[Federal Register Volume 85, Number 242 (Wednesday, December 16, 2020)]
[Rules and Regulations]
[Pages 81658-81695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27465]



[[Page 81657]]

Vol. 85

Wednesday,

No. 242

December 16, 2020

Part IV





Department of Labor





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Employee Benefits Security Administration





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29 CFR Parts 2509 and 2550





Fiduciary Duties Regarding Proxy Voting and Shareholder Rights; Final 
Rule

  Federal Register / Vol. 85 , No. 242 / Wednesday, December 16, 2020 / 
Rules and Regulations  

[[Page 81658]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Parts 2509 and 2550

RIN 1210-AB91


Fiduciary Duties Regarding Proxy Voting and Shareholder Rights

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Final rule.

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SUMMARY: The Department of Labor (Department) is amending the 
``Investment Duties'' regulation to address the application of the 
prudence and exclusive purpose duties under the Employee Retirement 
Income Security Act of 1974 (ERISA) to the exercise of shareholder 
rights, including proxy voting, the use of written proxy voting 
policies and guidelines, and the selection and monitoring of proxy 
advisory firms. This document also removes Interpretive Bulletin 2016-
01 from the Code of Federal Regulations as it no longer represents the 
view of the Department regarding the proper interpretation of ERISA 
with respect to the exercise of shareholder rights by fiduciaries of 
ERISA-covered plans.

DATES: Effective Date: The final rule is effective on January 15, 2021.
    Applicability Dates: See Section B.3(vi) of this document and Sec.  
2550.404a-1(g) of the final rule for compliance dates for Sec.  
2550.404a-1(e)(2)(ii)(D) and (E), (e)(2)(iv), (e)(4)(ii) of the final 
rule.

FOR FURTHER INFORMATION CONTACT: Jason A. DeWitt, Office of Regulations 
and Interpretations, Employee Benefits Security Administration, (202) 
693-8500. This is not a toll-free number.
    Customer Service Information: Individuals interested in obtaining 
information from the Department of Labor concerning ERISA and employee 
benefit plans may call the Employee Benefits Security Administration 
(EBSA) Toll-Free Hotline, at 1-866-444-EBSA (3272) or visit the 
Department of Labor's website (www.dol.gov/agencies/ebsa).

SUPPLEMENTARY INFORMATION:

A. Background and Purpose of Regulatory Action

    Title I of the Employee Retirement Income Security Act of 1974 
(ERISA) establishes minimum standards for the operation of private-
sector employee benefit plans and includes fiduciary responsibility 
rules governing the conduct of plan fiduciaries.\1\ In connection with 
proxy voting, the Department's longstanding position is that the 
fiduciary act of managing plan assets includes the management of voting 
rights (as well as other shareholder rights) appurtenant to shares of 
stock. In carrying out these duties, ERISA mandates that fiduciaries 
act ``prudently'' and ``solely in the interest'' and ``for the 
exclusive purpose'' of providing benefits to participants and their 
beneficiaries.\2\
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    \1\ Throughout this preamble, the Department's discussion of 
plan fiduciaries includes named fiduciaries under the plan, along 
with any persons that named fiduciaries have designated to carry out 
fiduciary responsibilities as permitted under ERISA section 
405(c)(1). Similarly, references to proxy voting also encompass 
situations in which a fiduciary directly casts a vote in a matter 
(e.g., voting in person at a shareholder meeting) rather than by 
proxy.
    \2\ ERISA section 404(a)(1). See also ERISA section 403(c)(1) 
(``[T]he assets of a plan shall never inure to the benefit of any 
employer and shall be held for the exclusive purposes of providing 
benefits to participants in the plan and their beneficiaries'').
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    This regulatory project was undertaken, in part, to confirm that, 
when exercising shareholder rights, ERISA plan fiduciaries may not 
subordinate the interests of plan participants and beneficiaries in 
receiving financial benefits under a plan to non-pecuniary 
objectives.\3\ This duty of loyalty--a bedrock principle of ERISA, with 
deep roots in the common law of trusts--requires those serving as 
fiduciaries to act with a single-minded focus on the interests of 
beneficiaries. The duty of prudence prevents a fiduciary from choosing 
an investment alternative that is financially less beneficial than 
reasonably available alternatives. The Supreme Court has described the 
duty of loyalty as requiring that fiduciaries act with an ``eye 
single'' to the interests of participants and beneficiaries,\4\ and 
appellate courts have described ERISA's fiduciary duties as ``the 
highest known to the law.'' \5\ The subject of this rulemaking is how 
these ERISA fiduciary duties apply to the exercise of shareholder 
rights by ERISA-covered plans, as a result of the Department's belief 
that confusion exists among some fiduciaries and other stakeholders 
with respect to the exercise of shareholder rights, perhaps due in part 
to varied statements the Department has made on the consideration of 
non-pecuniary or non-financial factors over the years in sub-regulatory 
guidance on these activities.
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    \3\ Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 
(2014) (the ``benefits'' to be pursued by ERISA fiduciaries as their 
``exclusive purpose'' does not include ``nonpecuniary benefits'') 
(emphasis in original).
    \4\ Pegram v. Herdrich, 530 U.S. 211, 235 (2000) (quoting 
Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982)).
    \5\ See, e.g., Tibble v. Edison Int'l, 843 F.3d 1187, 1197 (9th 
Cir. 2016).
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    The Department began interpreting the duties of prudence and 
loyalty and issuing sub-regulatory guidance in the area of proxy voting 
and the exercise of shareholder rights in the 1980s. The Department 
issued an opinion letter to Avon Products, Inc. in 1988 (the Avon 
Letter), in which the Department took the position that, while the 
fiduciary act of managing plan assets that are shares of corporate 
stock includes the voting of proxies appurtenant to those shares, the 
named fiduciary of a plan has a duty to monitor decisions made and 
actions taken by investment managers with regard to proxy voting.\6\
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    \6\ Letter to Helmuth Fandl, Chairman of the Retirement Board, 
Avon Products, Inc. 1988 WL 897696 (Feb. 23, 1988). Only a few 
commenters on the proposal mentioned the Avon Letter, either 
supporting the views taken in the letter as being consistent with 
other professional codes of ethics or asserting that the proposed 
rule reversed the intent of the Avon Letter by establishing a 
presumption that voting proxies is a cost to be minimized and not an 
asset to be prudently managed.
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    Subsequent to the Avon Letter, the Department issued additional 
guidance concerning fiduciary duties in the context of exercising 
shareholder rights. In 1994, the Department issued its first 
interpretive bulletin on proxy voting, Interpretive Bulletin 94-2 (IB 
94-2).\7\ IB 94-2 recognized that fiduciaries may engage in shareholder 
activities intended to monitor or influence corporate management in 
situations where the responsible fiduciary concludes that, after taking 
into account the costs involved, there is a reasonable expectation that 
such shareholder activities (by the plan alone or together with other 
shareholders) will enhance the value of the plan's investment in the 
corporation. The Department expected that increased shareholder 
engagement by pension funds--encouraged by the new interpretive 
bulletin--would improve corporate performance and help ensure companies 
treated their employees well.\8\ However, the Department also 
reiterated its view that ERISA does not permit fiduciaries, in voting 
proxies or exercising other shareholder rights, to subordinate the

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economic interests of participants and beneficiaries to unrelated 
objectives.
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    \7\ 59 FR 38860 (July 29, 1994).
    \8\ See 1994 DOL Press Conference, at 2-4, 10, 15-16; see also 
Leslie Wayne, U.S. Prodding Companies to Activism on Portfolios, 
N.Y. Times (July 29, 1994), www.nytimes.com/1994/07/29/business/us-prodding-companies-to-activism-on-portfolios.html (quoting official 
stating that the Department is ``trying to encourage corporations to 
be activist owners,'' and that ``such activism is consistent with 
your fiduciary duty and we expect it will improve your corporate 
performance'').
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    In October 2008, the Department replaced IB 94-2 with Interpretive 
Bulletin 2008-02 (IB 2008-02).\9\ The Department's intent was to update 
the guidance in IB 94-2 and to reflect interpretive positions issued by 
the Department after 1994 on shareholder engagement and socially-
directed proxy voting initiatives. IB 2008-02 stated that fiduciaries' 
responsibility for managing proxies includes both deciding to vote or 
not to vote.\10\ IB 2008-02 further stated that the fiduciary duties 
described at ERISA sections 404(a)(1)(A) and (B) require that in voting 
proxies the responsible fiduciary shall consider only those factors 
that relate to the economic value of the plan's investment and shall 
not subordinate the interests of the participants and beneficiaries in 
their retirement income to unrelated objectives. In addition, IB 2008-
02 stated that votes shall only be cast in accordance with a plan's 
economic interests. IB 2008-02 explained that if the responsible 
fiduciary reasonably determines that the cost of voting (including the 
cost of research, if necessary, to determine how to vote) is likely to 
exceed the expected economic benefits of voting, the fiduciary has an 
obligation to refrain from voting.\11\ The Department also reiterated 
in IB 2008-02 that any use of plan assets by a plan fiduciary to 
further political or social causes ``that have no connection to 
enhancing the economic value of the plan's investment'' through proxy 
voting or shareholder activism is a violation of ERISA's exclusive 
purpose and prudence requirements.\12\
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    \9\ 73 FR 61731 (Oct. 17, 2008).
    \10\ Id. at 61732.
    \11\ Id.
    \12\ Id. at 61734.
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    In 2016, the Department issued Interpretive Bulletin 2016-01 (IB 
2016-01), which reinstated the language of IB 94-2 with certain 
modifications.\13\ IB 2016-01 reiterated and confirmed that ``in voting 
proxies, the responsible fiduciary [must] 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.'' \14\ In further interpreting ERISA's 
duties, the Department has stated that it has rejected a construction 
of ERISA that would render the statute's tight limits on the use of 
plan assets illusory and that would permit plan fiduciaries to expend 
trust assets to promote myriad public policy preferences, including 
through shareholder engagement activities, voting proxies, or other 
investment policies.\15\
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    \13\ 81 FR 95879 (Dec. 29, 2016). In addition, the Department 
issued a Field Assistance Bulletin to provide guidance on IB 2016-01 
on April 23, 2018. See FAB 2018-01, at www.dol.gov/sites/dolgov/files/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-01.pdf.
    \14\ Id. at 95882.
    \15\ See id. at 95881.
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    On September 4, 2020, the Department published in the Federal 
Register a proposed rule to amend the ``Investment Duties'' regulation 
at 29 CFR 2550.404a-1 (Investment Duties regulation) to address the 
prudence and loyalty duties under sections 404(a)(1)(A) and 
404(a)(1)(B) of ERISA in the context of proxy voting and other 
exercises of shareholder rights by the responsible ERISA plan 
fiduciaries, the use of written proxy voting policies and guidelines, 
and the selection and monitoring of proxy advisory firms.\16\ The 
Department explained its belief that addressing the application of 
ERISA fiduciary obligations with respect to exercise of shareholder 
rights, including proxy voting, through notice-and-comment regulatory 
action under the Administrative Procedure Act was appropriate and would 
benefit ERISA plan fiduciaries and plan participants.
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    \16\ 85 FR 55219 (Sept. 4, 2020).
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    This regulatory project also was initiated to respond to a number 
of other issues. The Department was concerned, for example, that the 
Avon Letter and subsequent sub-regulatory guidance from the Department 
has resulted in a misplaced belief among some stakeholders that 
fiduciaries must always and in every case vote proxies, subject to 
limited exceptions, in order to fulfill their obligations under 
ERISA.\17\ Further, the Department was responding to significant 
changes in the way ERISA plans invest and changes in the investment 
world more broadly since the Department first issued guidance on these 
topics in 1988. Widespread shareholder activism and corporate takeovers 
at that time created an intense focus on shareholder voting by ERISA 
plans and confusion as to how fiduciary standards applied to such 
voting.
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    \17\ See, e.g., Barbara Novick, Revised and Extended Remarks at 
Harvard Roundtable on Corporate Governance Keynote Address ``The 
Goldilocks Dilemma'' (Nov. 6, 2019), www.blackrock.com/corporate/literature/publication/barbara-novick-remarks-harvard-roundtable-corporate-governance-the-goldilocks-dilemma-110619.pdf, at 15 (Avon 
Letter indicated ``that asset managers should generally vote shares 
as part of their fiduciary duty''); see Former SEC Commissioner 
Daniel M. Gallagher, Outsized Power & Influence: The Role of Proxy 
Advisers, Washington Legal Foundation (Aug. 2014), https://s3.us-east-2.amazonaws.com/washlegal-uploads/upload/legalstudies/workingpaper/GallagherWP8-14.pdf, at 3; Business Roundtable Comment 
Letter on SEC Proposed Amendments to Rule 14a-8 (Feb. 3, 2020), 
www.sec.gov/comments/s7-22-19/s72219-6742505-207780.pdf, at 2-3 
(``many institutional investors historically interpreted SEC and 
Department of Labor rules and guidance as requiring institutional 
investors to vote every share on every matter on a proxy'') (citing 
Gallagher); Manifest Information Services Ltd, Response to ESMA 
Discussion Paper `An Overview of the Proxy Advisory Industry: 
Considerations on Possible Policy Options' (June 2012), 
www.osc.gov.on.ca/documents/en/Securities-Category2-Comments/com_20120622_25-401_wilsons.pdf, at 37 (comment letter from European 
proxy voting agency describing DOL proxy guidance as concerning 
``duties of . . . fiduciaries . . . to vote the shares in companies 
held by their pension plans''); Charles M. Nathan, The Future of 
Institutional Share Voting: Three Paradigms (July 23, 2010), https://corpgov.law.harvard.edu/2010/07/23/the-future-of-institutional-share-voting-three-paradigms/ (``the current system for voting 
portfolio securities by application of uniform voting policies . . . 
is perceived as successfully addressing the commonly understood 
fiduciary duty of institutional investors to vote all of their 
portfolio securities on all matters''). See also U.S. Department of 
Labor, Transcript of Press Conference on Corporate Activist Role in 
Pension Planning (July 28, 1994), at 15-16 (then-Secretary Robert 
Reich stating that IB 94-2 ``makes very clear that . . . pension 
fund managers, trustees, [and] fiduciaries have an obligation to 
vote proxies'' unless the costs ``substantially outweigh'' the 
benefits) (1994 DOL Press Conference).
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    The Department described in the proposal a variety of changes in 
proxy voting policies and behavior, including an increase in the 
percentage of individual securities held by, and plan assets managed 
by, institutional investors, diminishing the scope of proxy voting 
rights and obligations attributable to individual securities held by 
ERISA plans.\18\ At the same time, since the 1980s, the type of 
investments held by ERISA plans has changed, for example through the 
development and growth of exchange-traded funds, sector-based equity 
products, hedge funds, and passive investments. The proportion of ERISA 
plan assets held in alternative investments like hedge, private equity, 
and venture capital funds has grown significantly.\19\ When issuing the 
proposed rule, the Department cited evidence that investors continue to 
add to the set of factors considered in their review and analysis of 
corporate practices.\20\
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    \18\ 85 FR 55219 at 55221-22 (Sept. 4, 2020).
    \19\ See id., at 55222.
    \20\ Kosmas Papadopoulos, The Long View: US Proxy Voting Trends 
on E&S Issues from 2000 to 2018, Harvard Law School Forum on 
Corporate Governance (Jan. 31, 2019), https://corpgov.law.harvard.edu/2019/01/31/the-long-view-us-proxy-voting-trends-on-es-issues-from-2000-to-2018, (2019 ISS Proxy Voting 
Trends).
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    The Department also took note of the issues and concerns identified 
during the U.S. Securities and Exchange Commission's (SEC's) ongoing 
proxy reform initiative.\21\ Pursuant to the 2019

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SEC Guidance, where an investment adviser has the authority to vote on 
behalf of its client, the investment adviser, among other things, must 
have a reasonable understanding of the client's objectives and must 
make voting determinations that are in the best interest of the client. 
Under this guidance, for an investment adviser to form a reasonable 
belief that its voting determinations are in the best interest of the 
client, the investment adviser should conduct an investigation 
reasonably designed to ensure that the voting determination is not 
based on materially inaccurate or incomplete information. The 2019 SEC 
Guidance also provides that investment advisers that retain proxy 
advisory firms to provide voting recommendations or voting execution 
services should consider additional steps to evaluate whether the 
voting determinations are consistent with the investment adviser's 
voting policies and procedures, and in the client's best interest 
before the votes are cast. The 2019 SEC Guidance provides that 
investment advisers should consider whether the proxy advisory firm has 
the capacity and competency to adequately analyze the matters for which 
the investment adviser is responsible for voting. The 2019 SEC Guidance 
also explains that an investment adviser's decision regarding whether 
to retain a proxy advisory firm should also include a reasonable review 
of the proxy advisory firm's policies and procedures regarding how it 
identifies and addresses conflicts of interest. Further, as part of the 
investment adviser's ongoing compliance program, the investment adviser 
must, no less frequently than annually, review and document the 
adequacy of its voting policies and procedures.
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    \21\ See, e.g., Commission Guidance Regarding Proxy Voting 
Responsibilities of Investment Advisers, 84 FR 47420 (Sept. 10, 
2019) (2019 SEC Guidance).
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    The SEC also adopted regulatory amendments that, among other 
things, require proxy advisory firms that are engaged in a solicitation 
to provide specified disclosures, adopt written policies and procedures 
reasonably designed to ensure that proxy voting advice is made 
available to securities issuers, and provide proxy advisory firm 
clients with a mechanism by which the clients can reasonably be 
expected to become aware of a securities issuer's views about the proxy 
voting advice, so that the clients can take such views into account as 
they vote proxies.\22\ The SEC issued supplemental guidance to assist 
investment advisers in assessing how to consider the additional 
information that may become more readily available to them as a result 
of these amendments, including in circumstances when the investment 
adviser uses a proxy advisory firm's electronic vote management system 
that ``pre-populates'' the adviser's proxies with suggested voting 
recommendations and/or for voting execution services.\23\
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    \22\ See Exemptions from the Proxy Rules for Proxy Voting 
Advice, 85 FR 55082 (Sept. 3, 2020) (2020 SEC Proxy Voting Advice 
Amendments).
    \23\ See Supplement to Commission Guidance Regarding Proxy 
Voting Responsibilities of Investment Advisers, 85 FR 55155 (Sept. 
3, 2020) (2020 SEC Supplemental Guidance).
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    The proposal on proxy voting and shareholder rights provided the 
Department with a vehicle to coordinate many of the fiduciary concepts 
concerning investing according to the pecuniary interests of plans with 
the rules governing the use of plan resources on proxy voting and the 
exercise of other shareholder rights.\24\ A more detailed discussion of 
the basis for the rulemaking and the evidence supporting the proposal 
can be found in the preamble to the Department's proposal.\25\ As 
discussed throughout this preamble, the final rule reflects significant 
modifications to the proposal based on the public record and 
commenters' feedback. The Department continues to believe that 
enhancing the effectiveness and efficiency of the proxy voting process 
for ERISA plans is an important goal. This process will be improved to 
the extent ERISA plan fiduciaries better understand how to make 
informed decisions when executing shareholder rights in compliance with 
ERISA's obligations of prudence and loyalty--specifically that the 
execution of such rights must be conducted in a manner to ensure that 
plan resources are not inappropriately allocated. The Department also 
believes that this rule is necessary to modernize standards for ERISA 
plan fiduciaries in this context, for example to recognize that proxy 
voting advice businesses, such as proxy advisory firms, now play a more 
significant role in the proxy voting process. It is not the 
Department's intention to judge the value of any specific proposal to 
be voted upon, for example, or to take a position on the merits of any 
particular topic. Rather, the Department intends only to address the 
standards according to which plan fiduciaries must make such judgments, 
a goal that the Department believes is more appropriately advanced in 
light of revisions made in the final rule.
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    \24\ 85 FR at 55219.
    \25\ Id., beginning at 55221 and in the proposed regulatory 
impact analysis beginning at 55227.
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    The Department invited interested persons to submit comments on the 
proposed rule, and in response received approximately 300 written 
comments from a variety of parties, including plan sponsors and 
fiduciaries, plan service and investment providers (including 
investment managers and proxy voting firms), and employee benefit plan 
and participant representatives. The Department also received 
approximately 6,700 submissions in response to petitions. The comments 
are available for review on the ``Public Comments'' page under the 
``Laws and Regulations'' tab of the Department's Employee Benefits 
Security Administration website.\26\
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    \26\ See www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments.
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B. Final Rule

    After evaluating the full range of public comments and extensive 
record developed on the proposal, the final rule as described below 
amends the Investment Duties regulation to address the prudence and 
loyalty duties under sections 404(a)(1)(A) and 404(a)(1)(B) of ERISA in 
the context of proxy voting and other exercises of shareholder rights 
by responsible ERISA plan fiduciaries. The Department anticipates that 
actions taken by the SEC as part of its proxy reform initiative may 
result in changes in practices among investment advisers and proxy 
advisory firms that will help address some of the Department's concerns 
about ERISA fiduciaries properly discharging their duties with respect 
to proxy voting activities and appropriately selecting and overseeing 
proxy advisory firms. However, the Department continues to believe that 
notice-and-comment rulemaking in this area is appropriate, in part 
because the Department's existing sub-regulatory guidance may have 
created a perception that ERISA fiduciaries must vote proxies on every 
proposal. In the Department's view, a regulation in this area will 
address the misunderstanding that exists on the part of some 
stakeholders that ERISA fiduciaries are required to vote all proxies 
and, to the extent that proxies are voted, direct fiduciaries to act in 
a manner consistent with the economic interests of plans and plan 
participants that does not subordinate their interests to any non-
pecuniary objectives or promote goals unrelated to the financial 
interests of participants and beneficiaries.
    Some commenters complained that the 30-day comment period was too 
short given the complexity of issues involved, the magnitude of such 
changes to the current marketplace

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practices related to proxy voting and other exercises of shareholder 
rights, and the need to prepare supporting data. Many commenters 
requested an extension of the comment period and that the Department 
schedule a public hearing on the proposal and allow the public record 
to remain open for post-hearing comments from interested parties. The 
Department has considered these requests, but has determined that it is 
neither necessary nor appropriate to extend the public comment period, 
hold a public hearing, or withdraw or republish the proposed 
regulation. A substantial and comprehensive public comment record was 
developed on the proposal sufficient to substantiate promulgating a 
final rule. The scope and depth of the public record that has been 
developed itself belies arguments that a 30-day comment period was 
insufficient. In addition, most issues relevant to the proposal have 
been analyzed and reviewed by the Department and the public in the 
context of three separate Interpretive Bulletins issued in 1994, 2008, 
and 2016 and the public feedback that resulted. Finally, public 
hearings are not required under the Department's general rulemaking 
authority under section 505 of ERISA, nor under the Administrative 
Procedure Act's procedures for rulemaking at 5 U.S.C. 553(c). In this 
case, a public hearing is not necessary to supplement an already 
comprehensive public record.
    Thus, this final rulemaking follows the notice-and-comment process 
required by the Administrative Procedure Act, and fulfills the 
Department's mission to protect, educate, and empower retirement 
investors. This rule is considered to be an Executive Order (E.O.) 
13771 regulatory action. Details on the estimated costs of this rule 
can be found in the final rule's economic analysis. The Department has 
concluded that the additions to the Investment Duties regulation and 
the rule's improvements as compared to the Department's previous sub-
regulatory guidance are appropriate and warranted. The final rule 
furthers the paramount goal of ERISA plans to provide a secure 
retirement for American workers. Accordingly, after consideration of 
the written comments received, the Department has determined to adopt 
the proposed regulation as modified and set forth below. As explained 
more fully below, the final regulation contains several important 
changes from the proposal in response to public comments.

