafting of employment agreements and severance arrangements

  • structuring, analyzing and maintaining investment funds that are suitable for plan investors

Thought Leadership

Ira has published a number of articles in publications such as The New York Law Journal, The New Jersey Law Journal, The Daily Deal, The Journal of Pension Planning and Compliance, Mergers and Acquisitions (The Monthly Tax Journal), The Journal of Taxation and Regulation of Financial Institutions, The Metropolitan Corporate Counsel, European Private Equity & Venture Capital Associations, The LPA Anatomised and Private Equity International and has been named to the Board of Advisors of the Journal of Taxation and Regulation of Financial Institutions. He also has lectured on topics such as the classification of workers, drafting employment agreements, equity alternatives for senior executives, investing IRA assets, the plan asset regulations, shareholder approval of equity plans, Code Section 409A, and key provisions for ERISA investors investing in a private equity fund.

Recognition

Ira has been recognized and ranked by various directories. US Legal 500 has carried the following comments: “Ira Bogner is ‘available, responsive and knowledgeable;” “Ira Bogner ‘provides a level of comfort with respect to business issues that is rare in the world of ERISA;” “Ira Bogner is the ‘go-to guy for fund sponsors needing help with ERISA.’”

Photo of Seth Safra Seth Safra

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined…

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined benefit to cash balance and floor-offset arrangements, ESOPs and 401(k) plans—often coordinating qualified and non-qualified arrangements. He also advises tax-exempt and governmental employers on 403(b) and 457 arrangements, as well as innovative new plan designs; and he advises on ERISA compliance for investments.

On the health and welfare side, Seth helps employers provide benefits that are cost-effective and competitive. He advises on plan design, including consumer-driven health plans with HSAs, retiree medical, fringe benefits, and severance programs, ERISA preemption, and tax and other compliance issues, such as nondiscrimination and cafeteria plan rules.

Seth also advises for-profit and non-profit employers, compensation committees, and boards on executive employment, deferred compensation, change in control, and equity and other incentive arrangements. In addition, he advises on compensation and benefits in corporate transactions.

Seth represents clients before the Department of Labor, IRS and other government agencies.

Seth has been recognized by Chambers USA, The Legal 500, Best Lawyers, Law360, Human Resource Executive, Lawdragon and Super Lawyers.

Photo of Steven Weinstein Steven Weinstein

Steven D. Weinstein is a partner in the Employee Benefits & Executive Compensation Group and co-head of the Strategic Corporate Planning Group. He has been practicing in the employee benefits field since 1984, representing clients sponsoring single employer and Taft-Hartley pension and welfare…

Steven D. Weinstein is a partner in the Employee Benefits & Executive Compensation Group and co-head of the Strategic Corporate Planning Group. He has been practicing in the employee benefits field since 1984, representing clients sponsoring single employer and Taft-Hartley pension and welfare plans.

Steven advises clients in all aspects of pension plan tax qualification and plan administration, including drafting of plan documents and employee communications; providing advice relating to corporate acquisitions and mergers; and negotiating investment management agreements, trust agreements, recordkeeping and custodial contracts, and other plan-related contracts.

In the tax-qualified plan area, Steven assists clients concerning the rules relating to discrimination testing, participation, vesting, cash or deferred arrangements, plan limitations and plan distributions. He also counsels clients regarding voluntary correction programs offered by the Internal Revenue Service and Department of Labor.

In addition, he counsels a wide array of clients on issues relating to fiduciary responsibility in connection with the administration and operation of employee benefit programs, particularly with respect to advice relating to the investment of plan assets. The latter advice includes the rules governing investment diversification, determination of plan assets, foreign indicia of ownership, prohibited transactions, and exclusive benefit and prudence. He also advises employers in connection with the implementation of all phases of reduction-in-force programs, including the drafting of severance plans and related documents, as well as employee communications required to effect these programs.

Steven has wide-ranging experience with health and welfare plans, particularly regarding the new rules issued under the Affordable Care Act (ACA). As a member of Proskauer’s interdisciplinary Health Care Reform Task Force, he assists clients and other Firm lawyers in preparing for the numerous changes resulting from ACA.

His experience is extensive in advising Fortune 500 companies with respect to the structure of their benefit plans and how such plans may be affected by corporate transactions. He also regularly counsels plan fiduciary committees as to best procedural practices to reduce potential exposure to fiduciary breach claims. His clients are most frequently in the manufacturing, financial services and entertainment sectors.

Steven has significant experience in assisting clients with the implementation and ongoing operation of non-qualified retirement plans and other types of executive compensation, including issues relating to ERISA coverage, and Section 409A and Section 457A compliance. He also advises clients in connection with executive employment agreements and change-in-control or severance arrangements.

Photo of Adam Scoll Adam Scoll

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard…

Adam Scoll is a partner in the Firm’s Tax Department and Private Funds Group.

He specializes in the area of Title I of ERISA and the investment of ERISA “plan assets,” advising both pension trusts and their investment managers and advisers with regard to compliance with ERISA’s complex fiduciary duty and prohibited transaction rules.

Adam regularly advises private investment fund sponsors regarding the structuring of their funds in order to accept investments from ERISA-covered pension trusts, including compliance with the ERISA “plan asset” regulations and the operation of venture capital operating companies (VCOCs) and real estate operating companies (REOCs).