[Federal Register Volume 59, Number 145 (Friday, July 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18198]
[[Page Unknown]]
[Federal Register: July 29, 1994]
_______________________________________________________________________
Part IV
Department of Labor
_______________________________________________________________________
Pension and Welfare Benefits Administration
_______________________________________________________________________
29 CFR Part 2509
Interpretive Bulletins Relating to the Employee Retirement Income
Security Act of 1974; Final Rule
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2509
[Interpretive Bulletin 94-2]
Interpretive Bulletins Relating to the Employee Retirement Income
Security Act of 1974
AGENCY: Department of Labor.
ACTION: Interpretive Bulletin.
-----------------------------------------------------------------------
SUMMARY: This document summarizes the Department of Labor's (the
Department) statements with respect to the duty of employee benefit
plan fiduciaries to vote proxies appurtenant to shares of corporate
stock held by their plans. In these statements, the Department has
explained, among other things, that the voting of proxies is a
fiduciary act of plan asset management. This document also describes
the Department's view of the legal standards imposed by sections
402(c)(3), 403(a) and 404(a)(1)(B) of part 4 of title I of the Employee
Retirement Income Security Act of 1974 (ERISA) on the use of written
statements of investment policy, including statements of proxy voting
policy or guidelines. The bulletin makes clear that a named fiduciary
who appoints an investment manager may, consistent with its fiduciary
obligations, issue written statements of investment policy, including
guidelines as to the voting of proxies by the investment manager.
Moreover, an investment manager may be required to comply with such
investment policies to the extent that any given investment decision
(including a proxy voting decision) is consistent with the provisions
of title I or title IV of ERISA. Finally, this document provides
guidance concerning the appropriateness under ERISA of more active
monitoring of corporate management by fiduciaries of plans that own
corporate securities.
EFFECTIVE DATE: January 1, 1975.
FOR FURTHER INFORMATION CONTACT:
William W. Taylor, Plan Benefits Security Division, Office of the
Solicitor, U.S. Department of Labor, Rm N-4611, 200 Constitution Ave.,
N.W., Washington, D.C. 20210, (telephone (202) 219-9141) or Mark
Connor, Office of Regulations and Interpretations, Pension and Welfare
Benefits Administration, U.S. Department of Labor, Rm N-5669, 200
Constitution Ave., N.W., Washington, D.C. 20210, (telephone (202) 219-
8671). These are not toll-free numbers.
SUPPLEMENTARY INFORMATION: In order to provide a concise and ready
reference to its interpretations of ERISA, the Department publishes its
Interpretive Bulletins in the Rules and Regulations section of the
Federal Register.
Published in this issue of the Federal Register is ERISA
Interpretive Bulletin 94-2, which consolidates information contained in
previous statements issued by the Department on the duty of employee
benefit plan fiduciaries to vote proxies appurtenant to shares of
corporate stock held by their plans. This document also explains that
the maintenance of written statements of investment policy, including
guidelines on voting proxies on securities held in plan investment
portfolios is consistent with title I of ERISA and that compliance with
such a policy would be required under ERISA to the extent that such
compliance with respect to any given investment decision is consistent
with the provisions of title I or title IV of ERISA. Finally, this
document provides guidance concerning the appropriateness under ERISA
of more active monitoring of corporate management by fiduciaries of
plans that own corporate securities.
The Department is publishing this interpretive bulletin because it
believes there is a need to publish in the Federal Register guidance
that the Department has previously provided through letters regarding
responsibilities of named fiduciaries, trustees and investment managers
with respect to the voting of proxies. In addition, the Department
believes that there is a need to publish further guidance on the
maintenance of and compliance with written statements of investment
policy issued by named fiduciaries to trustees and investment managers,
and on the appropriateness of more active monitoring of corporate
management by plan fiduciaries.
(Sec. 505, Pub. L. 93-406, 88 Stat. 894 (29 U.S.C. 1135).)