1. General Public Comments and Adoption of a Principles-Based Approach

    In response to the proposed rule, the Department received a 
considerable amount of support and opposition from interested parties.
    Commenters supporting the rule argued that the proposed rule was 
essential because the Department's existing sub-regulatory guidance has 
created a perception that ERISA fiduciaries must vote proxies on every 
proposal. This rulemaking, according to some commenters, would provide 
certainty to plan fiduciaries and benefit ERISA plan participants, by 
ensuring that plan resources will be expended only on proxy research 
and voting matters that are necessary to protect the economic interests 
of plan participants. Commenters supporting the proposal endorsed the 
Department's view that these rights must be exercised with a singular 
focus in mind--the economic interests of ERISA plan participants and 
beneficiaries. They agreed that in a rapidly changing investment 
landscape, plan fiduciaries and asset managers should not be influenced 
by non-financial interests. For example, some commenters explained that 
it is the duty of ERISA fiduciaries to reject attempts to advance 
political or social objectives at the expense of investment returns, 
growth, and stability for individuals saving for retirement, the very 
population that the Department, through ERISA, has been charged to 
protect. As one commenter explained, ERISA fiduciary duties are 
predicated on trust law, and trusts must be managed to the advantage of 
formally named beneficiaries--in this case plan participants and their 
beneficiaries--and not to benefit corporate management or vague notions 
of societal good as determined by other parties. Some commenters argued 
that proxy advisory firms, which often assist with proxy voting, have 
an outsized influence on voting decisions and have ``taken sides'' 
politically and socially.
    A number of commenters agreed in general with the Department's 
position on these issues, and some provided additional information 
substantiating the need for, and propriety of, the Department's 
proposed approach to managing proxy voting practices. Some further 
argued that, although exercising shareholder rights on the basis of 
environmental, social, or governance factors (commonly referred to as 
``ESG'') may be welcomed by some private investors, proxy rights should 
be exercised only for financial matters that will help secure the 
retirement of plan participants in the case of ERISA-covered pension 
and other retirement savings plans because when fiduciaries exercise 
proxy rights for non-financial reasons they are more likely to incur 
additional, unnecessary risks for investors that may not produce 
corresponding economic value. A few commenters supported the 
Department's assertion that the amount of ESG shareholder proposals has 
increased since 1988, as more such proposals are being put forward by 
groups with objectives other than increasing shareholder returns. While 
some commenters agreed with ESG proponents on the importance of 
environmental protections, social and political issues, and 
transparency in corporate governance, they nevertheless expressed their 
concern that proxy advisory firms, in particular, seem to have 
increasing power to promote these goals without the knowledge and 
agreement of a corporation's ``real'' owners, the shareholders, which 
include ERISA plans. They agreed that the Department has appropriately 
undertaken in this rulemaking to improve fiduciary oversight of these 
firms. Finally, commenters supporting the rule also said that any 
increased costs associated with the rule would be manageable, or, 
according to some commenters, that the rule would ultimately decrease 
plan costs and compliance burdens.\27\
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    \27\ One commenter suggested that the rule may especially 
benefit fiduciaries of small plans, for whom the cost and burden of 
voting all proxies may be an impediment to sponsoring a plan.
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    Other commenters, however, objected to the Department's proposed 
rulemaking and raised a variety of legal and practical concerns. Some 
commenters who objected to the proposal requested that the Department 
withdraw the rule entirely, propose a different rule that takes a more 
principles-based approach to this subject matter, or wait until the 
Department analyzes the impact of its rule concerning ``Financial 
Factors in Selecting Plan Investments.'' \28\ Alternatively, they 
argued that the Department should wait until the SEC establishes a 
track record of experience with its new proxy advisor and shareholder 
proposal rules, so that the Department can better align its guidance 
with the SEC's rules. Additionally, some commenters expressed the view 
that a principles-based approach would be consistent with the 
Investment Advisers Act of 1940 (Advisers Act) and the SEC's Rule 
206(4)-6 thereunder and might help to reduce burdens for

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fiduciaries in reconciling the Department's rule with the SEC's 
regulatory regime for investment advisers.
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    \28\ See 85 FR 72846 (Nov. 13, 2020).
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    Some commenters opposing the proposed rule claimed that the 
Department failed to establish that there is in fact a problem with 
fiduciaries' exercise of shareholder rights and argued that the 
proposal, if finalized, would upset decades of Departmental precedent. 
These commenters further said that the approach taken in the proposal 
represented a burdensome and costly solution to a perceived problem 
without ``real life'' examples of any plans or participants and 
beneficiaries that have been harmed.
    The Department does not believe that it is necessary to establish 
specific evidence of fiduciary misunderstandings or injury to plans or 
to plan participants in order to issue a regulation addressing the 
application of ERISA's fiduciary duties to the exercise of shareholder 
rights. Under the Department's authority to administer ERISA, the 
Department may promulgate rules that are preemptive in nature and is 
not required to wait for widespread harm to occur. The Department can 
thereby guard against injuries to plans and plan participants and 
beneficiaries and ensure prospective protections.
    Regardless, there are several reasons for this rulemaking. First, 
the Department is aware that some plan fiduciaries and other parties 
have incorporated, or have considered incorporating, non-pecuniary 
factors into their proxy voting decisions. Further, as documented in 
the proposal, there is a history of statements from stakeholders and 
others evidencing misunderstanding of the Department's sub-regulatory 
guidance.\29\ Finally, commenters on the proposal confirmed that 
fiduciaries may be over-relying on proxy advisory firms as a result of 
such confusion, by implementing advisory firms' voting recommendations 
without attention to whether the firms' policies are consistent with 
the economic interests of the plan. This final rule confirms that such 
decisions on proxy voting and other exercises of shareholder rights 
must be made pursuant to the duties of loyalty and prudence mandated by 
ERISA.
---------------------------------------------------------------------------

    \29\ 85 FR 55219, 55230 (Sept. 4, 2020).
---------------------------------------------------------------------------

    Some commenters argued that unless a number of clarifications and 
changes were made in the final rule, for example with respect to 
documentation and other requirements, the rule would be costly to 
implement and its standards costly to execute. Some commenters opposing 
the proposed rule argued that, not only is the rule unnecessary, but it 
would create new confusion for fiduciaries as they implement their 
duties under ERISA. According to these commenters, the rule would 
undermine fiduciaries' ability to act in what they believe to be the 
long-term economic interest of their plans' participants, which is a 
core statutory duty of fiduciaries to such participants. A few 
commenters provided an example of a potential ``trap'' that the 
proposal would create for fiduciaries, in that the rule would cause 
fiduciaries to not vote on a proposal for fear of violating the rule, 
but then later discover that they should in fact have voted on the 
proposal, effectively creating a breach of fiduciary duties. They 
claimed that the proposal was an example of ``government overreach'' 
that could dangerously impact the efficiency of the U.S. capital 
markets and the stability of the global economy.\30\ The opposing 
commenters also argued that the proposal, if finalized, would 
disenfranchise ERISA plans, and thereby plan participants, as 
investors, by reducing the power and value of their shareholder rights, 
including the right to vote proxies.\31\ Instead, voting power would be 
concentrated in the hands of non-ERISA investors, such as hedge funds, 
foreign investors, and other activist investors whose motivations may 
be based on short-term profits and non-economic factors, as well as in 
the hands of corporate management, as a result of the proposal's 
provision that, in these commenters' view, includes deference to 
management views.
---------------------------------------------------------------------------

    \30\ A number of commenters asserted that the proposal was a 
not-so-thinly-veiled, policy-based judgment against the value of ESG 
shareholder proposals. They argued that this judgment is not the 
Department's to make; rather, it is the role of plan fiduciaries to 
make such judgments, and ESG proposals are material to shareholder 
decision-making and an important part of the due diligence of 
fiduciaries in constructing long-term, diversified portfolios. The 
Department disagrees with these commenters. This rulemaking project, 
similar to the recently published final rule on ERISA fiduciaries' 
consideration of financial factors in investment decisions, 
recognizes, rather than ignores, the economic literature and 
fiduciary investment experience that show a particular ``E,'' ``S,'' 
or ``G'' consideration may present issues of material business risk 
or opportunities to a specific company that its officers and 
directors need to manage as part of the company's business plan and 
that qualified investment professionals would treat as economic 
considerations under generally accepted investment theories. 
However, the Department recognizes that other ``E,'' ``S,'' or ``G'' 
factors may be non-pecuniary and a fiduciary should not assume that 
combining ESG factors into a single rating, index, or score creates 
an amalgamated factor that is itself pecuniary. Rather, this final 
rule and the financial factors rule sought to make clear that, from 
a fiduciary perspective, the relevant question is not whether a 
factor under consideration is ''ESG,'' but whether it is a pecuniary 
factor relevant to the exercise of a shareholder right or to an 
evaluation of the investment or investment course of action. See 85 
FR at 72857 (Nov. 13, 2020).
    \31\ One commenter further warned that the rule could result in 
voter suppression, not just disenfranchisement, by preventing 
shareholders from reaching a quorum, which the Department itself 
acknowledged in the proposal would result in economic detriment to 
ERISA plans' holdings. Some corporate bylaws, for example, require a 
supermajority for certain votes, which may be difficult to achieve 
if certain shareholders are discouraged from voting.
---------------------------------------------------------------------------

    Commenters opposing the proposed rule stated that, in voting on 
proposals, investors, including ERISA plans, generally decide matters 
that will hold management accountable and materially impact the long-
term economic value of corporations. Some commenters argued that the 
proposal failed to recognize the potential long-term performance and 
economic impact of shareholder proposals on topics such as board 
independence and accountability--including opportunities to change a 
company's board of directors, diversity, approval of auditing firms, 
executive compensation policies--from either an individual investment 
or a wider portfolio perspective. These commenters disagreed with what 
they viewed as the Department's conclusion that ESG shareholder 
activity generally has little bearing on the value of corporate shares. 
Rather, these commenters claimed that a growing body of evidence 
demonstrates an increasing link between ESG activity, including the 
impact of ESG issues on a corporation's brand and reputation, and a 
corporation's long-term value. According to commenters, ESG factors may 
not appear to be economic on their face, yet all are fundamental 
corporate matters that often are critical to how companies strategize 
and manage risk, therefore impacting financial outcomes. As to proxy 
advisory firms, commenters opposing the rule argued that these firms 
engage in a rigorous process when making recommendations about proxy 
voting and that ongoing technological advances continue to enhance 
proxy voting transparency and effectiveness.
    The final rule reflects a number of modifications made by the 
Department in response to the public comments. As in the proposal, the 
final rule amends the Investment Duties regulation in regard to proxy 
voting and the exercise of shareholder rights. The most significant 
adjustment from the proposal results from changes to make the final 
rule a more principles-based approach in response to commenters. The 
Department is persuaded that the complexity involved in a determination 
of economic versus non-economic impact would be costly to implement, 
and believes the core structure of the proposal that focused on whether 
a

[[Page 81663]]

fiduciary has a prudent process for proxy voting and other exercises of 
shareholder rights is a more workable framework for achieving the 
objectives of the proposal. The final rule carries forward from the 
proposal a provision that requires plan fiduciaries, when deciding 
whether to exercise shareholder rights and when exercising such rights, 
including the voting of proxies, to carry out their duties prudently 
and solely in the interests of the plan participants and beneficiaries 
and for the exclusive purpose of providing benefits to participants and 
beneficiaries and defraying the reasonable expenses of administering 
the plan. Also similar to the proposal, but with some modifications in 
response to public comments, the final rule includes a list of 
principles that fiduciaries must comply with when making decisions on 
exercising shareholder rights, including proxy voting, in order to meet 
their prudence and loyalty duties under ERISA section 404(a)(1)(A) and 
(B), including duties to act solely in accordance with the economic 
interest of the plan and its participants and beneficiaries and not 
subordinate the interests of the participants and beneficiaries in 
their retirement income or financial benefits under the plan to any 
non-pecuniary objective, or promote non-pecuniary benefits or goals 
unrelated to the financial interests of the plan's participants and 
beneficiaries. Finally, the final rule includes specific language to 
make clear that plan fiduciaries do not have an obligation to vote all 
proxies, as well as a safe harbor provision, modified from the 
proposal, pursuant to which plan fiduciaries may adopt proxy voting 
policies and parameters prudently designed to serve the plan's economic 
interest that provide optional means for satisfying their fiduciary 
responsibilities regarding determining whether to vote under ERISA 
sections 404(a)(1)(A) and 404(a)(1)(B).

2. Elimination of Paragraphs (e)(3)(i) and (ii) From the Proposal

    The principles-based approach adopted in the final rule is 
reflected by the Department's elimination of paragraphs (e)(3)(i) and 
(ii) from the proposal. Paragraph (e)(3)(i) of the proposal provided 
that a plan fiduciary must vote any proxy where the fiduciary prudently 
determined that the matter being voted upon would have an economic 
impact on the plan after considering those factors described in 
paragraph (e)(2)(ii) of the proposal and taking into account the costs 
involved (including the cost of research, if necessary, to determine 
how to vote). Paragraph (e)(3)(ii) of the proposal provided that a plan 
fiduciary must not vote any proxy unless the fiduciary prudently 
determined that the matter being voted upon would have an economic 
impact on the plan after considering those factors described in 
paragraph (e)(2)(ii) of the proposal and taking into account the costs 
involved.
    The Department received a number of comments suggesting removal of 
the requirements in paragraphs (e)(3)(i) and (ii). Commenters 
criticized these provisions of the proposal as requiring a fiduciary to 
undertake an economic impact analysis in advance of each issue that is 
the subject of a proxy vote in order to even consider voting. A 
commenter further noted that a fiduciary may not discover until after 
the analysis is performed that the cost involved in determining whether 
to vote outweighs the economic benefit to the plan. Another commenter 
characterized this as a ``high risk compliance dilemma'' that could not 
be resolved without expending funds on analysis and documentation, 
without knowing in advance whether the expenditure is allowable. 
Commenters further indicated that the proposal was unclear as to how to 
establish whether an economic basis would be strong enough to justify 
voting and that it can be difficult, if not impossible, to ascertain 
whether a matter will have a future economic impact. Commenters further 
stated that the criteria enumerated in paragraph (e)(2)(ii) of the 
proposal for determining the economic impact of a proxy vote were too 
narrow, which could result in potentially negative consequences to 
plans because paragraph (e)(3)(ii) of the proposal could prohibit 
fiduciaries from engaging in activities that would mitigate risk. For 
instance, a commenter stated that, in its experience, once an 
evaluation of a proxy matter has been done, a situation with ``no 
economic impact'' is more of a theoretical possibility than a reality. 
According to this commenter, either its research will show that the 
matter being voted on will strengthen the company if implemented, or 
that it will not. The commenter further explained that, at a base 
level, a matter that would strengthen or otherwise improve a company is 
likely to result in an economic benefit in connection with a plan's 
investment when considered in the long-term. If a matter would not 
result in a net positive to the company, the commenter believes a 
fiduciary should vote against the proposal, not decline to vote. The 
commenter cautioned that prohibiting fiduciaries from voting in 
circumstances where they otherwise would vote against a matter may have 
the unintended consequence of allowing more frivolous proxy matters to 
be approved, resulting in decreased corporate accountability. 
Commenters also raised practical issues with respect to an obligation 
to not vote. Some explained that failing to vote can have the effect of 
a ``no'' vote or a ``yes'' vote, depending on the circumstances. 
Another commenter stated that modern proxy voting processes do not 
allow a holder of securities subject to the proxy to vote on some but 
not all proposals.
    Other commenters, however, supported paragraph (e)(3)(ii) of the 
proposal. They viewed the provision as an important clarification that 
plan fiduciaries are not required to vote all proxies, which could 
reduce diversion of plan resources by restricting voting activity only 
to those issues that offer an economic benefit to the plan.
    The Department has decided not to include the requirements in 
paragraphs (e)(3)(i) and (ii) of the proposal in the final rule at this 
time. The Department recognizes the concerns expressed by commenters 
regarding potentially increased costs and liability exposure, as well 
as the difficulty in some circumstances of determining whether a matter 
would have an economic impact and the possibility that a fiduciary 
might prudently determine that there are risks to plan investments that 
could result from not voting even when the matter being voted upon 
itself would not have an economic impact. Instead, the Department has 
provided a specific provision in the final rule stating that plan 
fiduciaries are not required to vote all proxies.

3. Section-by-Section Overview of Final Rule

(i) Paragraph (e)(1)
    Paragraph (e)(1) of the final rule, like the proposal, provides 
that the fiduciary duty to manage plan assets that are shares of stock 
includes the management of shareholder rights appurtenant to the 
shares, such as the right to vote proxies. Commenters raised a number 
of issues with respect to the general scope of fiduciaries' 
responsibilities and obligations under the rule as set forth in 
paragraph (e)(1) of the proposal.
    Several commenters supported the Department's goal of making clear 
that plan fiduciaries are not obligated to vote all proxies, and 
suggested the rule could be improved by including that clear statement 
in the regulatory text in paragraph (e)(1). The Department was clear in 
the preamble to the proposed

[[Page 81664]]

rule that one objective of the proposal was to correct a 
misunderstanding among some fiduciaries and other stakeholders that 
ERISA requires every proxy to be voted. Thus, the Department agrees 
that it would be appropriate to include an explicit statement to that 
effect in the final rule. The Department, however, believes that the 
statement fits better in paragraph (e)(2) (regarding the principles 
that must be considered in deciding whether to exercise shareholder 
rights) and has added a statement to paragraph (e)(2)(ii) that the 
ERISA fiduciary duty to manage proxy voting and other shareholder 
rights does not require the voting of every proxy or the exercise of 
every shareholder right.
    A commenter suggested that the rule should focus only on proxy 
voting, including the decision of whether to exercise voting rights, 
but should not extend to ``other shareholder rights.'' This commenter 
explained that other shareholder rights, such as inspecting an issuer's 
corporate record books and participating in corporate actions taken by 
the issuer, are substantively separate and distinct from proxy voting. 
Also, decisions on corporate actions such as stock splits, tender 
offers, exchange offers on bond issues, and mergers and acquisitions 
generally are not governed by proxy voting policies or undertaken with 
advice from proxy voting advisors. On this basis, the commenter 
recommended removing other shareholder rights from the rule. The 
Department is not persuaded to make the suggested change. The exercise 
of shareholder rights has been part of the Department's prior guidance 
since the first Interpretive Bulletin in 1994.\32\ The Department 
believes that the exercise of shareholder rights to monitor or 
influence management, which may occur in lieu of, or in connection 
with, formal proxy proposals is just as much an issue of fiduciary 
management of the investment asset as proxy voting and accordingly 
should be covered by the final rule.
---------------------------------------------------------------------------

    \32\ See 59 FR 38860, 38864 (July 29, 1994) (discussing 
activities to monitor or influence management by variety of means 
including by exercise of legal rights of a shareholder).
---------------------------------------------------------------------------

    Commenters also requested clarifications related to plan 
investments in SEC-registered investment companies, such as mutual 
funds. Several commenters noted that the preamble to the proposal 
suggested that the rule would not apply to a mutual fund's exercise of 
shareholder rights with respect to the stock it holds, and requested 
that the Department provide confirmation. As previously explained, 
ERISA does not govern the management of the portfolio internal to an 
investment fund registered with the SEC, including such fund's exercise 
of its shareholder rights appurtenant to the portfolio of stocks it 
holds.\33\ Accordingly, the final rule would not apply to such a fund's 
exercise of shareholder rights.
---------------------------------------------------------------------------

    \33\ 85 FR 55219, 55234 (Sept. 4, 2020).
---------------------------------------------------------------------------

    A commenter requested further clarification that the Department 
does not intend that plan fiduciaries apply the standards of the rule 
in reviewing, analyzing, or making a judgment on the proxy voting 
practices of the mutual funds in which the plan invests. This commenter 
explained that SEC-registered funds have the scale, internal expertise, 
and experience to analyze and vote proxies. According to the commenter, 
they also publicly report their proxy votes to the SEC, and must 
describe in their registration statements the policies and procedures 
that they use to determine how to vote proxies for their portfolio of 
securities. In the commenter's view, placing an obligation on plan 
fiduciaries to review and make judgments on the proxy voting practices 
of mutual funds in which they invest will substantially increase the 
administrative burden and costs for plans that invest in mutual funds. 
In contrast, another commenter suggested that the final rule should 
require fiduciaries to investigate a mutual fund's objectives in 
shareholder voting and engagement with portfolio companies and 
determine that the objectives are consistent with ERISA's loyalty 
requirement prior to deciding to invest in the fund or considering it 
as an option for participants. The commenter noted that since the 
issuance of the Avon Letter, plans increasingly invest in mutual funds 
or exchange-traded funds (ETFs) with stock voting authority residing in 
the funds. This commenter argued that nothing in the Avon Letter or 
subsequent guidance from the Department suggested that ERISA absolves a 
plan investment fiduciary of any fiduciary duty associated with the 
shareholder voting of shares that it owns indirectly through its share 
ownership in mutual funds and ETFs.
    In response to these comments, the Department notes that the issue 
raised by these commenters is beyond the scope of this rulemaking. 
Rather, fiduciary responsibilities with respect to investment decisions 
are addressed in the other provisions of the Investment Duties 
regulation, as recently amended. Paragraph (c)(1) provides that, in 
general, a fiduciary's evaluation of an investment or investment course 
of action must be based only on pecuniary factors and that a fiduciary 
may not subordinate the interests of participants and beneficiaries in 
their retirement income or financial benefits under the plan to other 
objectives and may not sacrifice investment return or take on 
additional investment risk to promote non-pecuniary benefits or goals. 
Furthermore, the weight given to any pecuniary factor by a fiduciary 
should appropriately reflect a prudent assessment of its impact on risk 
and return. Whether a particular fund's proxy voting activities would 
constitute a pecuniary factor and, if so, how much weight it should be 
given in an investment decision, are factual questions that should be 
resolved by the responsible fiduciary based on surrounding 
circumstances.
    Some commenters requested clarification of whether the rule applies 
to plan fiduciaries in the exercise of shareholder rights with respect 
to mutual funds and ETFs (which are sometimes organized as corporate or 
similar entities) when the fund itself seeks a vote of its shareholders 
on fund matters. According to commenters, for a variety of reasons, 
SEC-registered funds often face more challenges than operating 
companies to achieve a quorum and obtain approval of their proxy 
matters. The commenters explained that this is due to major differences 
in shareholder bases (funds have more diffuse and retail-oriented 
shareholder bases), proxy voting behavior of those bases (institutional 
investors comprise a larger percentage of operating companies' 
shareholder bases and are far more likely to vote), legal obligations, 
and organizational differences.
    Furthermore, according to commenters, funds also can have 
difficulty even identifying and reaching their shareholders when they 
invest through intermediaries, which severely limits a fund's ability 
to communicate with its shareholders to encourage voting. These factors 
contribute significantly to the costs and efforts required to seek and 
obtain necessary shareholder approvals for fund matters. Funds, and 
therefore fund shareholders, often bear the proxy costs associated with 
proxy campaigns, including costs associated with follow-up 
solicitations.
    According to a commenter, the SEC has recognized these issues in 
recent years. The commenter, as well as others, expressed concern that 
the rule could create further difficulty for funds in carrying out 
their proxy campaigns and potentially result in imposing unnecessary 
costs on funds, particularly in connection with funds' ability to

[[Page 81665]]

achieve a timely quorum at their own shareholder meetings. Another 
commenter indicated that ERISA plan investors receive a variety of 
proxies that must be evaluated, not only in connection with shares of 
common stock held by the plan, but also from SEC-registered funds as 
well as bank collective trust funds and other collective funds in which 
plans invest. The commenter stated that the regulated community needs 
to be able to clearly identify those proxies that are subject to the 
rule and those that are not. The commenter requested that the rule 
itself provide that plan investments in such securities are not subject 
to the requirements of the rule.
    In the proposal, the Department recognized that the proposed rule 
could impact the ability to achieve a quorum at shareholder meetings of 
funds.\34\ The Department believes that the changes made to the final 
rule significantly eliminate any provisions of the proposal that might 
impede achieving a quorum for shareholder meetings, including those 
held by funds. Under the proposal, a fiduciary would have not been able 
to vote unless the fiduciary prudently concluded that the matter being 
voted upon would have an economic impact on the plan. The burden of 
determining whether a fiduciary must, or must not, vote under the 
proposal was likely to result in fiduciaries opting to refrain from 
voting under one of the permitted practices described in the proposal. 
The Department's removal of the ``vote/not vote'' determination from 
the final rule should eliminate any concerns with potential liability 
on a fiduciary associated with making an incorrect decision as to 
whether or not to cast a proxy vote. The safe harbors in the final rule 
are also sufficiently flexible to permit a fiduciary to adopt voting 
policies that would permit proxy voting for fund shares while 
refraining from voting other types of shares. Moreover, the Department 
continues to believe, as stated in the preamble to the proposal, that 
fiduciary proxy voting policies may consider the economic detriment to 
a plan's investment that might result from direct and indirect costs 
incurred related to delaying a shareholders' meeting.\35\
---------------------------------------------------------------------------

    \34\ Id. at 55234.
    \35\ Id. at 55226.
---------------------------------------------------------------------------

(ii) Paragraph (e)(2)
    Paragraph (e)(2) of the proposal set forth the general 
responsibilities with respect to the exercise of shareholder rights 
under the regulation, and stated that when deciding whether to exercise 
shareholder rights and when exercising such rights, including the 
voting of proxies, fiduciaries must carry out their duties prudently 
and solely in the interests of the participants and beneficiaries and 
for the exclusive purpose of providing benefits to participants and 
beneficiaries and defraying the reasonable expenses of administering 
the plan pursuant to ERISA sections 403 and 404.
Paragraph (e)(2)(i)
    A commenter noted that paragraph (e)(2)(i) of the proposal 
referenced ERISA sections 403 and 404, and because those two separate 
sections each carry separate responsibilities, suggested that each be 
designated as a separate clause in the final regulation because a 
fiduciary could breach or fulfill one but not the other. The Department 
recognizes the separate responsibilities under sections 403 and 404 of 
ERISA, but has decided to remove the reference to section 403 for 
paragraph (e)(2)(i) of the final rule. As explained in connection with 
recently adopted amendments to the Investment Duties regulation, the 
Department believes it is important that the regulation focus on 
section 404 of ERISA.\36\ Although similar, and although actions taken 
in compliance with section 404 would likely satisfy similar obligations 
under section 403, the text of ERISA section 403 is not identical to 
ERISA section 404(a)(1)(A), and the Department is wary of possible 
inferences that compliance with the provisions of the final rule would 
also necessarily satisfy all the provisions of ERISA section 403. The 
Department also believes explicit reference to ERISA section 404 is not 
necessary because paragraph (e) is part of 29 CFR 2550.404a-1. As a 
result, paragraph (e)(2)(i) of the final rule provides that when 
deciding whether to exercise shareholder rights and when exercising 
such rights, including the voting of proxies, fiduciaries must carry 
out their duties prudently and solely in the interests of the 
participants and beneficiaries and for the exclusive purpose of 
providing benefits to participants and beneficiaries and defraying the 
reasonable expenses of administering the plan.
---------------------------------------------------------------------------

    \36\ 85 FR 72846, (Nov. 13, 2020).
---------------------------------------------------------------------------

