[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]


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Part IV





Department of Labor





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Pension and Welfare Benefits Administration



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29 CFR Part 2509




Interpretive Bulletins Relating to the Employee Retirement Income 
Security Act of 1974; Final Rule
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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.

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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).
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    \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.
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    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.
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    \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).
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    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.
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    \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.''
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    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\
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    \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.
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    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