Background
(1) Department Letters on Proxy Voting
The Department has issued two letters publicly addressing questions
that have arisen concerning the voting of proxies on shares of
corporate stock held by plans. In the first of these letters, addressed
to Helmuth Fandl, the Chairman of the Retirement Board of Avon
Products, Inc. and dated Feb. 23, 1988 (hereinafter referred to as the
``Avon letter''), the Department stated that the fiduciary act of
managing plan assets that are shares of corporate stock includes the
voting of proxies appurtenant to those shares of stock. As a result,
the Department stated, the responsibility for voting proxies lies
exclusively with the plan trustee unless either (1) the trustee is
subject to the directions of a named fiduciary pursuant to ERISA
Sec. 403(a)(1);\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).\2\ Where the
authority to manage plan assets has been delegated to an investment
manager pursuant to ERISA Sec. 403(a)(2), no person other than the
investment manager has authority to vote proxies appurtenant to such
plan assets, except to the extent the named fiduciary has reserved to
itself the right to direct a plan trustee regarding the voting of
proxies. Although not specifically mentioned in the Avon letter, it
follows that, in delegating investment management authority to an
investment manager, the named fiduciary may reserve the right to direct
a trustee regarding the voting of proxies relating to specified shares
of stock or issues. Moreover, in delegating investment management
authority to an investment manager, a named fiduciary may also reserve
to another named fiduciary the right to direct the trustee regarding
the voting of proxies, if the plan document provides for procedures for
allocating fiduciary responsibilities among named fiduciaries. ERISA
Sec. 405(c)(1).
---------------------------------------------------------------------------
\1\ERISA Sec. 403(a)(1) provides that if the plan expressly
provides that the trustee is subject to the direction of a named
fiduciary who is not a trustee, the trustee shall be subject to
proper directions which are made in accordance with the terms of the
plan and which are not contrary to ERISA.
\2\ERISA Sec. 403(a)(2) provides that if the authority to
manage, acquire or dispose of assets of the plan is delegated to one
or more investment managers pursuant to ERISA Sec. 402(c)(3), the
trustee shall not have exclusive authority with respect to such
assets. Coincident with the trustee's lack of exclusive authority,
ERISA Sec. 405(d) relieves the trustee of the obligation to manage
such assets and also limits the trustee's liability for acts and
omissions of such investment managers.
ERISA Sec. 402(c)(3) provides:
(c) Any employee benefit plan may provide--
* * *
(3) that a person who is a named fiduciary with respect to
control or management of the assets of the plan may appoint an
investment manager or managers to manage (including the power to
acquire and dispose of) any assets of a plan.
ERISA Sec. 3(38) defines ``investment manager'' as:
any fiduciary (other than a trustee or named fiduciary, as
defined in section 402(a)(2))--
(A) who has the power to manage, acquire, or dispose of any
asset of the plan;
(B) who is (i) registered as an investment adviser under the
Investment Advisers Act of 1940; (ii) is a bank, as defined in that
Act; or (iii) is an insurance company qualified to perform services
described in subparagraph (A) under the laws of more than one State;
and
(C) has acknowledged in writing that he is a fiduciary with
respect to the plan.
---------------------------------------------------------------------------
In the Avon letter, the Department indicated that an investment
manager would not be relieved of its fiduciary responsibility merely
because it follows directions of some other person as to the voting of
proxies, or delegates such responsibility to another person. The
Department also indicated that ERISA Sec. 404(a)(1)(B) requires the
named fiduciary appointing an investment manager to periodically
monitor the activities of the investment manager with respect to the
management of plan assets.\3\ These activities would include, according
to the Avon letter, decisions made and actions taken with regard to
proxy voting. The letter pointed out that compliance with this
requirement would in turn require proper documentation of the
activities that are subject to monitoring, including accurate records
as to the voting of proxies.
---------------------------------------------------------------------------
\3\A named fiduciary who appoints an investment manager in
accordance with ERISA Sec. 402(c)(3) may be liable for an act or
omission of the investment manager to the extent that the named
fiduciary violated ERISA Sec. 404(a)(1) in continuing the
appointment. See 29 C.F.R. Sec. 2509.75-8 (FR-17); Brock v. Berman,
673 F. Supp. 634, 637 (D. Mass. 1987).
---------------------------------------------------------------------------
In a subsequent letter, addressed to Robert A.G. Monks of
Institutional Shareholder Services, Inc. and dated January 23, 1990
(hereinafter referred to as the ``ISSI letter''), the Department stated
that an ERISA violation would occur if the investment manager is
explicitly or implicitly assigned the authority to vote proxies
appurtenant to certain plan-owned stock and the named fiduciary,
trustee or any person other than the investment manager makes the
decision on how to vote the same proxies. Thus, according to the
letter, if the investment management contract expressly provides that
the investment manager is not required to vote proxies, but does not
expressly preclude the investment manager from voting the relevant
proxies, the investment manager would nevertheless have the exclusive
fiduciary responsibility for voting the proxies. In contrast, the
letter points out, if either the plan document or the investment
management contract expressly precludes the investment manager from
voting proxies, the responsibility for voting proxies lies exclusively
with the trustee. Consistent with the requirements of ERISA
Sec. 403(a)(1), the trustee may, however, be subject to the directions
of a named fiduciary if the plan so provides.