    Activities that are intended to monitor or influence the management 
of corporations in which the plan owns stock can be consistent with a 
fiduciary's obligations under ERISA, if the responsible fiduciary 
concludes that such activities (by the plan alone or together with 
other shareholders) are appropriate after applying the considerations 
set forth in the final rule. However, the use of plan assets by 
fiduciaries to further policy-related or political issues, including 
ESG issues, through proxy resolutions would violate the prudence and 
exclusive purpose requirements of ERISA sections 404(a)(1)(A) and (B) 
and the final rule unless such activities are undertaken solely in 
accordance with the economic interests of the plan and its participants 
and beneficiaries. The mere fact that plans are shareholders in the 
corporations in which they invest does not itself provide a rationale 
for a fiduciary to spend plan assets to pursue, support, or oppose such 
proxy proposals. Moreover, the use of plan assets by fiduciaries to 
further policy or political issues through proxy resolutions that are 
not likely to enhance the economic value of the investment in a 
corporation would, in the view of the Department, violate the prudence 
and exclusive purpose requirements of ERISA sections 404(a)(1)(A) and 
(B) as well as the final rule. For example, with respect to proposals 
submitted by shareholders that request a corporation to incur costs, 
either directly or indirectly, without the proposal including a 
demonstrable expected economic return to the corporation, a fiduciary 
may, depending on the facts and circumstances, be obligated under ERISA 
and the final rule to vote against such proposals in order to protect 
the financial interests of the plan's participants and 
beneficiaries.\37\ Similarly, in the Department's view, it would not be 
appropriate for plan fiduciaries, including appointed investment 
managers, to incur expenses to engage in direct negotiations with the 
board or management of publicly held companies with respect to which 
the plan is just one of many investors. Nor generally should plan 
fiduciaries fund advocacy, press, or mailing campaigns on shareholder 
resolutions, call special shareholder meetings, or initiate or actively 
sponsor proxy fights on environmental or social issues relating to such 
companies, unless the responsible plan fiduciary concludes that such 
activities (alone or together with other shareholders) are appropriate

[[Page 81666]]

after applying the considerations set forth in the final rule.\38\
---------------------------------------------------------------------------

    \37\ The Department is not suggesting that a fiduciary must 
perform its own economic analysis, or incur expenses to obtain an 
analysis, to determine whether the proposal will economically 
benefit the corporation and its shareholders. For example, a 
fiduciary could prudently consider a credible economic analysis 
provided by the shareholder proponent.
    \38\ Although the provision in the proposal also made reference 
to ``purposes of the plan,'' the language is not carried forward in 
the final provision as the Department believes it is unnecessary 
because the purposes of a plan would be encompassed by the financial 
interests of plan participants and beneficiaries.
---------------------------------------------------------------------------

Paragraph (e)(2)(ii)
    Paragraph (e)(2)(ii) of the proposal set forth specific standards 
for fiduciaries to meet when deciding whether to exercise shareholder 
rights and when exercising shareholder rights. The requirements in 
paragraph (e)(2)(ii) of the proposal also served as the basis for a 
fiduciary's determination of whether a matter being voted upon would 
have an economic impact on a plan for purposes of compliance with 
paragraph (e)(3) of the proposal. Many commenters focused specifically 
on paragraphs (e)(2)(ii)(A) and (B) of the proposal, which required, in 
relevant part, that fiduciaries (A) consider only factors that they 
prudently determine will affect the economic value of the plan's 
investment based on a determination of risk and return over an 
appropriate investment horizon consistent with the plan's investment 
objectives and the funding policy of the plan, and (B) consider the 
likely impact on the investment performance of the plan based on such 
factors as the size of the plan's holdings in the issuer relative to 
the total investment assets of the plan, the plan's percentage 
ownership of the issuer, and the costs involved.
    Some commenters argued that the specificity of the proposal did not 
comport with what they asserted was a congressional intent that 
eschewed a prescriptive approach to ERISA's duties of loyalty and 
prudence, or with the Department's own Investment Duties regulation. 
Commenters also noted the potential burdens that paragraph (e)(2)(ii) 
of the proposal would place on plan fiduciaries to evaluate and justify 
decisions for potentially large numbers of proxy proposals and to 
monitor an investment manager's or proxy advisory firm's voting policy 
for consistency with the regulation, which could result in increased 
costs that would ultimately be borne by plan participants. Commenters 
also stated that the provision's requirement to take into account plan-
specific factors did not adequately recognize that investment managers 
do not have information on plan holdings they do not directly manage. 
Commenters further indicated that, with a focus on individual plans as 
opposed to investment managers responsible for pools of plan assets, 
paragraph (e)(2)(ii)(B) of the proposal failed to consider situations 
when several ERISA plans, particularly those with aligned objectives 
and liabilities, may together hold a significant stake in a company. In 
such cases, voting together could impact the investment and, as a 
result, each investor's portfolio. They argued that the proposal, in 
contrast, potentially would result in proxies being un-voted if each 
``slice'' of the aggregate is too insignificant.
    A commenter further suggested that an economic impact test, as 
described in the proposal, was ill-suited to the purpose and role of 
proxy voting. According to the commenter, many of the items on which 
corporate law permits shareholders to have a say--for example, the 
election of directors or ratification of auditors--are to mitigate risk 
and assure prophylactic measures are in place to avoid threats to their 
share of capital over the long term. The commenter questioned how a 
fiduciary would determine that voting against a company-proposed 
director for election to the board who was clearly unqualified and 
incompetent would have an economic impact on the plan. Another 
commenter explained that some votes, such as those supporting good 
corporate governance practices (e.g., election of outside directors) 
may not have an immediate measurable economic effect, but still be in 
the interest of plan investors. Another commenter opined that a short-
term economic impact will be easier to prove or disprove in terms of 
share price or other similarly rudimentary indicators, but questioned 
whether the rule should encourage fiduciaries to think only in terms of 
short-term economic gains. In this regard, several commenters requested 
that the Department confirm that a fiduciary may take into 
consideration the long-term nature of a plan's investment horizon. A 
commenter also suggested that the Department expand the criteria for 
voting to include issuer risk-based factors that ``promote long-term 
growth and maximize return on ERISA plan assets.'' Another commenter 
explained that proposals that encourage greater disclosure can result 
in enhancing shareholder value or serve in a prophylactic manner to 
prevent actions that might serve to diminish shareholder value. A 
commenter also criticized the proposal as focusing on the impact on 
individual plan investments. Commenters explained that modern portfolio 
theory focuses on the role that an investment plays in the context of 
an overall portfolio rather than on a stand-alone basis, and expressed 
the view that the roles that proxy voting and shareholder voices play 
in current portfolio risk management practices should be evaluated in 
the context of the long-term and portfolio-wide strategy, with 
consideration of the aggregate effects of shareholder votes and voices.
    After considering these comments, the Department has modified 
paragraph (e)(2)(ii)(A) and (B). An important goal in proposing the 
rule was to ensure that in making proxy voting decisions, fiduciaries 
act for the exclusive purpose of financially benefitting plan 
participants and not subordinating the interests of the plan and its 
participants to goals and objectives unrelated to their financial 
interests. Recent amendments to the Investment Duties regulation, which 
applies generally to fiduciary decisions on investments and investment 
courses of action, were adopted for much the same purpose.
    Paragraph (e)(2)(ii)(A) of the final rule requires that, when 
deciding whether to exercise shareholder rights and when exercising 
shareholder rights, a fiduciary must act solely in accordance with the 
economic interest of the plan and its participants and beneficiaries. 
The proposed requirement to prudently determine whether the economic 
value of the plan's investment will be affected based on a 
determination of risk and return over an appropriate investment horizon 
has not been included in the final rule in order to address commenter 
concerns that the impact of proxy voting may not be readily 
quantifiable and to reduce potential compliance costs. In the 
Department's view, the final rule provides sufficient flexibility for 
fiduciaries to consider longer-term consequences and potential economic 
impacts. Further, removal of the references to a plan's investment 
objectives and funding policy responds to concerns that investment 
managers responsible for only a portion of the plan assets may have 
limited access and visibility into those objectives and funding 
policies and such considerations may unnecessarily increase compliance 
costs without a commensurate benefit for the plan or its participants.
    The Department, however, cautions fiduciaries from applying an 
overly expansive view as to what constitutes an economic interest for 
purposes of paragraph (e)(2)(ii)(A) of the final rule. As previously 
discussed, the costs incurred by a corporation to delay a shareholder 
meeting due to lack of a quorum is an example of a factor that can be 
appropriately considered as affecting the economic interest of the 
plan. However, vague or speculative

[[Page 81667]]

notions that proxy voting may promote a theoretical benefit to the 
global economy that might redound, outside the plan, to the benefit of 
plan participants would not be considered an economic interest under 
the final rule.
    Paragraph (e)(2)(ii)(B) of the proposal required consideration of 
the likely impact on the investment performance of the plan based on 
such factors as the size of the plan's holdings in the issuer relative 
to the total investment assets of the plan, and the plan's percentage 
ownership of the issuer. Similar to the changes made to paragraph 
(e)(2)(ii)(A) of the final rule, the Department has removed this 
language to address concerns that where portions of the portfolio are 
managed by different investment managers, a specific manager may not 
know the plan's overall aggregate exposure to a single issuer. 
Accordingly, paragraph (e)(2)(ii)(B) of the final rule has been revised 
only to require a fiduciary consider the impact of any costs involved. 
However, in the Department's view, where the plan's overall aggregate 
exposure to a single issuer is known, the relative size of an 
investment within a plan's overall portfolio and the plan's percentage 
ownership of the issuer, may still be relevant considerations in 
appropriate cases in deciding whether to vote or exercise other 
shareholder rights.
    Several commenters requested further guidance or examples of costs 
that a fiduciary would be required to consider. In the view of the 
Department, for purposes of paragraph (e)(2)(ii)(B) of the final rule, 
the types of relevant costs would depend on the particular facts and 
circumstances. Such costs could include direct costs to the plan, 
including expenditures for organizing proxy materials; analyzing 
portfolio companies and the matters to be voted on; determining how the 
votes should be cast; and submitting proxy votes to be counted. If a 
plan can reduce the management or advisory fees it pays by reducing the 
number of proxies it votes on matters that have no economic consequence 
for the plan that also is a relevant cost consideration. In some cases, 
voting proxies may involve out-of-the-ordinary costs or unusual 
requirements, such as may be the case of voting proxies on shares of 
certain foreign corporations. Opportunity costs in connection with 
proxy voting could also be relevant, such as foregone earnings from 
recalling securities on loan or if, as a condition of submitting a 
proxy vote, the plan will be prohibited from selling the underlying 
shares until after the shareholder meeting.
    Paragraph (e)(2)(ii)(C) of the proposal provided that a fiduciary 
must not subordinate the interests of the participants and 
beneficiaries in their retirement income or financial benefits under 
the plan to any non-pecuniary objective, or sacrifice investment return 
or take on additional investment risk to promote goals unrelated to 
these financial interests of the plan's participants and beneficiaries 
or the purposes of the plan. A commenter took issue with this 
requirement, suggesting that it was inconsistent with some client 
expectations, as well as stewardship codes outside the United States 
that do not limit significant votes to economic impact to the 
portfolio. The Department disagrees and notes that the provision 
reflects the fundamental fiduciary duty of loyalty as set forth in 
ERISA section 404(a)(1)(A). The Department has modified the final rule 
in order to avoid suggesting that a fiduciary may exercise proxy voting 
and other shareholder rights with the goal of advancing non-pecuniary 
goals unrelated to the financial interests of the plan's participants 
and beneficiaries so long as it does not result in increased costs to 
the plan or a decrease in value of the investment. Thus, paragraph 
(e)(2)(ii)(C) of the final rule states that a fiduciary must not 
subordinate the interests of the participants and beneficiaries in 
their retirement income or financial benefits under the plan to any 
non-pecuniary objective, or promote non-pecuniary benefits or goals 
unrelated to these financial interests of the plan's participants and 
beneficiaries.
    Paragraph (e)(2)(ii)(D) of the proposal provided that a fiduciary 
must investigate material facts that form the basis for any particular 
proxy vote or other exercise of shareholder rights. The provision 
further stated that the fiduciary may not adopt a practice of following 
the recommendations of a proxy advisory firm or other service provider 
without appropriate supervision and a determination that the service 
provider's proxy voting guidelines are consistent with the economic 
interests of the plan and its participants and beneficiaries, as 
defined in paragraph (e)(2)(ii)(A) of the proposal.
    A commenter suggested the provision's requirement to investigate 
material facts was overly broad, and explained that there may be 
instances when routine or recurring proxy votes, such as annual proxy 
votes on the same subject, may not require a separate and distinct 
investigation in order for a fiduciary to make a prudent determination. 
A commenter indicated that paragraph (e)(2)(ii)(D) is overly 
burdensome, and that issues are addressed in paragraphs (e)(2)(ii)(F) 
and (e)(2)(iii) (relating to selection of service providers and 
delegation to investment managers). The commenter recommended deletion 
of the provision.
    On the other hand, another commenter suggested that the Department 
go further with the fiduciary requirement to investigate material facts 
by explicitly referencing review of the issuer response statements 
required by recently-adopted SEC proxy solicitation rules. The 
commenter indicated these filings may include significant, material 
information that could impact a voting decision (including decisions 
about whether to vote and how to vote) that by definition would not be 
considered by the proxy advisory firm in drafting its recommendation. 
Additionally, according to the commenter, recent SEC guidance on the 
proxy voting responsibilities of investment advisers encourages 
investment advisers to have policies and procedures in place to 
consider the information available to them about proxy advisory firms 
themselves under the SEC's new proxy solicitation rules (e.g., 
disclosures of proxy advisory firm conflicts of interests) as well as 
any information that comes to light after they have received a proxy 
advisory firm's voting recommendations (e.g., additional soliciting 
material setting forth an issuer's views on a recommendation). The 
supplemental guidance further states that, under certain circumstances, 
an investment adviser would likely need to consider such additional 
information from an issuer prior to exercising voting authority in 
order to demonstrate that it is voting in its client's best interest, 
and that it should disclose how its policies and procedures address the 
use of automated voting in cases where it becomes aware before the 
submission deadline for proxies that an issuer intends to file or has 
filed additional soliciting materials regarding a matter to be voted 
upon.
    Several commenters raised a number of concerns in connection with 
paragraph (e)(2)(ii)(D) of the proposal about proxy advisory firms, 
including conflicts of interest resulting from business relationships 
with companies that are the subject of proxy recommendations, a ``one-
size-fits-all'' approach to corporate governance that does not take 
into account differences in companies' business models, a lack of 
transparency in the process by which proxy advisory firm 
recommendations are developed, errors in proxy advisory firm reports 
and recommendations, proxy advisory firms' resistance to

[[Page 81668]]

engaging in a dialogue with issuers to correct errors and 
misunderstandings, automatic submission of votes for clients, cutting 
plan managers out of the decision-making process, and depriving issuers 
of a chance to correct the record or provide the market with additional 
information.
    After considering the comments, the Department is modifying 
paragraph (e)(2)(ii)(D) by requiring a fiduciary to evaluate, rather 
than investigate, material facts. This change is to remove any 
implication that plan fiduciaries would be expected to conduct their 
own investigation of material facts, which was not intended by the 
Department. Instead, the intent of this provision was to ensure that in 
making informed proxy voting decisions, fiduciaries should consider 
information material to a matter that is known or that is available to 
and reasonably should be known by the fiduciary. In this regard, the 
Department notes that, as described by the commenter above, as a result 
of recent SEC actions, clients of proxy advisory firms may become aware 
of additional information from an issuer which is the subject of a 
voting recommendation.\39\ An ERISA fiduciary would be expected to 
consider the relevance of such additional information if material. 
Paragraph (e)(2)(ii)(D) of the final rule thus provides that a 
fiduciary must evaluate material facts that form the basis for any 
particular proxy vote or other exercise of shareholder rights.
---------------------------------------------------------------------------

    \39\ 2020 SEC Supplemental Guidance, 85 FR at 55155-57. 
Fiduciaries may retain proxy advisory firms and other service 
providers, subject to any applicable requirements of paragraphs 
(e)(2)(ii)(F) and (e)(2)(iii) and (iv), as part of satisfying the 
fiduciaries' obligations to evaluate material facts.
---------------------------------------------------------------------------

    Some commenters also suggested that the Department strengthen the 
rule by including specific regulatory text that generally disallows 
``robovoting,'' a term some commenters describe as automatic voting 
mechanisms relying on proxy advisors. A commenter questioned whether 
robovoting is consistent with ERISA's stringent standards. Another 
commenter suggested that robovoting is an abridgment of fiduciary 
responsibility. Some commenters also suggested that the Department 
should prohibit robovoting for significant, contested, and 
controversial proxy votes. Commenters also suggested that the 
Department consider placing conditions on the use of robovoting, such 
as allowing robovoting only if a company that is the subject of a proxy 
advisory firm's recommendations has not submitted a response to the 
recommendation.
    The Department intended that the provisions in paragraph 
(e)(2)(ii)(D) of the proposal address the sort of concerns raised by 
these comments and provide appropriate guidelines for ERISA 
fiduciaries. The provision in the proposal stated, in relevant part, 
that a fiduciary may not adopt a practice of following the 
recommendations of a proxy advisory firm or other service provider 
without appropriate supervision and a determination that the service 
provider's proxy voting guidelines are consistent with the economic 
interests of the plan and its participants and beneficiaries as defined 
in paragraph (e)(2)(ii)(A) of the proposal. The Department does not 
dispute that proxy advisory firms can play a role in providing 
information to fiduciaries and economizing investors' ability to 
exercise shareholder rights and proxy voting. However, public comments 
submitted in connection with the proposal, and recent SEC actions in 
this area described above, highlight aspects of the proxy advisory 
firms' recommendations and services that can be problematic in a 
variety of ways. For example, the Department acknowledges some 
commenters noted that many ERISA plans rely on proxy advisory firms' 
pre-population and automatic submission mechanisms for proxy votes, 
which can provide a cost-effective way to exercise their shareholder 
voting rights in cases where the proxy advisor has processes which 
assure that its voting recommendations conform to the obligations that 
plan managers hold as fiduciaries. However, adopting such a practice 
for all proxy votes effectively outsources their fiduciary decision-
making authority. Rather, as the Department noted in the preamble to 
the proposed rule, ``certain proposals may require a more detailed or 
particularized voting analysis.'' \40\
---------------------------------------------------------------------------

    \40\ 85 FR at 55224. The SEC 2019 Guidance for Investment 
Advisers similarly cautioned that a higher degree of analysis ``may 
be necessary or appropriate'' for certain types of matters, 
including corporate events such as mergers and acquisitions, or 
matters that are ``highly contested or controversial.'' Commission 
Guidance Regarding Proxy Voting Responsibilities of Investment 
Advisers, 84 FR 47420, 47423-24 (Sept. 10, 2019). Release Nos. IA-
5325; IC-33605, available at www.govinfo.gov/content/pkg/FR-2019-09-10/pdf/2019-18342.pdf.
---------------------------------------------------------------------------

    In light of other changes in paragraph (e)(2) intended to adopt a 
more principles-based approach in the final rule, the Department has 
concluded that it would be better to address these proxy advisory firm 
issues in a separate paragraph in the final rule, which is described 
under paragraph (e)(2)(iv).
    Paragraph (e)(2)(ii)(E) of the proposal required a fiduciary to 
maintain records on proxy voting activities and other exercises of 
shareholder rights, including records that demonstrate the basis for 
particular proxy votes and exercises of shareholder rights. Recognizing 
that ERISA's prudence obligation carries with it a requirement to 
maintain records and document fiduciaries' decisions, most commenters 
did not seriously object to the proposal's general obligation to 
maintain records on proxy voting activities and other exercises of 
shareholder rights. Commenters did, however, express concern that the 
proposal included particularized recordkeeping mandates that were both 
unnecessary and costly. One commenter suggested an alternative that 
fiduciaries must make prudent efforts to maintain accurate records that 
include proxy voting activities and, where authority is delegated, 
require the same of that person. Other commenters complained that the 
requirement to maintain specific records demonstrating the basis for 
particular votes was unnecessary and costly. Some commenters observed 
that such a level of recordkeeping would exceed that required for other 
potentially more impactful investment decisions. Another noted that the 
provision appeared to require a level of recordkeeping greater than 
described in current guidance, and complained that the Department did 
not adequately explain the reason for this change. The commenter noted 
that the Department stated in 2011 that there was no basis to impose 
more onerous documentation requirements that treat proxy voting 
differently from other fiduciary activities.\41\ Some commenters 
requested general clarification on the types of documents that would be 
necessary to demonstrate the basis for a vote. A commenter suggested a 
specific clarification that proxy voting activity that is consistent 
with an applicable proxy voting policy does not require additional 
explanation or documentation. Further, as discussed below, commenters 
expressed concern that the requirement in paragraph (e)(2)(ii)(E) of 
the proposal to maintain documents demonstrating the basis for 
particular votes, as well as a similar requirement in paragraph 
(e)(2)(iii) of the proposal (relating to delegation of responsibilities 
to investment managers), suggested that the proposal would create new 
and heightened monitoring obligations for fiduciaries

[[Page 81669]]

that delegate responsibilities to investment managers.
---------------------------------------------------------------------------

    \41\ See Dep't of Labor Office of Inspector Gen. Report No. 09-
11-001-12-121 (March 31, 2011). The commenter cited the EBSA 
response to OIG conclusion that EBSA does not have adequate 
assurances that fiduciaries or third parties voted proxies solely 
for the economic benefit of plans.
---------------------------------------------------------------------------

    It has long been the view of the Department that compliance with 
the duty to monitor necessitates proper documentation of the activities 
that are subject to monitoring. However, the Department agrees that a 
less prescriptive approach to recordkeeping obligations is appropriate. 
The Department is retaining the general recordkeeping requirement, but 
is removing the requirement to maintain documents that would be 
necessary to demonstrate the basis for a vote to avoid any inferences 
related to responsibilities in monitoring investment managers, which 
are addressed in paragraph (e)(2)(iii) of the final rule. Thus, 
paragraph (e)(2)(ii)(E) of the final rule requires fiduciaries to 
maintain records on proxy voting activities and other exercises of 
shareholder rights. In general, the extent of the documentation needed 
to satisfy the monitoring obligation will depend on individual 
circumstances, including the subject of the proxy voting and its 
potential economic impact on the plan's investment. For fiduciaries 
that are SEC-registered investment advisers, the Department intends 
that the recordkeeping obligations under paragraph (e)(2)(ii)(E) be 
applied in a manner that aligns to similar proxy voting recordkeeping 
obligations under the Advisers Act.\42\
---------------------------------------------------------------------------

    \42\ See infra note 43 and accompanying text.
---------------------------------------------------------------------------

    Paragraph (e)(2)(ii)(F) of the proposal required that fiduciaries 
exercise prudence and diligence in the selection and monitoring of 
persons, if any, selected to advise or otherwise assist with exercises 
of shareholder rights, such as providing research and analysis, 
recommendations regarding proxy votes, administrative services with 
voting proxies, and recordkeeping and reporting services.
    Various commenters supported the Department's effort to better 
regulate proxy advisory firms and the proxy advisory process and 
suggested additional steps the Department should take in a final rule. 
Some suggested mandating disclosure of fees paid by investment managers 
to proxy voting advisors, prohibiting proxy advisory firms from 
consulting with companies when they also make recommendations on voting 
issues for that company, and establishing a baseline disclosure 
standard to which all proxy voting advice businesses must adhere. 
Others suggested placing specific conditions on a fiduciary's ability 
to rely on a proxy advisory firm's voting recommendation, such as 
requiring the proxy advisory firm to demonstrate that it had researched 
and analyzed evidence that would support a conclusion contrary to the 
proxy advisory firm's conclusion. A commenter suggested that the 
Department should make more specific reference to proxy advisory firm 
conflict of interest disclosures required by the recently amended SEC 
proxy solicitation rules. According to the commenter, the SEC rules 
require that proxy advisory firms provide specific, prominent 
disclosures of their conflicts of interest and of any policies and 
procedures designed to mitigate said conflicts. Additionally, these 
disclosures must be specific to the company on which the proxy advisory 
firm is issuing a report. The commenter recommended that the 
fiduciaries should be required to review a proxy advisory firm's 
conflicts disclosure, and that the Department should caution ERISA 
fiduciaries against relying on a proxy advisory firm's recommendations 
if the disclosures reveal a conflict with respect to an issuer that 
calls into question the firm's ability to provide objective advice. 
Another commenter suggested that the Department should wait until 
implementation of the SEC's new regulations to determine if any further 
action is necessary, and that the Department's approach to regulating 
fiduciary use of proxy advisory firms should align with the approach 
taken by the SEC so that SEC-registered investment advisers are subject 
to a consistent standard regarding their use of proxy advisory firms. 
On the other hand, some commenters criticized the Department's focus on 
proxy advisory firms as being based on unsupported allegations of proxy 
advisory firm critics, without the Department either substantiating 
those criticisms or noting the self-interest of the persons making 
those allegations.
    After considering the public comments, the Department is adopting 
paragraph (e)(2)(ii)(F) in the final rule unmodified. It provides that 
fiduciaries must exercise prudence and diligence in the selection and 
monitoring of persons, if any, selected to advise or otherwise assist 
with exercises of shareholder rights, such as providing research and 
analysis, recommendations regarding proxy votes, administrative 
services with voting proxies, and recordkeeping and reporting services. 
The provision is essentially a restatement of the general fiduciary 
obligations that apply to the selection and monitoring of plan service 
providers, articulated in the context of fiduciary and other service 
providers that advise or assist with exercises of shareholder rights. 
Thus, as a general matter, fiduciaries will be expected to assess the 
qualifications of the provider, the quality of services offered, and 
the reasonableness of fees charged in light of the services provided. 
The process also must avoid self-dealing, conflicts of interest or 
other improper influence. In considering any proxy recommendation, 
fiduciaries should assure that they are fully informed of potential 
conflicts of proxy advisory firms and the steps such firms have taken 
to address them. Furthermore, to the extent applicable, fiduciaries 
will be expected to review the proxy voting policies and/or proxy 
voting guidelines and the implementing activities of the person being 
selected. If a fiduciary determines that the recommendations and other 
activities of such person are not being carried out in a manner 
consistent with those policies and/or guidelines, then the fiduciary 
will be expected to take appropriate action in response.
    A commenter suggested deleting the list of services related to 
proxy voting. The commenter explained that the list is incomplete, and 
that codifying it might create confusion as to the types of services 
that may be necessary or appropriate for a particular voting activity. 
The Department does not believe it necessary to modify the provision as 
it is clear that the provision is not attempting to limit in any way 
the types of services that a plan or plan fiduciary may utilize in 
connection with exercising shareholder rights. Also, although the 
Department agrees that it would be important for a fiduciary to 
consider the proxy advisory conflict of interest disclosure required 
under recent SEC guidance, and that a fiduciary should consider whether 
potential conflicts may affect the quality of services to be provided, 
the Department does not believe it appropriate to expressly require 
review of such disclosure in paragraph (e)(2)(ii)(F) of the final rule 
because the provision could become outdated as disclosure obligations 
change over time. Rather, the Department believes that a general 
principles-based provision is adequate and would require ERISA 
fiduciaries to review disclosures of conflicts of interest required by 
SEC rules or guidance.
Paragraph (e)(2)(iii)
    Paragraph (e)(2)(iii) of the proposal required that, where the 
authority to vote proxies or exercise shareholder rights has been 
delegated to an investment manager pursuant to ERISA section 403(a)(2), 
or a proxy voting firm or other person performs advisory services as to 
the voting of proxies, a responsible plan fiduciary must require

[[Page 81670]]

such investment manager or proxy advisory firm to document the 
rationale for proxy voting decisions or recommendations sufficient to 
demonstrate that the decision or recommendation was based on the 
expected economic benefit to the plan, and that the decision or 
recommendation was based solely on the interests of participants and 
beneficiaries in obtaining financial benefits under the plan. The 
preamble explained that the proposal required fiduciaries to require 
documentation of the rationale for proxy-voting decisions so that 
fiduciaries can periodically monitor those decisions.
    Commenters expressed concern that paragraph (e)(2)(iii) of the 
proposal appeared to require a delegating fiduciary to, in effect, peer 
over the shoulder of an investment manager and supervise each voting 
decision to confirm the voting decision was made based on the economic 
impact on the plan. Commenters noted that such a monitoring obligation 
for proxy voting would be higher than for other fiduciary activities, 
and would be inconsistent with ERISA's general rules and prior 
Department guidance related to delegation of fiduciary 
responsibilities. Commenters asked for clarification that fiduciaries 
would not be required to monitor every proxy vote or second-guess other 
fiduciaries' specific proxy voting decisions, unless the fiduciary 
knows or should know the designated fiduciary is violating ERISA with 
their proxy voting procedures.
    Another commenter recommended removal of the requirement that a 
fiduciary require its investment managers and proxy advisory firms to 
document each voting decision along with the rationale for each 
decision, indicating that it would create unmanageable liability risk 
for fiduciaries by suggesting an obligation to review every voting 
decision made. Commenters indicated that the documentation requirement 
would be costly for investment managers, believing they would need to 
justify and communicate their decisions regarding the benefit of each 
proxy agenda item to each plan client. Another commenter suggested 
industry practice is that, when votes are exercised in accordance with 
approved proxy voting guidelines generally, only votes contrary to 
approved guidelines warrant specific documentation. Other commenters, 
however, believed documentation would be beneficial in protecting plan 
interests and suggested that further access to information and analyses 
from proxy advisory firms would help plan fiduciaries understand how 
the advisory firms developed their recommendations.
    The Department did not intend to create a higher standard for a 
fiduciary's monitoring of an investment manager's proxy voting 
activities than would ordinarily apply under ERISA with respect to the 
monitoring of any other fiduciary or fiduciary activity. Thus, the 
Department has revised the provision in the final rule to eliminate the 
requirement for documentation of the rationale for proxy voting 
decisions, and instead replaced it with a more general monitoring 
obligation. Specifically, paragraph (e)(2)(iii) of the final rule 
provides that where the authority to vote proxies or exercise 
shareholder rights has been delegated to an investment manager pursuant 
to ERISA section 403(a)(2), a proxy voting firm or other person who 
performs advisory services as to the voting of proxies, a responsible 
plan fiduciary shall prudently monitor the proxy voting activities of 
such investment manager or proxy advisory firm and determine whether 
such activities are consistent with paragraphs (e)(2)(i)-(ii) and 
(e)(3) of the final rule. The Department notes that while the provision 
does not contain a specific documentation requirement, an SEC rule 
requires investment advisers registered with the SEC under the Advisers 
Act to maintain a record of each proxy vote cast on behalf of a client, 
retain documents created by the adviser that were material to a 
decision on how to vote or that memorialize the basis for that 
decision, and to maintain each written client request for information 
on how the adviser voted proxies on behalf of the client and any 
written response by the investment adviser to any (written or oral) 
client request for information on how the adviser voted proxies on 
behalf of the requesting client.\43\ These requirements may be helpful 
to responsible plan fiduciaries in fulfilling monitoring requirements 
under paragraph (e)(2)(iii).
---------------------------------------------------------------------------

    \43\ SEC Rule 204-2, 17 CFR 275.204-2; see also SEC Rule 206(4)-
6(b) and (c), 17 CFR 275.206(4)-6(b) and (c) (relating to certain 
disclosures about proxy voting by an investment adviser that must be 
provided to, or may be requested by, a client of the investment 
adviser).
---------------------------------------------------------------------------

    Commenters also raised concerns about the statement in the preamble 
to the proposal that suggested uniform proxy policies may sometimes 
jeopardize responsible plan fiduciaries' satisfaction of their duties 
under ERISA as suggesting that ERISA plans should require investment 
managers to use customized policies. A commenter explained that 
currently investment managers with voting discretion may vote 
consistently across client accounts as appropriate (i.e., on those 
proposals for which objectives of the accounts are consistent and 
divergent economic interests or client-specific preferences are not 
present). Similarly, another commenter indicated that many investment 
advisers registered with the SEC use consistent proxy voting policies 
across client accounts, including accounts held by ERISA plans and 
pooled investment vehicles, because they believe those policies are in 
the best interest of clients.
    Some commenters believed that developing customized policies for 
particular ERISA plans or collective investment vehicles used by ERISA 
plans would increase costs for plans and investment managers without 
incremental benefit to participants and beneficiaries. A commenter 
noted that investment managers might need to run a parallel voting 
process for ERISA and non-ERISA assets, which would create additional 
administrative burden and costs. A commenter also asserted that due to 
increased risk, some managers might move in the direction of not 
undertaking voting responsibilities, which would then require plans to 
make their own assessments and invariably result in increased costs.
    A commenter suggested that the proposal's approach to regulating 
fiduciary use of proxy advisory firms should align with the approach 
taken by the SEC so that SEC-registered investment advisers are subject 
to a consistent standard regarding their use of proxy advisory firms. A 
commenter noted similar concerns in the context of proxy advisory 
services, indicating that paragraph (e)(2)(iii) implied that proxy 
advisors must tailor their rationale for every recommendation to each 
specific plan (and its participants) whose asset manager uses its 
research. A commenter believed such a requirement would be 
unnecessarily plan specific and unworkable. The commenter explained 
that proxy advisory firms support their clients, such as asset managers 
to retirement plans, by providing recommendations based on their chosen 
proxy voting policy, which is usually a custom policy the asset manager 
has selected to serve the interest of its client (e.g., a retirement 
plan and its participants). According to the commenter, the client's 
decisions as to what its policy should be and how it should vote are at 
the sole discretion of the asset manager.
    With respect to uniform proxy policies being utilized by investment 
managers, it was not the Department's intention to suggest that plans 
must require investment managers to vote

[[Page 81671]]

according to custom policies. Rather, the Department's statement 
reflected a general concern that responsible fiduciaries might be 
accepting investment managers' proxy voting policies without sufficient 
review as to whether those policies comply with ERISA and, if so, 
whether the investment managers were complying with those policies. The 
Department believes that the revisions to the recordkeeping requirement 
in the final rule described above appropriately address that issue.
Paragraph (e)(2)(iv)
    In light of other changes in paragraph (e)(2) intended to adopt a 
more principles-based approach in the final rule, some provisions 
related to proxy advisory firms that were in paragraph (e)(2)(ii)(D) of 
the proposal have been moved to a new paragraph (e)(2)(iv) in the final 
rule. Specifically, paragraph (e)(2)(ii)(D) of the proposal stated that 
the fiduciary may not adopt a practice of following the recommendations 
of a proxy advisory firm or other service provider without appropriate 
supervision and a determination that the service provider's proxy 
voting guidelines are consistent with the economic interests of the 
plan and its participants and beneficiaries as defined in paragraph 
(e)(2)(ii)(A) of the proposal.
    Paragraph (e)(2)(iv) of the final rule generally includes the same 
fiduciary obligations with respect to the use of proxy advisory firms 
and other service providers that were described in paragraph 
(e)(2)(ii)(D) of the proposal, with some modifications to strengthen 
the oversight obligations of fiduciaries who retain proxy advisory 
firms or other service providers. In response to the public comments 
that cited fiduciary practices that carry a high risk of noncompliance 
with ERISA, paragraph (e)(2)(iv) of the final rule has been modified so 
that a fiduciary that chooses to follow the recommendations of a proxy 
advisory firm or other service provider must determine that the firm or 
service provider's proxy voting guidelines are consistent with the five 
factors set forth in paragraph (e)(2)(ii)(A)-(E) of the final rule, 
rather than only paragraph (e)(2)(ii)(A). Because paragraph 
(e)(2)(ii)(F) of the final rule covers the exercise of prudence and 
diligence in the selection and monitoring of proxy advisory firms and 
other service providers, it would not generally be applicable to the 
proxy voting guidelines of a proxy advisory firm or other service 
provider.
    Paragraph (e)(2)(iv) of the final rule removes the appropriate 
supervision requirement since that requirement duplicates the 
monitoring obligations set forth in paragraph (e)(2)(ii)(F) of the 
final rule. A fiduciary that retains a proxy advisory firm or other 
service provider, however, remains subject to the prudence and 
diligence obligations described in paragraph (e)(2)(ii)(F) regarding 
the selection of that person and, if the fiduciary adopts a practice of 
following the recommendations of that person, the fiduciary is subject 
to the additional requirements of paragraph (e)(2)(iv) of the final 
rule.
(iii) Paragraph (e)(3)
    Paragraphs (e)(3)(i) and (ii) of the proposal, which would have 
required fiduciaries in certain circumstances to vote or not to vote 
proxies, were removed from the final rule, as discussed above. 
Paragraph (e)(3)(iii) of the proposal expressly acknowledged the 
appropriateness of ERISA fiduciaries' adoption of proxy voting policies 
to help them more cost-effectively comply with their obligations under 
the proposal. Paragraph (e)(3)(iii) of the proposal provided for 
adoption of general proxy voting policies or procedures and provided 
three examples of policies that could be utilized by fiduciaries 
(sometimes referred to as ``permitted practices'') in paragraphs 
(e)(3)(iii)(A)-(C) of the proposal. The proposed permitted practices 
included conditions intended to require a fiduciary to make prudence-
based judgments about the policies.
    The Department received a number of general comments on paragraph 
(e)(3)(iii) of the proposal. Several commenters supported use of proxy 
voting policies to help fiduciaries reduce costs and compliance 
burdens, but suggested that the scope of relief for fiduciaries under 
paragraph (e)(3)(iii) of the proposal was unclear, noting that clear 
``safe harbor'' relief was not afforded by the proposal. Commenters 
also asked about the extent to which fiduciaries following permitted 
practices would still be required to comply with particular provisions 
of the proposal that seemed more directed as evaluations of individual 
votes, e.g., some of the recordkeeping provisions in the proposal. 
Commenters recommended that the permitted practices should be made 
clear safe harbors indicating that fiduciaries are deemed to satisfy 
their prudence and loyalty obligations under ERISA. Commenters argued 
that without such treatment the permitted practices would not offer 
effective options for easing compliance burdens and associated costs as 
intended by the Department. Commenters also requested confirmation that 
plan fiduciaries have flexibility to adopt proxy voting policies in 
addition to the specific examples described in the rule. Other 
commenters did not support paragraph (e)(3)(iii) of the proposal, 
asserting that the proposal would effectively compel ERISA plans to 
adopt one of the permitted practices by imposing the proposal's 
burdensome cost-benefit analysis requirements.
    The Department has decided to retain, with modifications, the 
framework for adoption of proxy voting policies as set forth in 
paragraph (e)(3)(iii) of the proposal as paragraph (e)(3)(i) of the 
final rule. The provision in the final rule has been modified to more 
clearly provide safe harbor relief. The safe harbors apply to a 
fiduciary's duties of loyalty and prudence with respect to decisions on 
whether to vote, but do not apply to decisions on how to vote. Thus, a 
fiduciary will not breach its fiduciary responsibilities under sections 
404(a)(1)(A) and 404(a)(1)(B) of ERISA with respect to decisions on 
whether to vote, provided such policies are developed in accordance 
with a fiduciary's obligations under ERISA as set forth in the 
applicable provisions of paragraphs (e)(2)(i) and (ii) of the final 
rule. Because the compliance burdens under the rule should be 
significantly reduced by other changes from the proposal described 
elsewhere (e.g., the principles-based approaches and elimination of 
proposed paragraphs (e)(3)(i) and (ii)), the Department does not 
believe that fiduciaries will be compelled to adopt the proxy voting 
policies described in paragraph (e)(3)(i) of the final rule but rather 
will use them, as the Department intended, to provide cost-effective 
options for exercising shareholder rights in compliance with their 
fiduciary obligations under ERISA.
    Thus, paragraph (e)(3)(i) of the final rule provides that in 
deciding whether to vote a proxy pursuant to paragraphs (e)(2)(i) and 
(ii) of the final rule, fiduciaries to plans may adopt proxy voting 
policies under which voting authority shall be exercised pursuant to 
specific parameters prudently designed to serve the plan's economic 
interest. The final rule further provides that paragraphs (e)(3)(i)(A) 
and (B) set forth optional means for satisfying the fiduciary 
responsibilities under section 404(a)(1)(B) of ERISA, provided such 
policies are developed in accordance with a fiduciary's prudence 
obligations under ERISA as set forth in the applicable provisions of 
paragraphs (e)(2)(i) and (ii) of the final rule. These safe harbors are 
intended to be applied flexibly rather than in a binary ``all or none'' 
manner, and may be used either

[[Page 81672]]

independently or in conjunction with each other. The safe harbors are 
thus a means of establishing general proxy voting practices that allow 
plans to efficiently operationalize and manage shareholder rights 
consistent with the applicable fiduciary principles in paragraphs 
(e)(2)(i) and (ii). Paragraph (e)(3)(i) also makes clear that 
paragraphs (e)(3)(i)(A) and (B) are not intended to set forth an 
exclusive list of the policies that plans could adopt that would 
satisfy their responsibilities under the fiduciary principles in 
paragraphs (e)(2)(i) and (ii).
    Paragraph (e)(3)(i)(A) sets forth the first of two safe harbor 
policies contained in the final rule. It describes a policy that voting 
resources will focus only on particular types of proposals that the 
fiduciary has prudently determined are substantially related to the 
issuer's business activities or are expected to have material effect on 
the value of the investment. The provision is substantively similar to 
the permitted practice described in paragraph (e)(3)(iii)(B) of the 
proposal. However, the proposed provision listed types of proposals 
that a fiduciary might prudently consider focusing voting resources on: 
Proposals relating to corporate events (mergers and acquisitions 
transactions, dissolutions, conversions, or consolidations), corporate 
repurchases of shares (buybacks), issuances of additional securities 
with dilutive effects on shareholders, or contested elections for 
directors. Commenters expressed concern that the Department did not 
provide any economic analysis for why matters listed in proposed 
paragraph (e)(3)(iii)(B) would be more material to shareholders than 
other issues, and argued that voting on a variety of issues not 
included in that list would be in the interest of ERISA plans. For 
example, a commenter pointed out that mutual fund proposals, which may 
present difficulties for these funds in achieving quorum as compared to 
solicitations made by corporate issuers, and votes to approve auditors 
were not included in the list but could be considered material to 
investors.
    The list of matters included in the proposal was not intended as an 
exhaustive list of particular matters that merit consideration by 
fiduciaries. Nor was it intended to limit a fiduciary's flexibility to 
prudently consider other matters. The Department continues to believe 
that the listed issues are examples of matters that generally would be 
expected to have an economic impact on the value of the investment. 
Nonetheless, to avoid the potential for such a misperception, the 
Department is not including the list in paragraph (e)(3)(i)(A) of the 
final rule.
    The final provision slightly revises the language used to describe 
the fiduciary's prudence determination to reflect a pecuniary-based 
analysis. The final rule also broadly references the value of the 
investment rather than the plan's investment to make it clear that the 
evaluation could be at the investment manager level dealing with a pool 
of investor's assets or at the individual plan level. Paragraph 
(e)(3)(i)(A) of the final rule thus describes a policy that voting 
resources will focus only on particular types of proposals the 
fiduciary has prudently determined are substantially related to the 
issuer's business activities or are expected to have a material effect 
on the value of the investment.\44\
---------------------------------------------------------------------------

    \44\ The final rule uses the term ``material effect'' rather 
than ``significant impact.'' No substantive change is intended by 
the revision as the Department believes that ``significant impact'' 
is generally equivalent to ``material effect'' in this context. Use 
of the term materiality is intended to align the terminology 
consistent with the rest of the Investment Duties regulation. The 
Department believes that fiduciaries and investment managers are 
generally familiar with the concept of materiality from its use in 
connection with both ERISA and the Federal securities laws.
---------------------------------------------------------------------------

    Paragraph (e)(3)(i)(B) of the final rule sets forth the second safe 
harbor policy and is based on paragraph (e)(3)(iii)(C) of the proposal. 
The proposal provided that a fiduciary could adopt a policy of 
refraining from voting on proposals or particular types of proposals 
when the plan's holding of the issuer relative to the plan's total 
investment assets is below quantitative thresholds that the fiduciary 
prudently determines, considering its percentage ownership of the 
issuer and other relevant factors, is sufficiently small that the 
matter being voted upon is unlikely to have a material impact on the 
investment performance of the plan's portfolio (or investment 
performance of assets under management in the case of an investment 
manager). The proposal indicated that the Department was considering a 
specific quantitative upper limit for the threshold (i.e., a cap) under 
paragraph (e)(3)(iii)(C), and solicited comments on setting this upper 
limit, including whether a maximum cap should be defined and, if so, 
what factors should be considered in setting a cap. In particular, the 
Department solicited comments on whether a five percent cap would be 
appropriate, or some other percent level of plan assets.
    A commenter expressed the view that the permitted practice 
described in paragraph (e)(3)(iii)(C) to refrain from proxy voting 
would violate the requirement in ERISA section 404(a)(1)(B) that plan 
fiduciaries act ``with the care, skill, prudence, and diligence under 
the circumstances then prevailing [as] a prudent man acting in a like 
capacity and familiar with such matters.'' According to the commenter, 
the overwhelming majority of prudent experts--i.e., the expert 
professionals who make up the investment management community--have 
determined that proxy voting is in their clients' interests. Another 
commenter disagreed with the Department's statement that voting shares 
of plan holdings that comprise a small portion of total plan assets 
rarely advances plans' economic interests. The commenter indicated 
that, depending on the size of a plan, even small relative positions 
can have a large dollar value.
    Commenters also expressed concerns about potential negative 
unintended consequences of widespread adoption of the permitted 
practice. According to a commenter, if the majority of a plan's 
investments in portfolio companies fell within the parameters described 
in the permitted practice, this could leave the majority of the plan's 
portfolio un-voted, which in the aggregate would expose the plan 
investor to material risk even if the risk associated with each 
individual company was small. Additionally, according to commenters, 
non-voting by small plan investors could result in concentrating proxy 
votes in the hands of other investors whose interests might not align 
with the long-term interests of ERISA plans. Furthermore, non-voting by 
plans could result in companies with substantial portions of un-voted 
shares, and could also result in quorum requirements going unmet.
    With respect to the Department's request for input on whether a 
percent cap would be appropriate, commenters generally opposed such a 
provision and suggested that the Department avoid specifying a 
percentage cap on the portion of the plan's portfolio that must be 
represented by an issuer for proxy votes to be considered.
    The Department is not persuaded that the type of policy described 
in paragraph (e)(3)(iii)(C) of the proposal should be excluded from the 
final rule's safe harbor provision. The provision was designed to 
provide a fiduciary with flexibility to prudently tailor a quantitative 
threshold for a plan's portfolio, below which the outcome of the vote 
is unlikely to have a material impact on the performance of the plan's 
portfolio or, in situations where only a portion of the portfolio is 
being managed by an investment manager, the performance of the plan 
assets under

[[Page 81673]]

management. The Department believes that providing such an option in 
the final rule may be helpful to plans in reducing costs. The 
Department further believes that it can be prudent for a fiduciary to 
refrain from expending plan resources to vote on matters pertaining to 
a holding that makes up an immaterial portion because a fiduciary may 
prudently expect that voting on such matters will not have a material 
effect on performance. With respect to setting a cap, the Department 
does not believe it received sufficient information from comments to 
establish an upper limit in the final rule.
    Paragraph (e)(3)(i)(B) of the final rule thus describes as the 
second safe harbor a policy of refraining from voting on proposals or 
particular types of proposals when holding in a single issuer relative 
to the plan's total investment assets, or the portion of a plan's 
assets being managed by an investment manager, is below a quantitative 
threshold that the fiduciary prudently determines, considering its 
percentage ownership of the issuer and other relevant factors, is 
sufficiently small that the matter being voted upon is not expected to 
have a material effect on the investment performance.\45\ The final 
rule does not require a specific performance period for determining 
whether a material effect exists; fiduciaries must therefore prudently 
decide an appropriate performance period for use in its proxy voting 
policies under this safe harbor.
---------------------------------------------------------------------------

    \45\ The proposal referred to ``the outcome of the vote,'' 
rather than ``the matter being voted upon.'' This final rule uses 
``the matter being voted upon'' to make it clear that whether the 
fiduciary's voting power could sway the vote one way or the other is 
not relevant to application of the safe harbor. Rather, the point is 
that the plan's holding would be sufficiently small that any outcome 
of the vote (and any consequent changes to the value of the 
underlying asset) would have no material effect on the investment 
performance of the plan.
---------------------------------------------------------------------------

    The Department notes that paragraph (e)(3)(iii)(A) of the proposal 
is not being incorporated in the final rule. Paragraph (e)(3)(iii)(A) 
of the proposal described a policy of voting proxies in accordance with 
the voting recommendations of a corporation's management on proposals 
or types of proposals that the fiduciary prudently determined would be 
unlikely to have a significant impact on the value of the plan's 
investment, subject to any conditions determined by the fiduciary as 
requiring additional analysis because the matter being voted upon 
concerns a matter that may present heightened management conflicts of 
interest or is likely to have a significant economic impact on the 
value of the plan's investment. Commenters expressed the view that this 
permitted practice would be unprecedented, indicating that the 
Department has never previously indicated that a fiduciary may assume 
that another person is acting in the best interest of the plan. Rather, 
according to a commenter, the Department's consistent position is that 
a fiduciary must prudently select and monitor both fiduciary and non-
fiduciary service providers. The commenter questioned this provision's 
consistency with other provisions of the proposal, noting that under 
other provisions of the proposal plan fiduciaries would be required to 
increase their due diligence on proxy advisory firms consistent with 
prudence and loyalty obligations, but this permitted practice would 
allow them to follow corporate directors in deciding what is in the 
best interest of the fiduciaries' plan participants without undertaking 
similar due diligence.
    A commenter specifically noted that proxy advisory firms that are 
registered with the SEC under the Advisers Act owe their clients 
fiduciary duties of care and loyalty and suggested that if the 
permitted practice for management recommendations under paragraph 
(e)(3)(iii)(A) was adopted, then the Department should create a 
permitted practice for fiduciaries to rely on such firms. Commenters 
also questioned the safeguards offered by a permitted practice that 
relies on fiduciary duties that officers and directors owe to a 
corporation based on state corporate laws. A commenter stated that such 
a standard is lower that the fiduciary standard of care under ERISA. 
The commenter further stated that Delaware corporate law authorizes 
companies to waive director liability for breaches of the duty of care, 
and that corporate conflicts of interest with the company may also be 
waived upon approval of non-interested directors. Another commenter 
criticized reliance on fiduciary duties under state corporate law by 
noting that the law imposes these duties because management's interests 
can and do differ from those of the company's shareholders, and state 
corporate law requires shareholder votes precisely because managers' 
fiduciary duties alone are not adequate to align management's and 
shareholders' interests.
    The Department notes that some of the commenters may have misread 
paragraph (e)(3)(iii)(A) as establishing unconditional blanket reliance 
on management recommendations. The proposal expressly limited reliance 
on management recommendations to proposals or types of proposals that 
the fiduciary had prudently determined would be unlikely to have a 
significant impact on the value of the plan's investment. Nonetheless, 
based on concerns expressed by commenters, and on the Department's 
separate decision to remove the requirement not to vote in certain 
situations, the Department decided to not adopt this permitted practice 
in the final rule's safe harbor provisions.
    Commenters also provided several suggestions for additional 
permitted practices, none of which the Department has adopted. Several 
recommended a policy based on a determination that voting would not 
result in material additional costs to the plan. There is no need to 
include this permitted practice (or safe harbor) because the final rule 
does not have an express prohibition on voting based on the balance of 
economic effect and costs. Other commenters suggested permitted 
practices for following prudently designed and applied proxy voting 
guidelines. The Department does not believe it is necessary or 
appropriate to include such a safe harbor. Paragraph (e)(3)(i) already 
states that fiduciaries may adopt proxy voting policies providing that 
the authority to vote a proxy shall be exercised pursuant to specific 
parameters prudently designed to serve the plan's economic interest. 
Another commenter suggested that if the rule retains a permitted 
practice that permits a fiduciary to follow management recommendations, 
then the Department should add a permitted practice that permits 
following recommendations of the proxy advisory firm if the adviser 
owes a fiduciary duty to its clients. The Department has not retained 
the permitted practice regarding following management recommendations 
and believes that proxy advisory firms are adequately addressed in 
other provisions of the final rule.
    Paragraph (e)(3)(ii) of the final rule relates to the review of 
proxy voting policies adopted under paragraph (e)(3)(i). The 
corresponding provision at paragraph (e)(3)(iv) of the proposal, 
applicable to the proposal's permitted practices, required plan 
fiduciaries to review any proxy voting policies adopted pursuant to 
paragraph (e)(3)(iii) of the proposal at least once every two years. 
The Department explained that the proposed requirement was appropriate 
to ensure a plan's proxy voting policies remain prudent given ongoing 
changes in financial markets and the investment world, but solicited 
comments on whether some other maximum interval for review would be 
appropriate.
    Commenters suggested that a two-year requirement would be 
unnecessary and recommended removal. Commenters