In the ISSI letter, the Department also stated that the fiduciary
who has the authority to vote proxies has an obligation under ERISA to
take reasonable steps under the circumstances to ensure that the
proxies for which it is responsible are received. With respect to the
named fiduciary's duty to monitor the proxy voting activities of an
investment manager, the Department stated that the named fiduciary must
be able to review not only the investment manager's proxy voting
procedure, but also the actions taken in individual situations. Without
such information, the named fiduciary would not be able to determine if
the investment manager had fulfilled its fiduciary obligations in a
manner that justified continuation of the appointment.
Although the Avon and ISSI letters were almost entirely concerned
with procedural issues, the Department also reiterated its longstanding
interpretation of ERISA Sec. 404(a)(1) that fiduciaries must act
prudently and must not subordinate the interests of the participants
and beneficiaries to unrelated objectives. In the context of proxy
voting, the Department in the Avon letter noted that prudence requires
that the fiduciary consider those factors that may affect the value of
the plan's investment. Regarding the named fiduciary's obligation to
monitor the activities of investment managers, the Department in the
ISSI letter stated that the named fiduciary must act solely in the
interest of the participants and beneficiaries and without regard to
its relationship to the plan sponsor.
The statements in the document published today are intended to
reiterate and supplement, rather than supersede, the contents of the
Avon and ISSI letters.
The Avon and ISSI letters did not specifically address the voting
of proxies on shares of foreign corporations, but it is the
Department's view that the same principles apply. Namely, plan
fiduciaries have a responsibility to vote proxies on issues that may
affect the value of the shares in the plan's portfolio. There may,
however, be additional costs to the plan in voting shares of foreign
corporations, due to the variety of regulatory schemes and corporate
practices in foreign countries with respect to proxy voting. The
Department recognizes that the cost of exercising a vote on a
particular proxy proposal could exceed any benefit that the plan could
expect to gain in voting on the proposal. In this regard, the
Department interprets ERISA Sec. 404(a)(1) to require the responsible
plan fiduciary to weigh the costs and benefits of voting on proxy
proposals relating to foreign securities and make an informed decision
with respect to whether voting a given proxy proposal is prudent and
solely in the interest of the plan's participants and beneficiaries.
The fiduciary's decision should take into account the effect that the
plan's vote, either by itself or together with other votes, is expected
to have on the value of the plan's investment and whether this expected
effect would outweigh the cost of voting. Moreover, a fiduciary, in
deciding whether to purchase shares of a foreign corporation, should
consider, among other things, whether the difficulty and expense of
voting its shares is reflected in their market price.
(2) Written Statements of Investment Policy
A second purpose of this interpretive bulletin is to explain how
positions taken by the Department in the Avon and ISSI letters apply to
the use of written statements of investment policy, including
statements of proxy voting 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 as discussed in this
document would not encompass specific directions concerning the
purchase or sale of a specific investment at a stated time or the
voting of a specific proxy.
It is the Department's position that a named fiduciary's authority
to issue statements of investment policy to investment managers is
inherent in the named fiduciary's authority under the terms of the
plan, pursuant to ERISA Sec. 402(c)(3), to appoint investment managers.
The Department believes that statements of investment policy issued by
a named fiduciary are part of the ``documents and instruments governing
the plan'' within the meaning of ERISA Sec. 404(a)(1)(D). Thus, an
investment manager to whom an investment policy applies would be
required to comply with such policy to the extent permitted by ERISA
Sec. 404(a)(1)(D). See Dardaganis v. Grace Capital, Inc., 664 F. Supp.
105, 108 (S.D.N.Y. 1987) (Noncompliance with investment guidelines by
investment manager held to violate ERISA Sec. 404(a)(1)(D)); Marshall
v. Teamsters Local 282 Pension Trust Fund, 458 F. Supp. 986, 990-991
(E.D.N.Y. 1978) (Investment made in excess of trust percentage
restrictions held to violate ERISA Sec. 404(a)(1)(D)). Pursuant to this
section, a fiduciary must discharge his or her duties with respect to
the plan in accordance with the documents and instruments governing the
plan insofar as such documents and instruments are consistent with the
provisions of title I and title IV of ERISA.
It is the Department's view that statements of investment policy
should, in general, be distinguished from directions made by a named
fiduciary to a trustee pursuant to ERISA Sec. 403(a)(1). As used in
this interpretive bulletin, a statement of investment policy provides
general instructions or guidelines to be applied in all applicable
situations, such as identification of acceptable classes or types of
investments, limitations on investment categories as a percentage of
the plan's portfolio, or generally applicable guidelines regarding
voting positions in proxy contests (for example, criteria regarding the
support of or opposition to recurring issues, such as proposals to
create classified boards of directors or to provide for cumulative
voting for board members), rather than specific instructions as to the
purchase or sale of a specific investment at a specific time or
specific instructions to vote specific plan proxies a certain way.