[[Page 81674]]

expressed the view that review of permitted practices should be based 
on facts and circumstances and left to the fiduciary to decide. A 
commenter also expressed concern that a specific review requirement in 
the rule could create potential liability for fiduciaries in their 
ongoing monitoring of other plan policies, such as investment policy 
statements, fiduciary charters, plan expenses and other policies, or in 
connection with the frequency of requests for proposals.
    After considering comments, the Department has decided to remove 
the specific two-year requirement and provide a general requirement for 
periodic review of policies. The Department understands that general 
industry practice is to review investment policy statements 
approximately every two years and expects that fiduciaries will review 
proxy voting policies with roughly the same frequency. Nevertheless, 
the Department is persuaded that it is unnecessary to set an exact 
deadline and that doing so could create liability based on a technical 
temporal violation of the rule. As a result, paragraph (e)(3)(ii) of 
the final rule provides that plan fiduciaries shall periodically review 
proxy voting policies adopted pursuant to paragraph (e)(3)(i) of the 
final rule.
    Paragraph (e)(3)(iii) of the final rule relates to the effect of 
proxy voting policies adopted under the final rule's safe harbor 
provision. It is based on paragraph (e)(3)(v) of the proposal, which 
provided that no policies adopted under paragraph (e)(3)(iii) of the 
proposal would have precluded, or imposed liability for, submitting a 
proxy vote when the fiduciary prudently determines that the matter 
being voted upon would have an economic impact on the plan after taking 
into account the costs involved, or for refraining from voting when the 
fiduciary prudently determines that the matter being voted upon would 
not have an economic impact on the plan after taking into account the 
costs involved.
    A commenter indicated that paragraph (e)(3)(v) of the proposal was 
not sufficient to provide safe harbor relief for fiduciaries following 
permitted practices under the proposal. Another commenter expressed the 
view that the provision was not broad enough and should expressly 
permit fiduciaries to consider any prudent alternative courses of 
action for any particular proxy issue that may otherwise fall within 
the description of a permitted practice.
    The Department believes that paragraph (e)(3)(i) of the final rule 
provides sufficient clarity with respect to the Department's intended 
safe harbor treatment of proxy voting policies adopted under paragraph 
(e)(3) of the final rule. The Department also believes that the 
principles-based approach in the final rule provides sufficient 
flexibility for fiduciaries to exercise prudent judgment in making 
proxy voting determinations. Changes have been made to paragraph 
(e)(3)(iii) of the final rule to reflect this principles-based 
approach.
    Paragraph (e)(3)(iii) of the final rule provides that no proxy 
voting policies adopted pursuant to paragraph (e)(3)(i) of this section 
shall preclude, or impose liability for, submitting a proxy vote when 
the fiduciary prudently determines that the matter being voted upon is 
expected to have a material effect on the value of the investment or 
the investment performance of the plan's portfolio (or investment 
performance of assets under management in the case of an investment 
manager) after taking into account the costs involved, or refraining 
from voting when the fiduciary prudently determines that the matter 
being voted upon is not expected to have such a material effect after 
taking into account the costs involved. In light of the potentially 
large number of individual proxy votes that may need to be considered 
on an annual basis, the safe harbor provisions are intended to apply 
and operationalize the fiduciary principles described in the final rule 
for a particular plan in a cost-efficient manner and provide an 
alternative to retaining a proxy advisory firm to provide advice on 
each vote. Paragraph (e)(3)(iii) of the final rule shields a fiduciary 
from liability to the extent that the fiduciary deviates from policies 
adopted pursuant to the safe harbors based on the fiduciary's 
conclusion that a different approach in a particular case is in the 
economic interests of the plan considering the specific facts and 
circumstances.
(iv) Paragraph (e)(4)
    Paragraphs (e)(4)(i) and (ii) of the final rule, like the proposal, 
reflect longstanding interpretive positions published in the 
Department's prior Interpretive Bulletins. Paragraph (e)(4)(i)(A) of 
the proposal stated that the responsibility for exercising shareholder 
rights 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 section 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 section 403(a)(2). Paragraph (e)(4)(i)(B) of the proposal 
provided that where the authority to manage plan assets has been 
delegated to an investment manager pursuant to ERISA section 403(a)(2), 
the investment manager has exclusive authority to vote proxies or 
exercise other shareholder rights appurtenant to such plan assets, 
except to the extent the plan or trust document or investment 
management agreement expressly provides that the responsible 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 exercise or management of some or all of such shareholder 
rights.
    A commenter indicated that paragraph (e)(4)(i) of the proposal was 
unclear as to trustee responsibilities with respect to voting directed 
by plan participants pursuant to plan provisions. As discussed below, a 
new paragraph (e)(5) was added to the final rule to address ``pass-
through'' or ``participant-directed'' voting. Paragraph (e)(4)(i)(A) in 
the final rule is unchanged from the proposal, with a correction of a 
typographical error. Paragraph (e)(4)(i)(B) in the final rule is 
unchanged from the proposal.
    Paragraph (e)(4)(ii) of the proposal described obligations of an 
investment manager of a pooled investment vehicle that holds assets of 
more than one employee benefit plan. It stated that an investment 
manager of a pooled investment vehicle that holds assets of more than 
one employee benefit plan may be subject to an investment policy 
statement that conflicts with the policy of another plan. It also 
provided that compliance with ERISA section 404(a)(1)(D) requires the 
investment manager to reconcile, insofar as possible, the conflicting 
policies (assuming compliance with each policy would be consistent with 
ERISA section 404(a)(1)(D)). In the case of proxy voting, to the extent 
permitted by applicable law, the investment manager must vote (or 
abstain from voting) the relevant proxies to reflect such policies in 
proportion to each plan's economic interest in the pooled investment 
vehicle. Such an investment manager may, however, develop an investment 
policy statement consistent with Title I of ERISA and the Investment 
Duties regulation, and require participating plans to accept the 
investment manager's investment policy, including any proxy voting 
policy, before they are allowed to invest. In such cases, a fiduciary 
must assess whether the investment manager's investment policy

[[Page 81675]]

statement and proxy voting policy are consistent with Title I of ERISA 
and the Investment Duties regulation before deciding to retain the 
investment manager.
    Commenters indicated that the proposal's requirement to reconcile 
conflicting policies of investing plans and engage in proportionate 
voting to reflect conflicting policies would be highly burdensome for 
investment managers. A commenter noted that it is sometimes not 
possible to instruct a single client's holding within the fund 
differently than other clients, as ``split-voting'' is not permitted 
practice in certain markets or custodian banks. Commenters also 
indicated that paragraph (e)(4)(ii) of the proposal did not reflect 
current industry standard practice that investment in a plan asset 
vehicle is generally conditioned on acceptance of the investment 
objectives, guidelines, and policies that apply to the vehicle. Some 
commenters recommended deletion of the proposed requirement to 
reconcile conflicting policies of ERISA plans. Other commenters 
suggested deleting paragraph (e)(4)(ii) of the proposal entirely.
    Commenters requested that the language in paragraph (e)(4)(ii) of 
the proposal addressing a plan's acceptance of an investment manager's 
proxy voting policy be modified to clarify that the investment 
manager's investment policy statement or proxy voting policy must be 
consistent with Title I of ERISA, but are not required to be consistent 
with the proposed rule. Commenters indicated that investment managers 
would have difficulties performing the plan-specific evaluations 
required by the proposal. These issues are discussed more generally 
above. A commenter also indicated that even if the rule were to allow 
elimination of the plan-specific evaluation, the task to make changes 
to an investment manager's policies would still be enormous. According 
to the commenter, the trust's proxy voting guidelines would likely 
require revision, and once revised, would need to be presented, 
explained, and accepted by each participating plan, including non-ERISA 
plans not subject to the rule. Similarly another commenter suggested 
that the subtle differences between paragraph (e)(4)(ii) of the 
proposal and the analogous provision in IB 2016-01 might cause an 
investment manager, in order to protect all of its clients, to adopt a 
revised investment policy statement that it would require participating 
plans to accept, and that the process would involve both drafting that 
policy and obtaining consent from investing plans.
    The Department is not persuaded to remove paragraph (e)(4)(ii) from 
the final rule or change the language regarding reconciliation of 
conflicting policies of investing plans or proportionate voting. 
Similar guidance has been consistently part of the Department's prior 
Interpretive Bulletins in this area. As to the requirement that 
policies must be consistent with Title I of ERISA and the final rule 
and difficulties associated with plan specific evaluations, the 
Department believes that changes in paragraph (e)(2)(i) and (ii) of the 
final rule should address commenters' concerns. With respect to the 
commenter's identification of subtle differences between paragraph 
(e)(4)(ii) of the proposal and the relevant portion of IB 2016-01, the 
Department acknowledges that the language is not identical.\46\ 
However, the Department did not intend the language changes to 
fundamentally alter that guidance. Like IB 2016-01, paragraph 
(e)(4)(ii) recognizes that there may be circumstances under which an 
investment manager of a pooled investment vehicle that holds assets of 
more than one plan may be subject to conflicting policies of investing 
plans, but that the manager may avoid conflicting policies by requiring 
investors to accept the investment manager's policies before they are 
allowed to invest.\47\ However, paragraph (e)(4)(ii) adds language that 
describes the associated obligations of plan fiduciaries in making the 
decision to accept the investment manager's policies. Commenters did 
not question whether an ERISA fiduciary should assess an investment 
manager's investment policy statement for consistency with ERISA prior 
to accepting it. To the extent that the commenter's concerns about 
differences from the relevant portion of IB 2016-01 relate to the 
requirement that the manager's policies must be consistent with the 
final rule, the Department believes changes in paragraph (e)(2)(i) of 
the final rule, as described above, should address this concern. As a 
result, paragraph (e)(4)(ii) of the final rule is being adopted 
substantially as proposed.
---------------------------------------------------------------------------

    \46\ Specifically, IB 2016-01 stated: ``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 section 404(a)(1)(D) would require the 
investment manager to reconcile, insofar as possible, the 
conflicting policies (assuming compliance with each policy would be 
consistent with ERISA section 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 section 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 section 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 section 404(a)(1)(D).''
    \47\ See 59 FR 38860, 38863 (July 29, 1994) (``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 asse[n]t to such 
policy as a condition of investing.'').
---------------------------------------------------------------------------

(v) Paragraph (e)(5)
    A number of commenters indicated that the proposal did not 
specifically address proxy rights passed through to plan participants. 
A commenter explained that participants may invest in publicly-traded 
companies, as well as mutual funds and other securities, through a 
self-directed brokerage window offered by their plans. According to the 
commenter, self-directed brokerage windows involve the broker passing 
voting rights through to the participants. Further, participant-
directed plans, such as those structured to meet ERISA section 404(c) 
and related regulations, sometimes allow participants to invest in 
company stock and pass through voting to them. According to the 
commenter, many ERISA-covered plans have been drafted to explicitly 
provide that plan participants are deemed to be ``named fiduciaries'' 
when they vote securities held by their plan accounts. Commenters 
argued that the structure and provisions of the proposed regulation did 
not account for such ``pass-through'' or ``participant-directed'' 
voting activity, and requested that the Department expressly exclude 
such voting activity from the rule or provide clarification as to 
application of the proposed rule's requirements in the context of pass-
through of voting rights, including the responsibilities of trustees in 
connection with the actual votes of participants and whether 
participants when exercising their proxy voting rights would be treated 
as fiduciaries under the rule.
    The Department agrees that the proposal was not intended to address

[[Page 81676]]

the sort of pass-through voting that the commenters described. 
Accordingly, the final rule includes an express provision in new 
paragraph (e)(5) stating that the final rule does not apply to voting, 
tender, and similar rights with respect to such securities that are 
passed through pursuant to the terms of an individual account plan to 
participants and beneficiaries with accounts holding such securities. 
That should not be read as an indication that plan trustees and other 
plan fiduciaries do not have fiduciary obligations with respect to such 
practices. Prior Department guidance recognized that in certain 
circumstances a trustee may follow the instructions of participants in 
an eligible individual account plan that expressly states that a 
trustee is subject to the direction of plan participants with respect 
to certain decisions regarding the management of their account. In such 
a case, under section 403(a)(1) of ERISA, the trustee must follow the 
direction of participants if those directions are proper, made in 
accordance with plan terms, and not contrary to ERISA.\48\ Plan 
trustees and other fiduciaries would continue to have to comply with 
ERISA's prudence and loyalty provisions with respect to the pass 
through of votes to plan participants and beneficiaries, and can 
continue to rely on the Department's prior guidance with respect to 
such participant-directed voting, including 29 CFR 2550.404c-1 
implementing ERISA section 404(c)(1) to participant-directed pass 
through voting.
---------------------------------------------------------------------------

    \48\ See Letter from Deputy Assistant Secretary Lebowitz to 
Thobin Elrod (Feb. 23, 1989); Letter from Assistant Secretary Berg 
to Ian Lanoff (Sept. 28, 1995).
---------------------------------------------------------------------------

(vi) Paragraphs (g) and (h)
    Paragraph (g) provides the applicability dates for the final rule. 
Under paragraph (g), the final rule will be applicable thirty days 
after the date this final rule is published in the Federal 
Register.\49\ One commenter requested clarity with respect to whether 
the proposed applicability date applied only to paragraph (e) or to the 
entirety of Sec.  2550.404a-1. Paragraphs (g)(1) and (g)(3) of the 
final rule state that the applicability date for paragraph (e) is 
thirty days after the date this final rule is published in the Federal 
Register and shall apply to exercises of shareholder rights after such 
date. A number of commenters on the proposal stated that the proposed 
30-day effective date period would not accommodate the essential and 
lengthy transition processes that would be necessary for plan 
fiduciaries to fully comply with the rule.\50\ These commenters 
requested extensions up to 12 or 18 months after publication of a final 
rule. Alternatively, or in addition to extending the applicability 
date, commenters requested that if the Department retains the 30-day 
provision, that the final rule include guidance that would permit 
affected parties a more reasonable amount of time to comply with the 
rule. Commenters proffered a variety of suggestions that would help 
plan fiduciaries and others manage this new process, including a 
different applicability date, a transition rule, a grandfather rule for 
existing voting arrangements, and a temporary non-enforcement policy.
---------------------------------------------------------------------------

    \49\ One commenter argued that the rule is a ``major rule'' 
under the Congressional Review Act and thus may not be effective 
earlier than 60 days after publication in the Federal Register. As 
discussed in the Regulatory Impact Analysis below, the Office of 
Management and Budget has determined this rule is not a ``major 
rule'' for Congressional Review Act purposes and is therefore not 
subject to the delayed 60-day effective date.
    \50\ Commenters pointed out that plan sponsors and other 
fiduciaries would need to review, amend, and possibly renegotiate 
existing contracts with investment managers, proxy advisory firms, 
and other service and investment providers. Some commenters also 
expressed more specific concerns, for example, that, with respect to 
pooled investment vehicles, it may be necessary to obtain approval 
of revised investment policy statements from participating plans, 
which would be difficult to obtain in only 30 days.
---------------------------------------------------------------------------

    The Department is not extending the applicability date, 
particularly given the benefits this final rule affords to participants 
and beneficiaries. Furthermore, the Department believes that the final 
rule does not represent so significant a change from existing guidance 
that fiduciaries can reasonably claim impossibility in timely 
implementing most of its requirements. However, the Department agrees 
that for certain portions of the final rule, a later applicability date 
will address concerns of some commenters with respect to their ability 
to comply with the rule within the 30-day effective period. Paragraph 
(g)(3) grants fiduciaries until January 31, 2022, to comply with the 
requirements of paragraphs (e)(2)(ii)(D) and (E), (e)(2)(iv), and 
(e)(4)(ii) of the final rule. This delay gives fiduciaries additional 
time in making any modifications with respect to their use of proxy 
advisory firms and other service providers and for reviewing any proxy 
voting policies of pooled investment vehicles by investment managers. 
However, fiduciaries that are investment advisers registered with the 
SEC must comply with the 30-day effective date with respect to 
paragraphs (e)(2)(ii)(D) and (E) as such provisions are intended to be 
aligned with existing obligations under the Advisers Act, including 
Rules 204-2 and 206(4)-6 thereunder and the 2019 SEC Guidance and 2020 
SEC Supplemental Guidance.\51\
---------------------------------------------------------------------------

    \51\ The final rule includes a technical language change in 
paragraph (g) to conform paragraph (g) to Federal Register drafting 
conventions regarding the use of ``effective date'' versus 
``applicability date'' terminology.
---------------------------------------------------------------------------

    Finally, paragraph (h) of the final rule, as proposed, continues to 
provide that should a court of competent jurisdiction hold any 
provision of the rule invalid, such action will not affect any other 
provision. Including a severability clause describes the Department's 
intent that any legal infirmity found with part of the final rule 
should not affect any other part of the rule. The exact same paragraph 
is included in the final rule on Financial Factors in Selecting Plan 
Investments.

4. Interpretive Bulletin 2016-01 (IB 2016-01) and Field Assistance 
Bulletin 2018-01 (FAB 2018-01)

    The final rule also withdraws IB 2016-01 and removes it from the 
Code of Federal Regulations. Accordingly, as of publication of the 
final rule, IB 2016-01 may no longer be relied upon as reflecting the 
Department's interpretation of the application of ERISA's fiduciary 
responsibility provisions to the exercise of shareholder rights and 
written statements of investment policy, including proxy voting 
policies or guidelines.
    FAB 2018-01 concerned both ``ESG Investment Considerations'' and 
``Shareholder Engagement Activities.'' The portion of FAB 2018-01 under 
the heading of ``ESG Investment Considerations'' was superseded by the 
Department's final rule on ``Financial Factors in Selecting Plan 
Investments.'' \52\ Similarly, the portion of FAB 2018-01 under the 
heading ``Shareholder Engagement Activities'' will be superseded by 
this final rule and this accompanying preamble. Since that discussion 
is the sole remaining substantive portion of FAB 2018-01, as of the 
effective date of the final rule, FAB 2018-01 will no longer be 
considered current guidance issued by the Department.
---------------------------------------------------------------------------

    \52\ 85 FR at 72872.
---------------------------------------------------------------------------

C. Miscellaneous Issues

Constitutional Issues

    A number of commenters raised concerns that the proposal, or 
specific provisions of the proposal, may be inconsistent with certain 
rights afforded shareholders by the First and Fifth Amendments in the 
Constitution's Bill of Rights. The Department disagrees

[[Page 81677]]

with these constitutional arguments and, further, believes that the 
lack of merit of those arguments is even more pronounced in light of 
modifications to the proposed rule adopted in the final rule. Rather, 
the final rule is designed to help these ERISA fiduciaries meet 
statutory standards, in particular the requirement that ERISA 
fiduciaries must carry out their duties relating to the exercise of 
shareholder rights prudently and solely for the economic benefit of 
plan participants and beneficiaries. The Department's view of the scope 
of factors to be considered by an ERISA fiduciary when managing plans 
assets was articulated as recently as 2014 by the Supreme Court in 
Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 421 (2014) (the 
``benefits'' to be pursued by ERISA fiduciaries as their ``exclusive 
purpose'' do not include ``nonpecuniary benefits'').

First Amendment Free Speech and Exercise of Religion

    Some commenters asserted that the proposal may violate the First 
Amendment's protection of free speech. The decision to vote shares or 
engage in shareholder activism is, they argued, a form of speech, and 
they claimed that the Department established strict conditions and 
costly burdens on the established mechanism by which shareholders (and 
therefore their representatives) are able to communicate their 
interests and provide for companies to take (or refrain from taking) 
certain actions. They also argued that the proposal was targeted at 
preventing support of ESG-related initiatives and, by increasing the 
costs associated with determining whether it is acceptable to vote, 
would force fiduciaries to use a permitted practice either to not 
support those initiatives or to vote with corporate management; thus, 
the commenters concluded that the proposal was both a content- and 
viewpoint-based restriction. The proposal, according to these 
commenters, could mandate that assets are managed in a manner that is 
inconsistent with the values and interests of ERISA investors. 
Similarly, a few commenters claimed that the proposal also may violate 
the First Amendment's protections for freedom of religion, because it 
would curtail the rights of religious organizations to vote in 
accordance with their beliefs.
    The First Amendment bars the government from abridging freedom of 
speech or the right to assemble peaceably and from prohibiting the free 
exercise of religion.\53\ The right of free speech protects the open 
expression of ideas without fear of government reprisal. Some 
commenters stated that the right to vote a proxy consistent with the 
participants' and beneficiaries' values is protected speech, and argued 
that the proposed rule's requirements would unconstitutionally limit 
this right.
---------------------------------------------------------------------------

    \53\ U.S. Const., amend. I.
---------------------------------------------------------------------------

    These commenters relied predominantly on the premise that the 
proposal effectively would force fiduciaries either to not vote or to 
vote with management. As one commenter argued, the proposal would 
``impose unique and burdensome restrictions on shareholder activities 
that may be contrary to the interests of a favored group, while 
removing those restrictions when the expressive activity favors the 
preferred group.'' However, the Department in this final rule has 
removed the provisions that these commenters argued would create a fait 
accompli, allegedly stifling fiduciaries' speech-through-proxy-vote. 
Because of those changes, these arguments are moot.
    To the extent commenters would still argue that the final rule 
might run afoul of the Free Speech Clause, this argument is overbroad 
and inconsistent with Supreme Court precedent. ERISA requires 
fiduciaries to manage plan assets for the ``exclusive purpose'' of 
providing benefits and defraying expenses. Even if voting by a 
shareholder speaking for herself could be speech, as some commenters 
argued, proxy voting by a plan, which holds its shares in trust for its 
participants and beneficiaries, should appropriately and correctly be 
considered conduct. Consistent with Dudenhoeffer, fiduciary plan asset 
management activity must focus exclusively on providing ``benefits.'' 
That term refers to financial benefits (such as retirement income), and 
not to non-pecuniary goals. The final rule's provisions require that 
any proxy decision serves those financial benefits of participants and 
beneficiaries, a duty derived directly from the ERISA statute.
    To the extent proxy voting by a plan is speech, ERISA's 
requirements and the final rule's standards of diligence and 
consideration of cost plainly satisfy the independent scrutiny that is 
required for regulations of commercial speech.\54\ Moreover, the final 
rule is content- and viewpoint-neutral. The final rule does not require 
fiduciaries to say (or refrain from saying) anything in particular or 
take (or refrain from taking) any particular position, nor does it 
require fiduciaries to take action only on certain topics. The final 
rule instead requires that fiduciaries exercise authority over their 
proxies with the same loyalty and prudence applicable to all other 
aspects of their management of plan assets. And any restriction to 
express beliefs imposed by the rule still leaves open ample alternative 
channels to freely express those same beliefs.\55\
---------------------------------------------------------------------------

    \54\ See Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of 
New York, 447 U.S. 557, 564 (1980). Commenters generally argued that 
Central Hudson's commercial speech test would apply.
    \55\ Clark v. Community for Creative NonViolence, 468 U.S. 288, 
293 (1984).
---------------------------------------------------------------------------

    The Department also does not agree that the final rule violates the 
First Amendment's Free Exercise clause. The final rule is a neutral 
rule of general applicability and does not target any religious 
view.\56\ The final rule's provisions aim solely to ensure that 
fiduciaries base proxy decisions of any kind exclusively on the 
financial benefits of participants and beneficiaries, as required by 
ERISA.\57\ The impact on religion, if any, would be incidental and not 
violate the First Amendment.\58\ Moreover, pursuant to ERISA section 
4(b)(2), church plans, as defined in ERISA section 3(33), are not 
subject to ERISA and this regulation.\59\
---------------------------------------------------------------------------

    \56\ Church of the Lukumi Babalu Aye v. City of Hialeah, 508 
U.S. 520, 531 (1993) (``In addressing the constitutional protection 
for free exercise of religion, our cases establish the general 
proposition that [a law that is neutral and of general applicability 
need not be justified by a compelling governmental interest even if 
the law has the incidental effect of burdening a particular 
religious practice.], Employment Div., Dept. of Human Resources of 
Ore. v. Smith, 495 U.S. 872 (1990)'').
    \57\ Fraternal Order of Police of Newark v. City of Newark, 170 
F.3d 359, 360 (3d Cir. 1999) (``Because the Department makes 
exemptions from its policy for secular reasons and has not offered 
any substantial justification for refusing to provide similar 
treatment for officers who are required to wear beards for religious 
reasons, we conclude that the Department's policy violates the First 
Amendment'').
    \58\ See Fraternal Order of Police of Newark, 170 F.3d at 360; 
Smith, 495 U.S. at 878-79.
    \59\ See 29 U.S.C. 1002(33).
---------------------------------------------------------------------------

Fifth Amendment Takings

    A few commenters raised a different Constitutional concern--that 
the proposal may violate the Fifth Amendment's ``takings'' clause. 
Characterizing the right to vote a proxy as a plan asset, these 
commenters argue that the proposed rule would require ERISA plans to 
use their votes in a specific way, or relinquish them. The proposed 
rule's requirements, the commenters posited, are so burdensome as to 
prevent fiduciaries from fully exercising their voting rights.
    The Department disagrees that the provisions of the final rule 
violate the Takings Clause. The Fifth Amendment prohibits the 
government from taking

[[Page 81678]]

private property for public use without just compensation.\60\ A 
``regulatory taking'' is one in which a government regulation is ``so 
onerous that its effect is tantamount to a direct appropriation or 
ouster.'' \61\ The Government action must (1) affect a property 
interest and (2) go ``too far'' in so doing (i.e., amount to a 
deprivation of all or most economic use or a permanent physical 
invasion of property).\62\ How far is too far depends upon several 
factors, including ``the character of the governmental action, its 
economic impact, and its interference with reasonable investment-backed 
expectations.'' \63\
---------------------------------------------------------------------------

    \60\ U.S. Const. amend. V.
    \61\ Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537 (2005).
    \62\ Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1000-01, 1005 
(1984).
    \63\ Id. at 1005 (quoting PruneYard Shopping Ctr. v. Robins, 447 
U.S. 74, 832 (1980)).
---------------------------------------------------------------------------

    At the outset, the Takings Clause applies only when ``property'' is 
``taken.'' The Department has stated that the act of voting proxy 
shares is a fiduciary act of managing plan assets.\64\ The Department 
is not aware of any judicial authority that has addressed whether a 
shareholder right appurtenant to a share of stock, as opposed to the 
share of stock itself, is ``property'' for purposes of the Takings 
Clause and whether the ``taking'' analysis would involve an evaluation 
of the regulation's impact on the overall value of the stock. 
Nonetheless, even if the right to vote a proxy itself constitutes a 
constitutionally-protected property interest, neither the proposal nor 
this final rule ``takes'' that right or the underlying shares. Instead, 
the rule fully preserves the right to vote proxies in the economic 
interests of the plan. It is designed to protect, not diminish, 
participants' and beneficiaries' interests in their retirement benefits 
and the plan's economic interests by ensuring proxy votes do not 
subordinate those interests to non-pecuniary factors. The fiduciary 
maintains discretion to vote or not vote consistent with these 
interests. Given the Department's longstanding position that the plan's 
pecuniary interests guide the exercise of shareholder rights, there is 
no reasonable expectation that plans can make proxy voting decisions 
based on anything but plans' pecuniary interests.\65\ Further, both 
plans and securities are already subject to extensive regulation under 
state and federal law.\66\ Finally, the rule does not ``take'' property 
for public use, such as for public safety or historical preservation, 
but instead places parameters around proxy voting conduct that would 
fall outside of the prudence and loyalty duties found in the ERISA 
statute itself.
---------------------------------------------------------------------------

    \64\ Avon Letter, supra note 6.
    \65\ Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 
127 (1978) (finding historical preservation law not a taking in part 
because it permitted owner to obtain a reasonable return on its 
investment.).
    \66\ See, e.g., Ruckelshaus, 467 U.S. at 1007 (1984) (noting 
that expectations are necessarily adjusted in areas that ``ha[ve] 
long been the source of public concern and the subject of government 
regulation''); Franklin Mem'l Hosp. v. Harvey, 575 F.3d 121, 128 
(1st Cir. 2009) (holding that a claimant's investment-backed 
expectations were ``tempered by the fact that it operate[d] in the 
highly regulated hospital industry'').
---------------------------------------------------------------------------

Administrative Procedure Act

    A few commenters suggested that the Department's proposal was 
arbitrary and capricious and, more specifically, failed to comply with 
the Administrative Procedure Act. Also, although not necessarily framed 
in terms of the Department's compliance with the Administrative 
Procedure Act, a number of commenters asserted that the Department 
lacked sufficient evidentiary support for proposing the rule. For 
example, commenters pointed out that the Department suggested an 
increase in shareholder proposals as justification for the rule, which 
they argued is not relevant to whether fiduciaries are confused about 
their fiduciary obligations with respect to proxy voting, and that the 
Department did not cite to any enforcement action or other evidence 
that ERISA plan participants have been harmed or that ERISA plan 
fiduciaries are actually confused about their responsibilities. Other 
commenters disagreed and believed that the Department established 
sufficient evidence to support its proposal--for example, evidence that 
politically charged shareholder proposals result in the incursion of 
sometimes significant costs but do not demonstrably enhance shareholder 
value--and that the Department, therefore, is correct to limit voting 
on such proposals. Commenters supporting the rule also discussed 
evidence that proxy advisory firms, which exert massive amounts of 
influence over public companies, have well-documented deficiencies, 
including conflicts of interest, errors, and a lack of transparency.
    Some commenters also argued that the proposal was a significant 
departure from prior Departmental guidance on shareholder rights 
without sufficiently establishing the existence of a problem to be 
solved, or otherwise providing a reason why the rule otherwise is 
necessary. Commenters also argued that no further clarification of the 
existing Interpretive Bulletin and Field Assistance Bulletin regarding 
fiduciaries' ERISA obligations with respect to proxy voting is 
necessary.
    With respect to the arguments of commenters concerning the 
Administrative Procedure Act, the Department believes that there are 
sufficient reasons to justify the promulgation of this final rule, 
including the lack of precision and consistency in the marketplace with 
respect to ERISA fiduciary obligations with respect to exercises of 
shareholder rights, shortcomings in the rigor of the prudence and 
loyalty analysis by some fiduciaries and other market participants, and 
perceived variation in some aspects of the Department's past guidance. 
Further, the iterative Interpretive Bulletins since 1994, followed by 
the Field Assistance Bulletin issued in 2018, and the number of 
advisory opinions and information letters historically issued on this 
topic demonstrate the need for notice and comment guidance issued under 
the Administrative Procedure Act.\67\ The Department does not believe 
that there needs to be specific evidence of fiduciary misbehavior or 
demonstrated injury to plans and plan participants in order to issue a 
regulation addressing the application of ERISA's fiduciary duties to 
the exercise of shareholder rights, including proxy voting, the use of 
written proxy voting policies and guidelines, and the selection and 
monitoring of proxy advisory firms.
---------------------------------------------------------------------------

    \67\ See Executive Order 13891, 84 FR 55235 (Oct. 15, 2019), 
promoting notice-and-comment rulemaking for guidance.
---------------------------------------------------------------------------

    The need for this regulation was also demonstrated by the 
disagreements among commenters on fundamental aspects of the proposal, 
which itself confirmed that a lack of clarity in fact exists and that 
ERISA fiduciaries and other market stakeholders would benefit from the 
Department's guidance in this final rule, as well as the confusion 
regarding the scope of fiduciaries' duties with respect to proxy voting 
and shareholder rights evidenced by the number of statements by 
stakeholders and others expressing a belief that fiduciaries are 
required by ERISA to always vote proxies. Moreover, under the 
Department's authority to administer ERISA, the Department may 
promulgate rules that are preemptive in nature and is not required to 
wait for widespread harm to occur. The Department can take steps to 
ensure that plans and plan participants and beneficiaries are protected 
prospectively and has the ability to issue regulations

[[Page 81679]]

to ensure that fiduciaries follow their statutory duties and mitigate 
the possibility of future violations.
    The Department also believes that proceeding through notice-and-
comment rulemaking rather than promulgating further interpretive 
guidance has other benefits, including the benefit of public input and 
the greater stability of codified rules. Proceeding in this manner is 
also consistent with the principles of Executive Order 13891 and the 
Department's recently issued PRO Good Guidance rule, which emphasize 
the importance of public participation, fair notice, and compliance 
with the Administrative Procedure Act.

Tension With State Corporate Law

    Some commenters argued that the proposal, if finalized, would 
undermine state corporate laws, which reflect the inherent value of 
shareholder voting, threaten good corporate governance, and impede 
shareholders' voting rights. The Department is, according to these 
commenters, overstepping its authority and substituting its opinion for 
that of shareholders, the owners of corporations, as to what is 
important for corporate management and business affairs. Shareholders' 
exercise of voting rights is a critical ``check'' on the principal-
agent conflict that arises from the separation of ownership and 
management in modern corporate law. Other commenters asserted that, in 
addition to potentially conflicting with corporate law, the 
Department's rule may conflict with corporations' and institutional 
investors' existing policies for shareholder voting, policies that have 
evolved over time, in response to real economic and financial 
developments, to enhance the efficiency and efficacy of the shareholder 
voting process.
    The Department disagrees with commenters that this rulemaking 
creates any real conflict with state corporate laws. Although the rule 
will affect ERISA plan fiduciaries as to whether and how they exercise 
certain shareholder rights, the rule will not impact such rights 
themselves. Commenters failed to provide specific examples 
demonstrating any material conflict or compliance issue concerning 
these state laws.

Coordination With Other Federal Laws and Policies

    Some commenters expressed their concern that the rule, if 
finalized, could negatively impact the U.S. securities markets to the 
extent the rule interferes with other federal agencies' objectives--for 
example, by making it more difficult for the SEC to perform its mission 
of protecting securities markets and investors. According to 
commenters, in efficient markets shareholders are assumed to exercise 
their voting rights to ensure that investments are managed in their 
best interests, and the proposed rule would frustrate evolving market 
efficiencies concerning when and how shareholders vote proxies. 
Commenters also alleged that potential conflicts could arise for 
financial market stakeholders who are subject to the laws of other 
federal agencies, including the SEC, the Office of the Comptroller of 
the Currency, and the Commodity Futures Trading Commission.
    The Department believes that the changes made to the final rule 
mitigate any concerns with respect to potential conflicts with other 
regulatory regimes. For example, the final rule is intended to align 
with comparable SEC requirements imposed on investment advisers with 
respect to recordkeeping.\68\ Both the proposed and final rules were 
sent to the SEC and other federal agencies as part of the inter-agency 
review conducted by the Office of Management and Budget pursuant to 
Executive Order 12866. Also, the final rule, as described above, adopts 
a principles-based approach that is fundamentally consistent with the 
Department's published interpretive guidance in this area beginning in 
1994. Accordingly, the Department does not agree that the final rule 
will make it more difficult for the SEC or any other federal agency to 
perform their missions or that the final rule will have any negative 
impact on the U.S. securities markets. Rather, many public comments 
welcomed the final rule as appropriately describing the prudence and 
loyalty obligations of ERISA fiduciaries in connection with the 
exercise of shareholder rights.
---------------------------------------------------------------------------

    \68\ In pursuing its consultations with other regulators, the 
Department aimed to avoid conflict with other federal laws and 
minimize duplicative provisions between ERISA and federal securities 
laws. However, the governing statutes do not permit the Department 
to make obligations under ERISA identical in all respects to duties 
under federal securities laws.
---------------------------------------------------------------------------

Consistency With International Practices and Regulatory Trends

    A few commenters also raised concerns about how the proposal, if 
finalized, would impact international investment. For example, one 
commenter, a financial services provider, claimed that the rule's 
mandate that proxy voting be based solely on an ERISA plan's economic 
interests is inconsistent with the provider's clients' expectations, 
and also with investment stewardship standards outside of the United 
States. The commenter claimed that asset managers in the European Union 
and other developed nations are increasingly subject to standards 
exactly opposite to those proposed by the Department, which incorporate 
(and sometimes require) consideration of ESG factors. Further, some 
international securities issuers require that investors vote proxies, 
and commenters queried what a plan fiduciary should do in such cases.
    This final rule reflects ERISA's requirements. Fiduciaries of 
ERISA-covered pension and other benefit plans are statutorily bound to 
manage those plans, including shareholder rights appurtenant to shares 
of stock, with a singular goal of maximizing the funds available to pay 
benefits under the plan. The duties of prudence and loyalty under ERISA 
may not be the same investment standards the commenters referenced 
under which international regulation of proxy voting and other 
exercises of shareholder rights is taking place. Accordingly, 
international trends or the actions of regulators in other countries 
are not an appropriate gauge for evaluating ERISA's requirements as 
they apply to fiduciary management of investments, including the topics 
covered by this final rule relating to the exercise of shareholder 
rights, including proxy voting, the use of written proxy voting 
policies and guidelines, and the selection and monitoring of proxy 
advisory firms. Moreover, to the extent foreign legal and financial 
standards condone sacrificing returns to consider non-pecuniary 
objectives, they are inconsistent with the fiduciary obligations 
imposed by ERISA.
    As to commenters' assertion that some international securities 
issuers require that investors vote proxies, as discussed above, the 
final rule does not carry forward the provision from the proposal 
stating that a plan fiduciary must not vote any proxy unless the 
fiduciary prudently determines that the matter being voted upon would 
have an economic impact on the plan after considering those factors 
described in paragraph (e)(2)(ii) of the proposed rule, taking into 
account the costs involved (including the cost of research, if 
necessary, to determine how to vote). The Department also believes that 
such a voting requirement by an issuer of securities held by a plan 
would be a relevant consideration for the plan fiduciary when applying 
the more principles-based approach adopted in the final rule when 
deciding whether to vote. However, the Department has previously noted 
that in deciding

[[Page 81680]]

whether to purchase shares that may involve out-of-the-ordinary costs 
or unusual requirements--specifically referencing as an example voting 
proxies on shares of certain foreign corporations--the responsible 
fiduciary should consider whether the difficulty and expense of voting 
the shares is reflected in the market price.\69\ Similarly, in the 
Department's view, in deciding whether to purchase or retain shares, a 
fiduciary would have to consider proxy voting requirements of an issuer 
that conflict with the fiduciary's duties of prudence and loyalty under 
ERISA or that interfere with the fiduciary's ability to comply with 
those duties.
---------------------------------------------------------------------------

    \69\ See, e.g., 29 CFR 2509.2016-01 (last paragraph in the 
section entitled ``Proxy Voting'').
---------------------------------------------------------------------------

D. Regulatory Impact Analysis

    This section analyzes the regulatory impact of the Department's 
final regulation amendments to the ``Investment Duties'' regulation in 
29 CFR 2550.404a-1 addressing the application of the prudence and 
exclusive purpose responsibilities under ERISA with respect to the 
exercise of shareholder rights, including proxy voting, the use of 
written proxy voting policies and guidelines, and the selection and 
monitoring of proxy advisory firms. As stated earlier in this preamble, 
in connection with proxy voting, the Department's longstanding position 
articulated in sub-regulatory guidance that was first issued in the 
1980s is that the fiduciary act of managing plan assets includes the 
management of voting rights (as well as other shareholder rights) 
appurtenant to shares of stock. In carrying out these duties, ERISA 
mandates that fiduciaries act ``prudently'' as well as ``solely in the 
interest'' and ``for the exclusive purpose'' of providing benefits to 
participants and their beneficiaries.\70\
---------------------------------------------------------------------------

    \70\ ERISA section 404(a)(1). See also ERISA section 403(c)(1) 
(``[T]he assets of a plan shall never inure to the benefit of any 
employer and shall be held for the exclusive purposes of providing 
benefits to participants in the plan and their beneficiaries'').
---------------------------------------------------------------------------

    This regulatory project was initiated because the Department 
believes there is a persistent misunderstanding among some fiduciaries 
and other stakeholders with respect to ERISA's requirements regarding 
proxy voting and the exercise of shareholder rights. This 
misunderstanding may be due in part to varied statements the Department 
has made on the consideration of non-pecuniary or non-financial factors 
in sub-regulatory guidance about those activities. This final rule 
provides certainty to plan administrators and benefits ERISA plan 
participants by eliminating the misunderstanding that exists among some 
stakeholders that ERISA fiduciaries are required to vote all proxies 
rather than only proxies determined to have a net positive economic 
impact on the plan. The final rule also supplements the Department's 
sub-regulatory guidance by specifying actions fiduciaries can take to 
ensure they are meeting their long-standing obligation under ERISA to 
act prudently, solely in the interests of participants and 
beneficiaries, and for the exclusive purpose of providing benefits and 
defraying reasonable plan expenses.
    While the Department expects that this final rule will benefit 
plans and participants overall, it also will impose some compliance 
costs to the extent that fiduciaries do not currently meet specific 
requirements found in the final rule. However, as discussed in the cost 
section below, the Department has made significant modifications to the 
proposal in the final rule by taking a less prescriptive, principles-
based approach to the subject matter that focuses on whether a 
fiduciary has a prudent process for voting and other exercises of 
shareholder rights. These changes will significantly reduce the 
potential compliance costs for fiduciaries.
    The benefits, costs, and transfer impacts associated with the final 
rule depend on the number of plan fiduciaries that are currently not 
following or misinterpreting the Department's existing sub-regulatory 
guidance. While the Department does not have sufficient data to 
estimate the number of such fiduciaries, the Department expects the 
number is small because the Department believes that most fiduciaries 
largely comply with the Department's existing sub-regulatory guidance 
in this area, which is consistent with the principles-based 
requirements of the final rule. The Department expects that the 
benefits of the rule will be appreciable for participants and 
beneficiaries covered by plans with noncompliant investment 
fiduciaries. If the Department's assumption regarding the number of 
noncompliant fiduciaries is understated, the proposed rule's benefits, 
costs, and transfer impacts will be proportionately higher; however, 
even in this instance, the Department believes that the final rule's 
benefits still justify its costs.

1. Relevant Executive Orders

    The Department has examined the effects of this rule as required by 
Executive Order 12866,\71\ Executive Order 13563,\72\ Executive Order 
13771,\73\ the Congressional Review Act,\74\ the Paperwork Reduction 
Act of 1995,\75\ the Regulatory Flexibility Act,\76\ Section 202 of the 
Unfunded Mandates Reform Act of 1995,\77\ and Executive Order 
13132.\78\
---------------------------------------------------------------------------

    \71\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
    \72\ Improving Regulation and Regulatory Review, 76 FR 3821 
(Jan. 18, 2011).
    \73\ Reducing Regulation and Controlling Regulatory Costs, 82 FR 
9339 (Jan. 30, 2017).
    \74\ 5 U.S.C. 804(2) (1996).
    \75\ 44 U.S.C. 3506(c)(2)(A) (1995).
    \76\ 5 U.S.C. 601 et seq. (1980).
    \77\ 2 U.S.C. 1501 et seq. (1995).
    \78\ Federalism, 64 FR 43255 (Aug. 10, 1999).
---------------------------------------------------------------------------

    Executive Orders 12866 and 13563 direct agencies to assess the 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects; distributive impacts; and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to review by the Office of Management and Budget (OMB). Section 
3(f) of the Executive order defines a ``significant regulatory action'' 
as an action that is likely to result in a rule (1) having an annual 
effect on the economy of $100 million or more in any one year, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating a serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive order.
    OMB has determined that this rule is not economically significant 
within the meaning of section 3(f)(1) of the Executive Order 12866, but 
that it is significant within the meaning of section 3(f)(4) of the 
Executive order. Therefore, the Department provides an assessment of 
the potential costs, benefits, and transfers associated with

[[Page 81681]]

this final rule below. OMB has reviewed the final rule pursuant to the 
Executive order. Pursuant to the Congressional Review Act, OMB has 
determined that this final rule is not a ``major rule,'' as defined by 
5 U.S.C. 804(2).
1. Introduction
    ERISA plan assets comprise a substantial stake of the shares of 
public companies. In 2018, pension plan assets contained stock holdings 
of $1.7 trillion; such holdings made up 27 percent of large defined 
benefit plan assets and 25 percent of large defined contribution plan 
assets.\79\ However, ERISA pension holdings represent a decreasing 
share of all corporate equity. ERISA defined benefit and defined 
contribution plans held just 5.5 percent of total corporate equity in 
2019, down from a high of 22 percent in 1985.\80\
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    \79\ Department estimates are based on Form 5500 annual reports 
filed by plans with 100 or more participants. These estimates 
include only stocks held directly or through Direct Filing Entities, 
not through mutual funds.
    \80\ Department calculations are based on U.S. Federal Reserve 
statistics. Board of Governors of the Federal Reserve System, 
Financial Accounts of the United States--Z.1 (Sept. 2020).
---------------------------------------------------------------------------

    Prior to its annual meeting, a publicly traded company sets a 
record date and sends out a list of proposals on which shareholders 
will vote. A shareholder must hold shares as of the record date in 
order to vote at a shareholder meeting. There are two types of 
proposals: Management proposals and shareholder proposals. Management 
proposals--including director elections, audit firm ratification 
proposals, and proposals regarding the company's executive compensation 
program (also known as ``say-on-pay'' proposals)--account for 98 
percent of proposals and are largely mandated by law or exchange 
listing requirements. From 2011 to 2017, shareholder proposals 
accounted for about two percent of proposals but often were more 
controversial and thus received more attention than management 
proposals.\81\ Shareholder votes on some proposals, such as director 
elections, are binding. Votes on many other proposals, including 
shareholder proposals and say-on-pay proposals, are not binding and 
serve only as shareholder recommendations for the company's board.\82\
---------------------------------------------------------------------------

    \81\ Morris Mitler, Dorothy Donohue & Sean Collins, Proxy Voting 
by Registered Investment Companies, 2017, Investment Company 
Institute Research Perspective (July 2019), at 4 (hereinafter ``ICI 
Proxy Voting Report'').
    \82\ Id., at 6; see also 15 U.S.C. 78n-1.
---------------------------------------------------------------------------

1.1. Need for Regulation
    As discussed above in section A, Background and Purpose of 
Regulatory Action, the Department believes that this final rule is 
necessary to provide clarity and certainty regarding the application of 
fiduciary obligations of loyalty and prudence with respect to exercises 
of shareholder rights, including proxy voting. Despite past efforts to 
make clear fiduciary obligations in this regard, the Department is 
concerned that its existing sub-regulatory guidance may have 
inadvertently created the perception that fiduciaries must vote proxies 
on every shareholder proposal to fulfill their obligations under ERISA. 
This belief may have caused some fiduciaries to pursue proxy proposals 
that have no connection to increasing the value of investments used to 
pay benefits or defray reasonable plan administrative expenses.
    For example, some fiduciaries may feel obligated to vote proxies 
for non-pecuniary proposals related to environmental, social, or public 
policy agendas. The situation is concerning due to the recent increase 
in the number of environmental and social shareholder proposals 
introduced. From 2011 through 2017, shareholders submitted 462 
environmental proposals and 841 social shareholder proposals, and 
resubmitted at least once 41 percent of environmental and 51 percent of 
social proposals.\83\ These proposals increasingly call for disclosure, 
risk assessment, and oversight, rather than for specific policies or 
actions, such as phasing out products or activities.\84\ The Department 
believes it is likely that many of these proposals have little bearing 
on share value or other relation to plan financial interests.\85\ The 
Department also has reason to believe that responsible fiduciaries may 
sometimes rely on third-party proxy voting advice without taking 
sufficient steps to ensure that the advice is impartial and rigorous.
---------------------------------------------------------------------------

    \83\ Procedural Requirements and Resubmission Thresholds under 
Exchange Act Rule 14a-8, 84 FR 66458, 66491 (Dec. 4, 2019).
    \84\ See 2019 ISS Proxy Voting Trends, supra note 20.
    \85\ See John G. Matsusaka, Oguzhan Ozbas, & Irene Yi, Can 
Shareholder Proposals Hurt Shareholders? Evidence from SEC No-Action 
Letter Decisions, U.S.C. CLASS Research Paper No. CLASS17-4 (2019), 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2881408, at 25; 
Joseph P. Kalt, L. Adel Turki, Kenneth W. Grant, Todd D. Kendall & 
David Molin, Political, Social, and Environmental Shareholder 
Resolutions: Do They Create or Destroy Shareholder Value?, National 
Association of Manufacturers (June 2018), www.shopfloor.org/wp-content/uploads/2018/06/nam_shareholder_resolutions_survey.pdf.
---------------------------------------------------------------------------

    The Department's objective in issuing this final rule is to ensure 
that plan fiduciaries act solely in accordance with the economic 
interest of the plan and its participants and beneficiaries and 
consider only pecuniary factors when deciding whether to vote proxies 
or exercise shareholder rights. The Department believes that addressing 
these issues in the final rule will help safeguard the interests of 
participants and beneficiaries in their plan benefits.
1.2. Affected Entities
    This final rule would affect ERISA-covered pension, health, and 
other welfare plans that hold shares of corporate stock. It would 
affect plans with respect to stocks they hold directly, as well as with 
respect to stocks they hold through ERISA-covered intermediaries, such 
as common trusts, master trusts, pooled separate accounts, and 103-12 
investment entities. The final rule would not affect plans with respect 
to stock held through registered investment companies, because the 
final rule does not apply to such funds' internal management of such 
underlying investments. The final rule also does not apply to voting, 
tender, and similar rights with respect to securities that are passed 
through pursuant to the terms of an individual account plan to 
participants and beneficiaries with accounts holding such securities.
    ERISA-covered plans with 100 or more participants (large plans) 
annually report data on their stock holdings on Form 5500 Schedule H 
(see Table 1). Approximately 27,000 defined contribution plans and 
5,000 defined benefit plans, with approximately 84 million 
participants, either hold common stocks or are an Employee Stock 
Ownership Plan (ESOP). Additionally, 573 health and other welfare plans 
file the schedule H and report holding common stocks either directly or 
indirectly. In total, large pension plans and welfare plans hold 
approximately $1.7 trillion in stock value. Common stocks constitute 
about 25 percent of total assets of those pension plans that are not 
ESOPs and hold common stock. Out of the 25,400 pension plans that hold 
common stock and are not ESOPs, about 20,000 plans hold common stock 
through an ERISA-covered intermediary and approximately 3,500 plans 
hold common stock directly. A smaller number of plans hold stock both 
directly and indirectly.\86\ In total, there are approximately 32,000 
plans holding either common stock or employer stock, comprised of large 
plans, welfare plans, and ESOPs. In addition to the large pension 
plans, approximately 629,000

[[Page 81682]]

small pension plans hold assets and some may invest in stock.\87\
---------------------------------------------------------------------------

    \86\ DOL estimates from the 2018 Form 5500 Pension Research 
Files.
    \87\ The Form 5500 does not require these plans to categorize 
the assets as common stock, so the Department does not know if they 
hold stock.

       Table 1--Number of Pension and Welfare Plans Holding Common Stocks or ESOP by Type of Plan, 2018 a
----------------------------------------------------------------------------------------------------------------
   Common Stock  (no employer         Defined         Defined     Total  pension                     Total all
           securities)                benefit      contribution        plans       Welfare plans       plans
----------------------------------------------------------------------------------------------------------------
Direct Holdings Only............           1,272           2,286           3,558             569           4,127
Indirect Holdings Only..........           2,792          17,591          20,383               3          20,386
Both Direct and Indirect........             941             586           1,527               1           1,528
                                 -------------------------------------------------------------------------------
    Total.......................           5,005          20,463          25,468             573          26,041
ESOP (No Common Stock)..........  ..............           5,809           5,809  ..............           5,809
Common Stock and ESOP...........  ..............             591             591  ..............             591
                                 -------------------------------------------------------------------------------
    Total All Plans Holding                5,005          26,863          31,868             573          32,441
     Stocks.....................
----------------------------------------------------------------------------------------------------------------
\a\ DOL calculations from the 2018 Form 5500 Pension Research Files.