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. Thus, in cases where the named fiduciary issues a statement
of investment policy to the plan trustee, the trustee's obligation to
follow the investment policy would also be analyzed under ERISA
Sec. 404(a)(1)(D). Although, in the absence of proper directions under
ERISA Sec. 403(a)(1) or of an investment manager appointed pursuant to
ERISA Sec. 402(c)(3), the trustee or trustees of a plan have exclusive
authority and discretion to manage and control plan assets, the
trustees, like other fiduciaries, are also required to comply with the
governing instruments of the plan insofar as such documents are
consistent with titles I and IV of ERISA. Accordingly, a trustee to
whom a statement of investment policy applies would be required to
comply with such policy unless, for example, it would be imprudent to
do so in a given instance.
Maintenance of statements of investment policy is not specifically
required under ERISA. The Department, however, believes that such
statements serve a legitimate purpose in many plans by helping to
assure that investments are made in a rational manner and are designed
to further the purposes of the plan and its funding policy.\4\ A
statement of investment policy that includes a statement of proxy
voting policy may increase the likelihood that proxy voting decisions
are consistent with other aspects of the investment policy. Moreover,
in plans with multiple investment managers, a written proxy voting
policy may also prevent (where such prevention is desirable) the
managers from taking conflicting positions on a given voting decision.
One purpose of this interpretive bulletin is to clarify that
maintenance of a statement of investment policy, including a statement
of proxy voting policy, is consistent with the fiduciary duty of
prudence under ERISA Sec. 404(a)(1)(B).\5\ 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.
---------------------------------------------------------------------------
\4\ERISA Sec. 402(b)(1) requires every plan to ``provide a
procedure for establishing and carrying out a funding policy and
method consistent with the objectives of the plan and the
requirements of [title I].'' The ERISA Conference Report indicates
that the purpose of this requirement is to--
enable the plan fiduciaries to determine the plan's short- and
long-run financial needs and communicate these requirements to the
appropriate persons. For example, with a retirement plan it is
expected that under this procedure the persons who manage the plan
will determine whether the plan has a short-run need for liquidity,
(e.g., to pay benefits) or whether liquidity is a long-run goal and
investment growth is a more current need. This in turn is to be
communicated to the persons responsible for investments so that
investment policy can be appropriately coordinated with plan needs.
H.R. Rep. No. 93-1280, 93rd Cong., 2nd Sess. at 297 (1974).
\5\ERISA Sec. 404(a)(1)(B) provides that a plan fiduciary shall
discharge his or her duties ``with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent man
acting in a like capacity and familiar with such matters would use
in the conduct of an enterprise of a like character and with like
aims.''
---------------------------------------------------------------------------
Another issue that has arisen with respect to statements of
investment policy, including statements of proxy voting policy,
concerns investment managers of pooled investment accounts holding the
assets of more than one employee benefit plan. Such managers may be
subject, for example, to a proxy voting policy from one plan that
conflicts with the policy from another plan. It is the Department's
view that investment managers of pooled accounts who are required to
comply with multiple investment policies, including proxy voting
policies, must to the extent possible, comply with each policy
(assuming compliance with each policy would be consistent with ERISA
Sec. 404(a)(1)(D)). If investment policies conflict, it may be
necessary to vote proxies to reflect each policy in proportion to the
respective plan's interest in the pooled account, unless in the
particular situation voting in such a manner would be imprudent or
otherwise inconsistent with applicable law. Nothing in ERISA, however,
prevents such an investment manager from maintaining a single
investment policy, including a proxy voting policy, and requiring all
participating investors to give their asset to such policy as a
condition of investing in the pooled account. As with policies
originated by named fiduciaries, a statement of investment policy
issued by an investment manager and adopted by the participating plans
would be regarded as an instrument governing the participating plans,
and compliance with such a policy would be governed by ERISA
Sec. 404(a)(1)(D).
(3) Shareholder Activism
The Department believes that, where proxy voting decisions may have
an effect on the value of the plan's underlying investment, plan
fiduciaries should make proxy voting decisions with a view to enhancing
the value of the shares of stock, taking into account the period over
which the plan expects to hold such shares. Similarly, in certain
situations it may be appropriate for a fiduciary to engage in
activities intended to monitor or influence corporate management if the
fiduciary expects that such activities are likely to enhance the value
of the plan's investment.