    While this final rule would directly affect ERISA-covered plans 
that possess the relevant shareholder rights, the activities covered 
under the final rule would be carried out by responsible fiduciaries on 
plans' behalf. Many plans hire asset managers to carry out fiduciary 
asset management functions, including proxy voting. In 2018, large 
ERISA plans reportedly used approximately 17,800 different service 
providers, some of whom provide services related to the exercise of 
plans' shareholder rights. Such service providers include trustees, 
trust companies, banks, investment advisers, and investment 
managers.\88\
---------------------------------------------------------------------------

    \88\ DOL estimates are derived from the 2018 Form 5500 Schedule 
C.
---------------------------------------------------------------------------

    In addition, this final rule will indirectly affect proxy advisory 
firms.\89\ Currently, this market is dominated by two firms: 
Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co., 
LLC (Glass Lewis). It has been estimated that in 2013, the combined 
market share of these two firms was 97 percent (61 percent for ISS and 
36 percent for Glass Lewis).\90\ Each year, ISS covers approximately 
44,000 shareholder meetings and executes 10.2 million ballots on behalf 
of clients holding 4.2 trillion shares. Glass Lewis covers about 20,000 
shareholder meetings annually and provides services to more than 1,300 
clients that collectively manage more than $35 trillion in assets.\91\
---------------------------------------------------------------------------

    \89\ One commenter pointed out that in a proprietary survey of 
the largest pension funds and defined contribution plans, 
approximately 92 percent of the respondents indicated that they have 
formally delegated proxy voting responsibilities to another named 
fiduciary (e.g., an Investment Manager), and approximately 42 
percent of respondents engage a proxy advisory firm (directly or 
indirectly) to help with voting some or all proxies.
    \90\ Glassman, James K., and J.W. Verret, ``How to Fix our 
Broken Proxy Advisory System.'' Arlington, VA: Mercatus Center 
(2013).
    \91\ Exemptions from the Proxy Rules for Proxy Voting Advice, 85 
FR 55082 (Sept. 3, 2020) (2020 SEC Proxy Voting Advice Amendments).
---------------------------------------------------------------------------

    ERISA plans' demand for proxy advice might decline if fiduciaries 
refrain from voting shares under the provisions of this final rule or 
under proxy voting policies adopted pursuant to the safe harbors 
provided in paragraphs (e)(3)(i)(A) and (B). Plan fiduciaries may want 
customized recommendations about which particular proxy proposals would 
have a material effect on the investment performance of their 
particular plan and how they should cast their vote. Plans' preferences 
for proxy advice services could shift to prioritize services offering 
more rigorous and impartial recommendations. These effects may be more 
muted, however, if the SEC rule amendments enhance the transparency, 
accuracy, and completeness of the information provided to clients of 
proxy voting firms in connection with proxy voting decisions.
1.3. General Comments on the Proposed Regulatory Impact Analysis
    Comments on the proposed regulatory impact analysis included 
comments that supported the proposal and others that challenged the 
Department's analytical approach, assumptions, and conclusions, 
including criticizing the Appendix A ``illustrative'' analysis as a 
fundamentally flawed approach to the measurement of possible costs, 
benefits, and transfers associated with the proposed rule.
    As noted, a few commenters agreed with the Department's conclusion 
that the rule would provide certainty to plan administrators and 
benefits ERISA plan participants by eliminating the misunderstanding 
that exists among some stakeholders that ERISA fiduciaries are required 
to vote all proxies rather than only proxies determined to have a net 
positive economic impact on the plan analysis. One commenter stated 
that outside of clear cases of economic gain, the benefits of proxy 
voting ``are dubious at best.'' Another commenter dismissed the 
argument that the benefits of shareholder engagement may include 
realizing gains over the long term and asserted that short-term costs 
are non-trivial and long-term future benefits are highly speculative. A 
commenter stated that the rule will add elements of transparency and 
accountability to the proxy voting process.
    Many commenters, however, challenged the Department's proposed 
Regulatory Impact Analysis and criticized the Department's analysis of 
the relevant literature.
    With respect to the literature, commenters criticized DOL's 
assertion that the evidence on the effectiveness of and benefits from 
proxy voting is ``mixed.'' The Department continues to believe that the 
research studies have a wide range of findings. Some studies have found 
that the adoption of shareholder proposals has a positive effect on 
financial performance. For example, Dimson, Karakas, and Li's research, 
which examines U.S. public companies, finds that the adoption of ESG 
shareholder proposals increases the returns of companies.\92\ Flammer's 
research, which examines shareholders proposals of U.S. publicly traded 
companies, also finds that the adoption of shareholder proposals 
related to corporate social responsibility improves the financial 
performance of

[[Page 81683]]

companies.\93\ In addition, Martin's research finds that the adoption 
of shareholder proposals relating to corporate social responsibility 
increases the returns and market share of companies.\94\ Finally, 
Cu[ntilde]at, Gin[eacute], and Guadalupe's research, which examines 
shareholder proposals filed with the SEC, finds that adoption of 
shareholder proposals relating to executive pay improves the market 
value and the long-term profitability of firms.\95\ In contrast, other 
studies have found shareholder proposals to have a negative effect on 
financial performance. Cai and Walking's research finds that the 
announcement of labor-sponsored shareholder proposals results in a 
negative market reaction.\96\ Prevost and Rao's research finds that 
firms that receive shareholder proposals for the first time experience 
transitory declines in market returns, while firms that repeatedly 
receive shareholder proposals experience permanent declines in market 
returns.\97\ In addition, Larcker, McCall, and Ormazabal's research, 
which examines Russell 3000 companies, finds that changes in 
compensation contracts made to comply with proxy advisor voting 
policies results in a negative stock market reaction.\98\ Finally, 
Woidtke's research, which examines Fortune 500 companies, finds that an 
increase in shareholder activism by public pension funds is negatively 
associated with stock returns.\99\ Furthermore, there are studies with 
inconclusive results. Karpoff, Malatesta, and Walking's research finds 
that shareholder proposals have a negligible effect on the share values 
and operating returns of firms.\100\ Wahal's research, which examines 
firms targeted by pension funds with a social agenda, finds that firms 
that receive proxy proposals do not experience significant abnormal 
returns.\101\ Wahal's research also finds no evidence of long-term 
improvement in the performance of the firm.\102\ Similarly, Del Guercio 
and Hawkins' research, which examines firms that received shareholder 
proposals from large pension funds, finds no evidence of significant 
abnormal long-term returns.\103\ Smith's research, which also examines 
firms targeted by CalPERS, finds that there is no statistically 
significant change in the operating performance.\104\
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    \92\ Dimson, Elroy, O[gbreve]uzhan Karaka[scedil], and Xi Li., 
Active Ownership, 28 The Review of Financial Studies 12 (2015).
    \93\ Flammer, Caroline, Does Corporate Social Responsibility 
Lead to Superior Financial Performance? A Regression Discontinuity 
Approach, 61 Management Science 11 (2015).
    \94\ Martins, Fernando, Corporate Social Responsibility, 
Shareholder Value, and Competition. (2020).
    \95\ Cu[ntilde]at, Vicente, Mireia Gin[eacute], and Maria 
Guadalupe, Say Pays! Shareholder Voice and Firm Performance, 20 
Review of Finance 5 (2016).
    \96\ Cai, Jie, and Ralph A. Walkling., Shareholders' Say on Pay: 
Does it Create Value?, Journal of Financial and Quantitative 
Analysis (2011).
    \97\ Prevost, Andrew K., and Ramesh P. Rao, Of What Value are 
Shareholder Proposals Sponsored by Public Pension Funds, 73 Journal 
of Business 2 (2000).
    \98\ Larcker, David F., Allan L. McCall, and Gaizka Ormazabal, 
Outsourcing Shareholder Voting to Proxy Advisory Firms, 58 Journal 
of Law and Economics 18 (2015).
    \99\ Woidtke, Tracie, Agents Watching Agents?: Evidence from 
Pension Fund Ownership and Firm Value, 63 Journal of Financial 
Economics 1 (2002).
    \100\ Karpoff, Jonathan M., Paul H. Malatesta, and Ralph A. 
Walkling, Corporate Governance and Shareholder Initiatives: 
Empirical Evidence, 42 Journal of Financial Economics 3 (1996).
    \101\ Wahal, Sunil, Pension Fund Activism and Firm Performance, 
Journal of Financial and Quantitative Analysis (1996).
    \102\ Id.
    \103\ Del Guercio, Diane, and Jennifer Hawkins, The Motivation 
and Impact of Pension Fund Activism, 52 Journal of Financial 
Economics 3 (1999).
    \104\ Smith, Michael, Shareholder Activism by Institutional 
Investors: Evidence from CalPERS, 51 Journal of Finance 1 (1996).
---------------------------------------------------------------------------

    With respect to the Department's analysis, assumptions, and 
conclusions, although several commenters noted that the costs and 
benefits associated with a proxy vote are highly uncertain and 
difficult to quantify, commenters argued that the Department's analysis 
overstated the current costs of proxy voting, understated the new costs 
that ERISA plans will incur if the proposal were finalized, and 
neglected to account for benefits to proxy voting that the proposal 
would appear to classify as non-economic in nature yet have been linked 
to better financial performance. One commenter cited the research of a 
team of academics that found benefits of shareholder voting for the 
market value of shares.\105\
---------------------------------------------------------------------------

    \105\ Vicente Cu[ntilde]at & Mireia Gin[eacute] & Maria 
Guadalupe, 2012. ``The Vote Is Cast: The Effect of Corporate 
Governance on Shareholder Value,'' Journal of Finance; Vicente 
Cu[ntilde]at & Mireia Gin[eacute] & Maria Guadalupe, 2016. ``Say 
Pays! Shareholder Voice and Firm Performance,'' Review of Finance, 
European Finance Association, vol. 20(5), at 1799-1834.
---------------------------------------------------------------------------

    Many commenters asserted that the proposed rule will discourage 
voting, and some suggested that less proxy voting by ERISA investors 
will increase the influence of non-ERISA investors. Several of the 
commenters expressed concerns that the costs imposed by the rule would 
cause fiduciaries not to vote proxies, even when economically 
beneficial, or to adopt the permitted practices described in the 
proposal which they argued would benefit corporate management at the 
expense of plan participants and beneficiaries. A commenter asserted 
that because abstentions may have the effect of a ``no'' or ``yes'' 
vote, the rule may tip votes one way or the other.\106\ Some commenters 
argued that having proxy votes cast by individuals who are not experts, 
for example by activists or hedge fund managers rather than by stable, 
expert, fiduciary shareholders, would not be in the interests of ERISA 
beneficiaries. Several commenters stated that the rule could lead to a 
concentration of voting power among a few large firms whose proxy votes 
are large enough to make an economic impact on the plan's investment. 
Several commenters noted that proxy voting serves as an important 
vehicle for checks and balances to keep corporate management 
accountable, focused on long-term value creation, and to prevent 
opportunistic behavior.\107\ Another commenter suggested that there is 
significant uncertainty with respect to the economic impact of any 
proxy vote and that the proposal's requirement to determine the 
economic impact of voting proxies requires a level of precision that is 
inconsistent with the way fiduciaries operate. Other commenters 
expressed concern about determining whether to vote proxies in relation 
to ESG issues; many criticized the rule for ignoring academic evidence 
supporting the pecuniary impact of issues the proposal deemed to be 
non-economic, such ESG concerns that involve significant risks to 
companies--such as litigation, reputational harm, or stranded assets--
and business activities that cause adverse impacts to individuals, 
employees, and communities.\108\ They argued such

[[Page 81684]]

matters are critical to performing due diligence risk analysis and have 
become increasingly germane to assessing company strategy and long-term 
financial viability. One commenter criticized the Department for 
allowing the permitted practice of voting with management but not 
allowing a similar permitted practice of voting with proxy advisors. 
The commenter asserted that voting with proxy advisors costs less and 
that proxy advisors are subject to fewer and less severe conflicts than 
management.
---------------------------------------------------------------------------

    \106\ Data on abstentions not tipping votes is suggestive, but 
not definitive. Figure 9 of the ICI's 2017 research on proxy voting 
(www.ici.org/pdf/per25-05.pdf), indicates that the percentage of 
shares voting ``for'' various proposals (the overwhelming number of 
which were management proposals) as 95.2% in favor of management 
proposals and 29.2% in favor of shareholder proposals. The data is 
aggregated for all votes and not focused on specific proposals, 
which could indicate that there are no close votes or at least some 
close votes which could be tipped. Based on this uncertainty, the 
Department cannot quantify the number of close votes that could be 
tipped based on the available data, especially for shareholder 
proposals. While the Department received multiple comments 
expressing concern that the rule would make it more difficult to 
reach a quorum, the commenters did not include any data supporting 
this assertion, and the Department is not aware of any data sources 
that would support a qualitative or quantitative analysis of the 
final rule's impact on reaching a quorum.
    \107\ For the CFA Institute Code of Ethics and Standards of 
Professional Conduct and the CFA Institute Corporate Governance 
Manual, please see www.cfainstitute.org/en/ethics-standards/ethics/code-of-ethics-standards-of-conduct-guidance.
    \108\ Some commenters cited a 2015 survey by the CFA Institute 
that reported that 73 percent of global investors take ESG factors 
into account in their investment analysis and decisions. They also 
refer to a McKinsey study that reports that ESG companies create 
value disproportionate to their peers. Similarly, by citing many 
studies made by the investment industry, some commenters asserted 
that there is a substantial, and growing, body of empirical research 
that has identified meaningful links between a company's ESG 
characteristics and financial performance. These include studies 
produced by MSCI, Bank of America Merrill Lynch, Allianz Global 
Investors, Nordea Equity Research, Goldman Sachs, Morningstar, and 
Deutsche Asset & Wealth Management. Some commenters cited an 
academic study that uses ISS and FactSet data to present evidence of 
a positive causal effect of the passing of corporate social 
responsibility shareholder proposals, the ones that are presumably 
tied to ESG investing motives, to the correspondent shareholder 
returns. Martins, Fernando, Corporate Social Responsibility, 
Shareholder Value, and Competition (July 1, 2020). Available at 
SSRN: https://ssrn.com/abstract=3651240 or http://dx.doi.org/10.2139/ssrn.3651240. The same commenter cited an observational 
study that reaches the same conclusion: www.hbs.edu/faculty/conferences/2013-sustainability-and-corporation/Documents/Active_Ownership_-_Dimson_Karakas_Li_v131_complete.pdf. One 
commenter referred to a meta-study showing that there is a 
correlation between sustainability business practices and economic 
performance. Clark, Gordon L. and Feiner, Andreas and Viehs, 
Michael, From the Stockholder to the Stakeholder: How Sustainability 
Can Drive Financial Outperformance (March 5, 2015). Available at 
SSRN: https://ssrn.com/abstract=2508281 or http://dx.doi.org/10.2139/ssrn.2508281.
---------------------------------------------------------------------------

    Finally, some commenters focused specifically on proxy advisory 
firms. Some commenters disagreed with the Department's expectation that 
the rule may reduce plans' demand for proxy advice. A commenter pointed 
to a report from the Manhattan Institute that suggested that some ERISA 
fiduciaries are using proxy advisors as a low-cost way of meeting their 
own fiduciary voting obligations, despite the fact that the proxy 
advisor firms themselves are not held to a fiduciary standard. One 
commenter argued that proxy advisors are in a resource-constrained 
environment that adversely affects the advice they provide. In support, 
the commenter cites a study suggesting that ISS provides lower quality 
advice during the proxy season, when the firm is at its busiest, and 
higher quality advice during other times. This result suggests that 
during the busy proxy season, when proxy advisor firms' resources are 
most constrained, such firms are unable to maintain the same quality of 
service as provided during other periods.
    After reviewing the public comments, the Department agrees that 
there is uncertainty regarding the costs and benefits of proxy voting 
activities of ERISA plans, both currently and under the terms of the 
proposed regulation. The Department presented an illustration of an 
analytical approach to evaluating the possible impacts of the proposed 
rule. The Department presented the data it had to estimate the impacts 
of the rule and also highlighted places where it lacked data to 
accurately measure key parameters. In so doing, the Department 
solicited comments and data to allow the accurate estimation of the 
impact of the rule's requirement and the permitted practices. The 
Department received comments on the illustration and its assumptions 
that sought to estimate the costs of the proposed rule. Commenters did 
not provide explicit data or estimates for a per vote burden to conduct 
research or required documentation, nor did they provide alternative 
estimates of the number of proxies that would be impacted by the 
proposal. Thus, notwithstanding the solicitation of such data, the 
Department still lacks critical information that would allow it to use 
or modify the model to try to produce a more accurate measure of the 
cost of the final rule's requirements.
    The Department included the illustration to solicit public input on 
one possible way to envision and quantify the potential cost burden and 
costs savings that could be associated with the proposal. The 
Department emphasized that the illustration was based on speculative 
assumptions due to insufficient data, and, as noted above, many of the 
commenters criticized its basis. Based on the public comments and the 
fact that commenters did not provide data or estimates that would 
support continued use of the illustration as part of this final 
regulatory impact analysis, the Department has concluded that the 
illustrative analysis that was presented for public comment as part of 
the proposal does not represent a reliable construct for evaluating the 
costs, benefits, and transfers associated with the final rule. Perhaps 
more importantly, however, as discussed above and below, the Department 
has made substantial changes to the proposed rule that have reduced 
much of the cost burden associated with the final rule and thus the 
illustrative analysis, even with its challenges identified by the 
commenters, no longer reflects the potential burdens associated with 
the rule.
1.4. Benefits
    This final rule would benefit plans by providing improved guidance 
regarding how ERISA's fiduciary duties apply to proxy voting. As 
discussed above, sub-regulatory guidance that the Department has 
previously issued over the years may have led to a misunderstanding 
among some that fiduciaries are required to vote on all proxies 
presented to them. This misunderstanding may have led some plans to 
expend plan assets unnecessarily to research and vote on proxy 
proposals not likely to have a pecuniary impact on the value of the 
plan's investments. The final rule is intended to eliminate that 
confusion and includes specific language in paragraph (e)(2)(ii) 
clearly stating that plan fiduciaries do not have an obligation to vote 
all proxies. The rule also includes a ``safe harbor'' provision under 
which plan fiduciaries may adopt proxy voting policies and parameters 
prudently designed to serve the plan's economic interest. This will 
encourage ERISA fiduciaries to execute shareholder rights in an 
appropriate and cost-efficient manner.
    The final rule clarifies the duties of fiduciaries with respect to 
proxy voting and the monitoring of proxy advisory firms. Specifically, 
in order to meet their fiduciary obligations to manage shareholder 
rights, plan fiduciaries must (i) act solely in accordance with the 
economic interest of the plan and its participants and beneficiaries 
considering the impact of any costs involved; (ii) not subordinate the 
interests of the participants and beneficiaries in their retirement 
income or financial benefits under the plan to any non-pecuniary 
objective, or promote non-pecuniary benefits or goals; and (iii) 
prudently monitor the proxy voting activities of investment managers or 
proxy advisory firms to whom that authority to vote proxies or exercise 
shareholder rights has been delegated.
    Accordingly, plan fiduciaries will be better positioned to conserve 
plan assets by having clear direction and the option to prudently adopt 
voting policies that (i) focus voting resources only on particular 
types of proposals that the fiduciary has prudently determined are 
substantially related to the issuer's business activities or are 
expected to have a material effect on the value of the investment; and 
(ii) refrain from voting on proposals or particular types of proposals 
when the plan's holding in a single issuer relative to the plan's total 
investment assets is below a quantitative threshold that the fiduciary 
prudently determines, considering its percentage ownership of the 
issuer and

[[Page 81685]]

other relevant factors, is sufficiently small that the matter being 
voted upon is not expected to have a material effect on the investment 
performance of the plan's portfolio. Thus, votes will be cast that more 
frequently advance plans' economic interests. Cost savings and other 
benefits to plans would flow to plan participants and beneficiaries and 
plan sponsors.
    The final rule will replace existing guidance on fiduciary 
responsibilities for exercising shareholders' rights. The final rule 
will provide more certainty than the existing sub-regulatory guidance, 
and unlike such guidance, the final rule sets forth binding, specific 
requirements.
    The final regulation could increase investment returns on plan 
assets by specifying when plan fiduciaries should or should not 
exercise their shareholder rights to vote proxies. Plan fiduciaries are 
responsible for maximizing the economic benefits to the plan, including 
in their management of proxy voting rights, which may involve voting 
proxies or declining to vote them. If the cost of obtaining information 
that informs the vote exceeds the likely economic benefits to the plan 
of voting, then fiduciaries should not vote. This course of action will 
save resources and increase societal benefits.
    The resources freed for other uses due to voting fewer proxies 
(minus potential upfront transition costs) would represent benefits of 
the rule. To the extent that the final regulation increases the 
investment return on plan assets, it would enhance participants' and 
beneficiaries' retirement security, thereby strengthening a central 
purpose of ERISA. For the plans and participants that would be affected 
by the final rule, the benefits they would experience from higher 
investment returns, compounded over many years, could be considerable.
    The increased returns would be associated with investments 
generating higher pre-fee returns, which means the higher returns 
qualify as benefits of the rule. However, to the extent that there are 
any externalities, public goods, or other market failures, those might 
generate costs to society on an ongoing basis. For example, a fiduciary 
may vote for a proposal on a corporate merger or acquisition 
transaction to maximize shareholder value even though implementation of 
the proposal would bring about impacts in an affected geographic area 
that would be adverse for local businesses or residents. Finally, some 
portion of the increased returns would be associated with transactions 
in which there is an opposite party experiencing a decreased return of 
equal magnitude. This portion of the rule's impact would, from a 
society-wide perspective, be appropriately categorized as a transfer as 
discussed further in the Transfers section below (though it should be 
noted that, if there is evidence of wealth differing across the 
transaction parties, it would have implications for marginal utility of 
the assets).
1.5. Costs
    The Department received several comments regarding estimated costs 
for the proposed rule. Commenters were divided in their opinions about 
whether the illustration over or under estimated the proposed rule's 
total costs.
    Several commenters expressed concern that the rule will increase 
plan costs. One commenter said that conducting a cost-benefit analysis 
for each vote is ``unworkable'' and will ``create a dramatic cost 
burden.'' Some commenters asserted that the proposed rule would 
substantially increase costs because the commenters claimed that the 
current cost to vote proxies was small, with one commenter even 
suggesting it was approaching zero. Other commenters argued that the 
Department's cost estimates were suspect because the Department 
estimates that saving resulting from adopting the proposal's permitted 
practices were significantly larger than the entire revenues of the 
proxy advisory market. One commenter suggested their cost to provide 
services would increase by 10 to 20 times their current rate. Other 
commenters pointed out that although the model showed large costs, 
actual costs would be even larger, approaching $13 billion a year.
    A few of the commenters criticized that the rule places a higher 
emphasis on short-term costs and performance, as the short-term 
economic impact is often easier to quantify with less uncertainty. The 
commenters argued that this would lead fiduciaries to focus on short-
term economic implications at the expense of long-term value, which 
some commenters argued would be in violation of a fiduciary's duty.
    One commenter stated the proposal was onerous and that it may not 
even be possible for a plan fiduciary to do the proposal's mathematical 
exercises to determine the economic impact, let alone defend the 
determination, of every proxy vote in a detailed way and document it. 
The commenter felt this would raise the costs of even routine proxy 
votes. The commenter also said plans may need to hire additional 
service providers to help determine the economic impact on the plan of 
each vote. The need to have additional reviews and recordkeeping 
procedures would increase costs for voting analysis. Several commenters 
noted that the Department's economic analysis overlooked costs 
associated with the proposed rule, such as the cost of analyzing 
whether to abstain from a vote and the overhead costs of voting with 
management.
    A commenter said plans do not have the expertise nor the desire to 
vote the proxies themselves but instead rely on asset managers. The 
commenter suggested the proposed rule would make proxy advisory 
services more expensive, and the need to independently investigate the 
basis of the proxy advisor's recommendation will be costly. Another 
commenter reported that they would need to charge a rate 10 to 20 times 
the firm's current rate due to the proposal. The commenter stated that 
such a high cost to vote would force plans to either not vote or defer 
to management.
    Another commenter expressed the view that the cost to use ERISA 
3(38) investment managers will increase as they will have to bifurcate 
their processes, policies, and voting to accommodate ERISA and non-
ERISA accounts. Additionally, the commenter argued that institutional 
investors already approach their proxy voting methodically and 
professionally.
    Several commenters noted that the analysis failed to address 
opportunity costs or externalities. With reference to externalities, 
one commenter referred to academic research on corporate voting and 
elections that highlights the voters' motivation of communication with 
the board of directors.\109\ According to this research, voting can be 
used as a channel of communication with boards of directors, and 
protest voting can lead to significant changes in corporate governance 
and strategy. In such scenarios, voting success would not only be 
assessed by examining the returns to individual targeted firms' stocks, 
but also by the impact on the behavior of other companies throughout 
their portfolios. Another commenter noted, as an example of a negative 
externality, a study by Arjuna Capital that emphasized the negative 
environmental effects of carbon

[[Page 81686]]

emissions, which could potentially be addressed through proxy 
voting.\110\
---------------------------------------------------------------------------