Although, within the corporate structure, the primary
responsibility to oversee corporate management falls on the
corporation's board of directors, the Department believes that active
monitoring and communication with corporate management is consistent
with a fiduciary's obligations under ERISA where the responsible
fiduciary concludes that there is a reasonable expectation that such
activities by the plan alone, or together with other shareholders, are
likely to enhance the value of the plan's investment, 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.\6\
---------------------------------------------------------------------------
\6\In this regard, the Department believes that this standard
would not be different for portfolios designed to match the
performance of market indexes (sometimes referred to as ``index
funds''). In such funds, the investments are often held on a long-
term basis and the prudent exercise of proxy voting rights or other
forms of corporate monitoring or communication may be the only
method available for attempting to enhance the value of the
portfolio.
---------------------------------------------------------------------------
Active monitoring and communication activities may concern a
variety of issues, such as the independence and expertise of candidates
for the corporation's board of directors or assuring that the board has
sufficient information to carry out its responsibility to monitor
management. Other issues might include 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. 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.
Given the absence of guidance published by the Department on
statements of investment policy in general and on proxy voting
guidelines in particular, the Department has determined that
publication of this document would be beneficial to practitioners in
the field of employee benefit plan investments.
List of Subjects in 29 CFR Part 2509
Employee benefit plans, Pensions.
For the reasons set forth in the preamble, Part 2509 of Title 29 of
the Code of Federal Regulations is amended as follows:
PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974
1. The authority citation for Part 2509 continues to read as
follows:
Authority: 29 U.S.C. 1135. Section 2509.75-1 is also issued
under 29 U.S.C. 1114. Sections 2509.75-10 and 2509.75-2 are also
issued under 29 U.S.C. 1052, 1053, 1054. Secretary of Labor's Order
No. 1-87 (52 FR 13139).
2. Part 2509 is amended by adding a new Sec. 2509.94-2 to read as
follows:
Sec. 2509.94-2 Interpretive Bulletin relating to written statements of
investment policy, including proxy voting policy 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.
(1) Proxy Voting
The fiduciary act of managing plan assets that are shares of
corporate stock includes the voting of proxies appurtenant to those
shares of stock. As a result, the responsibility for voting proxies
lies exclusively with the plan trustee except to the extent that
either (1) the trustee is subject to the directions 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 vote
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.
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 voting proxies. 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, the responsible fiduciary
consider those factors that may affect the value of the plan's
investment and not subordinate the interests of the participants and
beneficiaries in their retirement income to unrelated objectives.
These duties 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 interest of the
participants and beneficiaries and without regard to its
relationship to the plan sponsor.
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. 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.
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 value of the plan's
investment. Although the same principles apply for proxies
appurtenant to shares of foreign corporations, the Department
recognizes that in voting such proxies, plans may, in some cases,
incur additional costs. Thus, a fiduciary should consider whether
the plan's vote, either by itself or together with the votes of
other shareholders, is expected to have an effect on the value of
the plan's investment that will outweigh the cost of voting.
Moreover, a fiduciary, in deciding whether to purchase shares of a
foreign corporation, should consider whether the difficulty and
expense in voting the 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 Sec. 404(a)(1) (A) and (B). Since the fiduciary act
of managing plan assets that are shares of corporate stock includes
the voting 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 which sets
forth guidelines concerning investments and investment courses of
action which 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. 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 directions 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 directions 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. Compliance with ERISA Sec. 404(a)(1)(D)
would require such investment manager to reconcile, insofar as
possible, the conflicting policies (assuming compliance with each
policy would be consistent with ERISA Sec. 404(a)(1)(D)) and, if
necessary and to the extent permitted by applicable law, vote the
relevant proxies to reflect such policies in proportion to each
plan's interest in the pooled investment vehicle. If, however, the
investment manager determines that compliance with conflicting
voting policies would violate ERISA Sec. 404(a)(1)(D) in a
particular instance, for example, by being imprudent or not solely
in the interest of plan participants, the investment manager would
be required to ignore the voting policy that would violate ERISA
Sec. 404(a)(1)(D) in that instance. Such an investment manager may,
however, require participating investors to accept the investment
manager's own investment policy statement, including any statement
of proxy voting policy, before they are allowed to invest. 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,
is likely to enhance the 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.
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.
Signed at Washington, DC, this 21st day of July, 1994.
E. Olena Berg,
Assistant Secretary for Pension and Welfare Benefits, U.S. Department
of Labor.
[FR Doc. 94-18198 Filed 7-28-94; 8:45 am]
BILLING CODE 4510-29-M