    \109\ David Yermack, Shareholder Voting and Corporate 
Governance, 2 Ann Rev. Fin. Econ. 2.1, 2.15 (2010); Frederick 
Alexander, The Benefit Stance: Responsible Ownership in The Twenty-
First Century, 36 Oxford Rev. Econ Policy 341, 355 (2020); Robert G. 
Hansen and John R. Lott, Externalities and Corporate Objectives in a 
World with Diversified Shareholder/Consumers, Journal Of Financial 
And Quantitative Analysis, 1996, vol. 31, issue 1, 43-68.
    \110\ See http://arjuna-capital.com/wp-content/uploads/2016/07/Climate_Change_from_the_Investor_s_Perspective.pdf.
---------------------------------------------------------------------------

    One commenter stated they currently incur minimal costs to execute 
proxy votes in a way that they believe best protects the interests of 
participants and beneficiaries. Another commenter said that any 
increased costs would be minimal and suggested that to ensure the rule 
imposes a minimal burden on plan managers and proxy advisory firms, the 
Department could allow these firms to make the data used for voting 
shareholder decisions publicly available for external economic 
analysis, allowing academics, think tanks, and concerned citizens to 
provide additional economic analysis.
    Finally, commenters expressed concern that by requiring plan 
fiduciaries to determine economic materiality and to document that 
determination, the proposed rule would increase litigation risk for 
plan fiduciaries. A few of the commenters specifically alluded to 
increased litigation risk from plan participants, alleging improper 
voting activity. Some of the commenters stated that this risk would 
discourage plan fiduciaries to vote proxy votes.
    After carefully considering such comments, the Department made 
several modifications to the proposed rule. The most significant 
adjustment from the proposal results from the Department's agreement 
with the recommendation of some commenters that the final rule take a 
more principles-based approach to this subject matter. The Department 
estimates that the more principles-based approach will reduce much of 
the cost burden associated with the proposed rule. As discussed earlier 
in this preamble, the most significant revision in the final rule 
eliminates paragraphs (e)(3)(i) and (ii) from the proposal.
    Paragraph (e)(3)(i) of the proposal provided that a plan fiduciary 
must vote any proxy where the fiduciary prudently determines that the 
matter being voted upon would have an economic impact on the plan, 
after considering those factors described in paragraph (e)(2)(ii) of 
the proposal and taking into account the costs involved (including the 
cost of research, if necessary, to determine how to vote). Paragraph 
(e)(3)(ii) of the proposal provided that a plan fiduciary must not vote 
any proxy unless the fiduciary prudently determines that the matter 
being voted upon would have an economic impact on the plan after 
considering those factors described in paragraph (e)(2)(ii) of the 
proposal and taking into account the costs involved.
    As stated above, commenters criticized these provisions of the 
proposal as requiring a fiduciary to undertake an economic impact 
analysis in advance of each issue that is the subject of a proxy vote 
in order to even consider voting. A commenter further noted that a 
fiduciary may not discover until after the analysis is performed that 
the cost involved in determining whether to vote outweighs the economic 
benefit to the plan.
    The Department is persuaded by the comments that the requirements 
contained in paragraphs (e)(3)(i) and (ii) of the proposal should not 
be incorporated in the final rule. The Department recognizes the 
concerns expressed regarding potential increased costs and liability 
exposure, as well as potential risks to plan investments that could 
result from fiduciaries not voting when prudent to do so. Due to this 
and other changes the Department has made in the final rule that are 
discussed above, the Department expects that the incremental costs of 
the final rule provisions will be minimal on a per-plan basis.
    The Department recognizes that plans will need to spend time 
reviewing the final rule, evaluating how it affects their proxy voting 
practices, and implementing any necessary changes. The Department 
estimates that this review process will require a lawyer to spend 
approximately four hours to complete, resulting in a cost burden of 
approximately $34.3 million.\111\ The Department believes that these 
processes will likely be performed for most plans by a service provider 
that likely oversees multiple plans. Therefore, the Department's 
estimate likely represents an upper bound, because it is based on the 
number of affected plans. The Department does not have sufficient data 
that would allow it to estimate the number of service providers acting 
in such a capacity for these plans.
---------------------------------------------------------------------------

    \111\ The burden is estimated as follows: (63,911 plans * 4 
hours) = 255,644 hours. A labor rate of $138.41 is used for a 
lawyer. The cost burden is estimated as follows: (63,911 plans * 4 
hours * $138.41) = $34,309,915.
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    The Department believes that many fiduciaries already are compliant 
with the final rule, because they are meeting the requirements of the 
Department's sub-regulatory guidance and prudently conducting their 
business operations to satisfy their fiduciary obligations as required 
by ERISA.\112\ The Department acknowledges that such practices are not 
universal. In the course of its enforcement activity, the Department 
sometimes encounters instances where documentation is absent or does 
not meet the requirements of this final rule. The Department 
additionally believes that the availability of economies of scale 
limits the costs of this final rule. The Department understands that 
under the final rule, most of the relevant fiduciary duties will reside 
with, and most of the required activities will be performed by, third-
party asset managers, as is already common practice. Such asset 
managers are often large and provide the relevant fiduciary services 
for a large number of plans. The Department estimates that plan 
fiduciaries or investment managers will require a half hour annually 
and a half hour of help from clerical staff to maintain or document the 
required information, resulting in an annual cost burden estimate of 
$6.05 million.\113\ For a more in-depth discussion on the costs for 
maintaining the required documentation, please refer to the Paperwork 
Reduction Act section of this document below.
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    \112\ 29 CFR 2509.2016-01 (81 FR 95879, Dec. 29, 2016).
    \113\ The burden is estimated as follows: 63,911 plans * 0.5 
hours = 31,955.4 hours for both a plan fiduciary and clerical staff. 
A labor rate of $134.21 is used for a plan fiduciary and a labor 
rate of $55.14 for clerical staff (31,955.4 * $134.21 = $4,288,739 
and 31,955.4 * $55.14 = $1,762,023).
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    Several of the commenters noted that the Department failed to 
recognize the additional costs associated with developing or updating 
policies or procedures to reflect the requirements of the proposed 
rule. One commenter, however, asserted that most fiduciaries have 
thoughtful proxy policies. Another commenter stated that, contrary to 
the DOL assumption that there are ``cost savings'' because of the 
provisions in the rule that allow the adoption of proxy voting 
policies, proxy voting policies already exist and the rule would impose 
additional costs because such policies will need to be reviewed on an 
initial and ongoing basis. After further deliberation, the Department 
agrees that plans are likely to incur such costs, particularly plans 
that choose to adopt the safe harbors contained in paragraphs 
(e)(3)(i)(A) and (B) of the final rule. The Department believes that 
the final rule largely comports with industry practice for ERISA 
fiduciaries; therefore the Department estimates that on average, it 
will take a legal professional two hours to update policies and 
procedures for each of the estimated 63,911 plans affected by the rule. 
This results in a cost of $17.2 million in the first year.\114\

[[Page 81687]]

The requirement in paragraph (e)(3)(ii) to periodically review proxy 
voting policies already is required for fiduciaries to meet their 
obligations under ERISA; therefore, the Department does not expect that 
plans will incur additional cost associated with the periodic review.
---------------------------------------------------------------------------

    \114\ The burden is estimated as follows: 63,911 plans * 2 hours 
= 127,821.8. A labor rate of $134.21 is used for a plan fiduciary: 
(127,821.8 * $134.21 = $17,154,957).
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    The Department generally does not expect that this final rule will 
change the costs associated with plans' remaining voting activity. 
Provisions requiring responsible fiduciaries to monitor and document 
voting policies and activities would generally be satisfied by current 
best practices that satisfy earlier Departmental guidance. Neither does 
the Department expect plans to incur substantial costs from proxy 
advisory firms' potential efforts to help fiduciaries meet the final 
rule's requirements. If they do not already meet the standards detailed 
in the final regulation, plans that currently exercise shareholder 
rights, including proxy voting activities, will incur the costs 
associated with deciding whether to exercise shareholder rights 
pursuant to this final rule. The Department, however, does not have 
sufficient information to document such costs.
    It is possible that proxy advisory firms would take steps to avoid 
or mitigate conflicts of interest, strengthen factual and analytic 
rigor, better match their research and recommendations with ERISA 
plans' interests, or increase transparency as a result of the final 
rule. The Department notes, however, that proxy advisory firms are 
likely to take at least some of these steps in response to recent SEC 
policy initiatives and spread their related costs across all of their 
clients, not just ERISA plans.\115\ At the same time, the final rule 
may reduce plans' demand for proxy advice. However, this reduction in 
demand is beneficial to plans as they previously were purchasing more 
advice than they would have otherwise chosen due to their 
misunderstanding that they were required to vote all proxies. This 
reduced demand will lower the market price and the amount of advice 
purchased. Consequently, any compliance costs passed on from proxy 
advisory firms to ERISA plans are likely to be at least partially 
offset by plans' cost savings from purchasing a smaller amount of 
advice. It should be noted that proxy advisory firms will see a 
reduction in revenues as a result of the decreased demand for their 
services. In addition, proxy advisory firms' efforts to satisfy any SEC 
requirements might ease responsible fiduciaries' efforts to comply with 
this final rule. For example, it may be easier to monitor proxy 
advisory firms if those firms provide additional disclosure about their 
conflicts of interest and their policies and procedures to address such 
conflicts.
---------------------------------------------------------------------------

    \115\ The SEC's rule amendments require proxy advisory firms 
engaged in a solicitation to provide conflicts of interest 
disclosure, to adopt and publicly disclose policies and procedures 
reasonably designed to ensure that the company subject of the proxy 
voting advice has such advice made available to it at or prior to 
the time the advice is disseminated, and to provide a mechanism by 
which its clients can become aware of any written statements by the 
company in response to the proxy advice. The SEC also modified its 
proxy solicitation antifraud rule to specifically include material 
information about the proxy advisor's methodology, sources of 
information, or conflicts of interest, as examples of when the 
failure to disclose could, depending upon the particular facts and 
circumstances, be considered misleading. See 2020 SEC Proxy Voting 
Advice Amendments, at 242-246.
---------------------------------------------------------------------------

    The Department estimates that the final rule would impose 
incremental costs of approximately $57.52 million in the first year and 
$6.05 million in subsequent years. Over 10 years, the associated costs 
would be approximately $90.6 million with an annualized cost of $12.90 
million, using a seven percent discount rate.\116\ Using a perpetual 
time horizon (to allow the comparisons required under Executive Order 
13771), the annualized costs in 2016 dollars are $6.76 million at a 
seven percent discount rate.\117\
---------------------------------------------------------------------------

    \116\ The costs would be $101.58 million over 10-year period 
with an annualized cost of $11.91 million, applying a three percent 
discount rate.
    \117\ The annualized costs in 2016 dollars would be $6.31 
million applying a three percent discount rate.
---------------------------------------------------------------------------

1.6. Transfers
    Proxy advisory firms that respond best to this final rule will 
likely gain a relative competitive advantage. Firms that limit or 
eliminate conflicts of interest and modify their services to better 
align with the guidance of these final regulations could gain market 
share relative to firms that do not. Firms that are willing to tailor 
their voting guidelines, strategies, and costs according to each plan's 
investment guidelines could gain market share relative to firms that do 
not.
    The final rule may reduce plans' demand for proxy advice, lowering 
the market price, the amount of advice purchased, and revenues. This 
represents a transfer from proxy advisory firms to plans, who will 
benefit as they previously were purchasing more advice than they would 
have chosen to due to their misunderstanding that plan fiduciaries were 
required to vote all proxies.
    The Department also notes, however, that the market for proxy 
advisors could also change as a result of the final rule. Such changes 
could lead to increased competition among proxy advisory firms. In such 
a scenario, it is possible that the rule will result in a reduction in 
the expenses plans incur to purchase proxy advisory services. Although 
the Department does not have sufficient data to quantify this 
possibility, it would result in a transfer from proxy advisory firms to 
plans.
    Moreover, as noted previously, if some portion of rule-induced 
increases in returns would be associated with transactions in which the 
opposite party experiences decreased returns of equal magnitude, then 
this portion of the final rule's impact would, from a society-wide 
perspective, be appropriately categorized as a transfer.
1.7. Regulatory Alternatives
    As discussed above, the Department considered retaining paragraphs 
(e)(3)(i) and (ii) of the proposal. Paragraph (e)(3)(i) of the proposal 
provided that a plan fiduciary must vote any proxy where the fiduciary 
prudently determines that the matter being voted upon would have an 
economic impact on the plan, after considering those factors described 
in paragraph (e)(2)(ii) of the proposal and taking into account the 
costs involved (including the cost of research, if necessary, to 
determine how to vote). Paragraph (e)(3)(ii) of the proposal provided 
that a plan fiduciary must not vote any proxy unless the fiduciary 
prudently determines that the matter being voted upon would have an 
economic impact on the plan after considering those factors described 
in paragraph (e)(2)(ii) of the proposal and taking into account the 
costs involved.
    After carefully considering comments, the Department was persuaded 
to eliminate paragraphs (e)(3)(i) and (ii) and adopt a more principles-
based, less prescriptive approach in the final rule that will reduce 
much of the cost burden associated with the proposed rule. Commenters 
criticized these provisions of the proposal as requiring a fiduciary to 
undertake an economic impact analysis in advance of each issue that is 
the subject of a proxy vote in order to even consider voting. A 
commenter further noted that a fiduciary may not discover until after 
the analysis is performed that the cost involved in determining whether 
to vote outweighed the economic benefit to the plan. The Department 
recognizes the concerns expressed regarding potential increased costs 
and liability exposure associated with these provisions, as well as 
potential risks to plan investments

[[Page 81688]]

that could result from fiduciaries not voting when prudent to do so.
1.8. Uncertainty
    The Department's economic assessment of this final rule's effects 
is subject to uncertainty. Specific areas of uncertainty are discussed 
below:
    Cost Savings--As noted earlier, the Department lacks complete data 
on plans' exercise of their shareholder rights appurtenant to their 
stock holdings, including proxy voting activities, and on the attendant 
costs and benefits. Many of the commenters criticized that the 
Department lacks data and evidence to support its cost-benefit analysis 
and remarked that the Department should not move forward with the rule 
until the associated costs and benefits are more certain. The 
Department firmly disagrees and believes that the impact of the rule 
has been reasonably assessed based on the best available data.
    Demand for New Services--The Department solicited comments 
regarding whether the final rule would create a demand for new 
services, and if so, what alternate services or relationships with 
service providers might result and how overall plan expenses could be 
impacted. The Department did not receive comments that specifically 
addressed this question.
    Other Securities--The final rule will generally govern plans' 
exercise of shareholder rights appurtenant to their stock holdings of 
individual companies, but not to their holdings of other securities. 
The Department cannot determine whether some plans nonetheless would 
modify their practices with respect to other securities because of this 
final rule. As noted earlier, ERISA pensions held just 5.5 percent of 
total corporate equity in 2019, down from a high of 22 percent in 1985. 
Mutual funds, in contrast, held 22 percent of all corporate equity in 
2019, up from 6 percent in 1985.\118\ As ERISA-covered pensions have 
shifted from defined benefit to defined contribution plans, both the 
proportion of pension assets invested in mutual funds and the 
proportion of all mutual fund shares owned by pensions have increased 
dramatically. In 2019, ERISA-covered pensions held 25 percent of all 
mutual fund shares, up from 8 percent in 1985. ERISA would apply to any 
proxy votes for mutual fund shares and shares of other funds registered 
with the SEC for which the plan fiduciary is responsible. ERISA does 
not govern the management of the portfolio internal to a fund 
registered with the SEC, including such fund's exercise of its 
shareholder rights appurtenant to the portfolio of stocks it holds, 
though ERISA would apply to similar funds organized as collective 
investment trusts. One commenter stated that if plans do not 
participate in the proxy process, it may prevent issuers from reaching 
quorum for their shareholder meetings, and this would impose costs on 
plans.
---------------------------------------------------------------------------

    \118\ Department calculations based on U.S. Federal Reserve 
statistics, Financial Accounts of the United States--Z.1.
---------------------------------------------------------------------------

    Non-ERISA Investors--Many asset managers serve both ERISA plans and 
other investors. The Department believes such uniform voting for ERISA 
and non-ERISA clients may sometimes jeopardize responsible fiduciaries' 
satisfaction of their duties under ERISA. However, as noted earlier in 
the preamble, this concern may be mitigated in the case of investment 
managers subject to the SEC's jurisdiction by the fact that federal 
securities law requires investment advisers to make the determination 
in their client's best interest and not to place the investment 
adviser's own interests ahead of their client's.\119\ Where an SEC 
registered investment adviser has assumed the authority to vote on 
behalf of its client, the SEC has stated that the investment adviser, 
among other things, must have a reasonable understanding of the 
client's objectives and must make voting determinations that are in the 
client's best interest.
---------------------------------------------------------------------------

    \119\ See Commission Interpretation Regarding Standard of 
Conduct for Investment Advisers, 84 FR 33669, 33673 (July 12, 2019) 
(discussing an adviser's obligation to make a reasonable inquiry 
into its client's financial situation, level of financial 
sophistication, investment experience and financial goals and have a 
reasonable belief that the advice it provides is in the best 
interest of the client based on the client's objectives); Commission 
Guidance Regarding Proxy Voting Responsibilities of Investment 
Advisers, Release No. IA-5325 (Aug. 21, 2019) (82 FR 47420 (Sep. 10, 
2019) (clarifying investment advisers' duties when voting 
shareholder proxies). See also Rule 206(4)-6 under the Investment 
Advisers Act of 1940, 17 CFR 275.206(4)-6 (Under rule 206(4)-6, it 
is a fraudulent, deceptive, or manipulative act, practice or course 
of business within the meaning of section 206(4) of the Investment 
Advisers Act for an investment adviser to exercise voting authority 
with respect to client securities, unless the adviser (i) has 
adopted and implemented written policies and procedures that are 
reasonably designed to ensure that the adviser votes proxies in the 
best interest of its clients, which procedures must include how the 
investment adviser addresses material conflicts that may arise 
between the adviser's interests and interests of their clients; (ii) 
discloses to clients how they may obtain information from the 
investment adviser about how the adviser voted with respect to their 
securities; and (iii) describes to clients the investment adviser's 
proxy voting policies and procedures and, upon request, furnishes a 
copy of the policies and procedures to the requesting client.
---------------------------------------------------------------------------

    Under this final rule, responsible fiduciaries might increase their 
demands for asset managers to implement separate policies customized 
for particular ERISA plans or for ERISA plans generally, such as 
policies that align with the proposed permitted practices in paragraph 
(e)(3)(iii). One commenter noted that policies would increase costs for 
plans and investment without an incremental benefit to participants and 
beneficiaries. The Department discusses the impact of updating policies 
and procedures in the cost section above.
    Asset Allocation--This final rule could exert influence on a plan's 
asset allocation. For example, the quantitative threshold provision in 
paragraph (e)(3)(i)(B) would permit responsible fiduciaries, after 
prudently considering the relevant factors, to adopt proxy voting 
policies allowing them to refrain from voting on proposals or 
particular types of proposals when the plan's holding in a single 
issuer is sufficiently small relative to the plan's total investment 
that the outcome of the vote is not expected to have a material impact 
on the investment performance of the plan's portfolio. This provision 
might produce additional economic benefits by promoting fuller and more 
optimal diversification where it may otherwise have been lacking. That 
is, the quantitative threshold could prompt a fiduciary to diversify 
what otherwise would have been a concentration of more than the 
specified threshold amount of a plan's portfolio in a single stock.
    Vote Categories--Proxy votes can be tallied in four ways: For, 
against/withhold, abstain, and not voted. The vast majority of 
outstanding shares are held in ``street name'' by intermediaries, such 
as broker-dealers. Broker-dealers may have discretionary authority to 
vote proxies without receiving voting instructions from the owner of 
the shares for routine and noncontroversial matters, such as the 
ratification of a company's independent auditors. For matters in which 
a broker-dealer does not have discretionary authority to vote, a broker 
non-vote is required. For matters that require approval of a majority 
of shares present and voting, abstentions (which are cast neither for 
nor against a proposal) and broker non-votes are not counted in the 
final tally. For matters that require approval of a majority of the 
shares issued and outstanding, abstentions or broker non-votes are 
treated as votes against the proposal. If an investor is unsure about a 
matter or unsure whether her interests and management's interests are 
aligned, the investor arguably should abstain.

[[Page 81689]]

1.9. Conclusion
    The final rule would benefit ERISA-covered plans, as it provides 
guidance regarding how ERISA's fiduciary duties apply to proxy voting 
and in particular when fiduciaries should refrain from voting. Plan 
fiduciaries will be able to conserve plan assets as they refrain from 
researching and voting on proposals that are unlikely to have a 
material effect on the investment performance of the plan's portfolio, 
and thereby increase the return on plan assets. The Department 
estimates that the final rule's cost impact is substantially less than 
the proposal due to significant revisions to the required actions of a 
plan fiduciary that were made in the final rule in response to comments 
on the proposal.
2. Paperwork Reduction Act
    In accordance with the Paperwork Reduction Act of 1995 (PRA 95) (44 
U.S.C. 3506(c)(2)(A)), the Department solicited comments concerning the 
information collection request (ICR) included in the Fiduciary Duties 
Regarding Proxy Voting and Shareholder Rights ICR (85 FR 55219). At the 
same time, the Department also submitted an information collection 
request (ICR) to the Office of Management and Budget (OMB), in 
accordance with 44 U.S.C. 3507(d).
    The Department received comments that specifically addressed the 
paperwork burden analysis of the information collection requirement 
contained in the proposed rule. The Department took into account such 
public comments in developing the revised paperwork burden analysis 
discussed below.
    In connection with publication of this final rule, the Department 
is submitting an ICR to OMB requesting approval of a new collection of 
information under OMB Control Number 1210-0165. The Department will 
notify the public when OMB approves the ICR.
    A copy of the ICR may be obtained by contacting the PRA addressee 
shown below or at www.RegInfo.gov. PRA ADDRESSEE: G. Christopher Cosby, 
Office of Regulations and Interpretations, U.S. Department of Labor, 
Employee Benefits Security Administration, 200 Constitution Avenue NW, 
Room N-5718, Washington, DC 20210; [email protected]. Telephone: 202-
693-8410; Fax: 202-219-4745. These are not toll-free numbers.
    It has long been the view of the Department that the duty to 
monitor necessitates proper documentation of the activities that are 
subject to monitoring.\120\ Accordingly, the Department's final rule 
requires that plan fiduciaries maintain records on proxy voting 
activities and other exercises of shareholder rights. This requirement 
applies to all pension plans with investments, including those that 
have shareholder rights and proxy votes that may need to be exercised.
---------------------------------------------------------------------------

    \120\ 29 CFR 2509.2008-2 (73 FR 61731 (Oct. 17, 2008)).
---------------------------------------------------------------------------

    The Department believes that most plan fiduciaries have followed 
the Department's prior sub-regulatory guidance or already are 
performing most if not all of the documentation requirements of the 
final rule as a prudent practice in their normal course of business. 
While the incremental burden of the final rule is generally small, 
perhaps even de minimis, the Department discussed the full burden of 
such requirements below to allow for full evaluation of the 
requirements in the information collection.
    According to the most recent Form 5500 data there are 721,876 
pension plans (92,480 large plans and 629,396 small plans) and 8,475 
health or welfare plans (5,626 large plans filing a schedule H, and 
2,849 small plans filing a schedule I).\121\ While the Schedule H 
collects information on a plan's stock holdings, Schedule I lacks the 
specificity to determine if small plans hold stocks. As shown in Table 
1, 31,868 pension plans hold stocks and would have shareholder rights 
they may need to exercise. Additionally, 573 health and other welfare 
plans file the schedule H and report holding either common stocks or 
employer stocks. The Department lacks information on the number of 
small plans that hold stock. Small plans are significantly less likely 
to hold stock than larger plans. For purposes of estimating the burden, 
five percent of small plans are presumed to hold stock resulting in 
31,470 small plans needing to comply with the information collection. 
Therefore, a total of 63,911 plans will need to comply with this 
information collection.
---------------------------------------------------------------------------

    \121\ EBSA estimates using 2018 Form 5500 filing data.
---------------------------------------------------------------------------

2.1. Maintain Documentation
    The final rule requires that the named plan fiduciary must maintain 
records on proxy voting activities and other exercises of shareholder 
rights. Where the authority to vote proxies or exercise shareholder 
rights has been delegated to an investment manager pursuant to ERISA 
section 403(a)(2), or a proxy voting firm or another person performs 
advisory services as to the voting of proxies, plan fiduciaries must 
prudently monitor the proxy voting activities of such investment 
manager or proxy advisory firm and determine whether such activities 
are consistent with paragraphs (e)(2)(i) and (ii) and (e)(3) of this 
section.
    Much of the information needed to fulfill these requirements is 
generated in the normal course of business. Plans may need additional 
time to maintain the proper documentation, but this burden is likely to 
be reduced by the adoption of policies by plan fiduciaries that 
incorporate one or more of the final rule's safe harbors.
    Commenters expressed concerns that the proposed rule would be 
onerous, since it would not be feasible for plan fiduciaries to 
determine the economic impact of every proxy vote in a detailed way and 
document it. Thus, commenters suggested that the Department 
underestimated the amount of time that fiduciaries and clerical staff 
would spend documenting and maintaining documentation for votes. As 
discussed above in Section 1.5, after carefully considering these 
comments, the Department was persuaded to adopt a more principles-
based, less prescriptive approach in the final rule that does not carry 
forward specific documentation and recordkeeping provisions in the 
proposal that were identified by commenters as burdensome and 
unnecessary. The Department believes that with this revision, the final 
rule's documentation and recordkeeping requirements should result in 
less burden than the proposal's requirements, because the final rule 
requirements mirror previous guidance and align with existing fiduciary 
duty of documentation.
    However, in light of the public comments that argued that the 
Department underestimated the recordkeeping burden and because of the 
uncertainty involved in determining which plans will need to change 
recordkeeping practices to comply with the final rule, the Department 
is retaining the documentation time estimate from the proposal. This is 
responsive to the commenters' assertion and is a step intended to avoid 
underestimating the average time required for plan fiduciaries to 
comply with the final rule.
    The Department estimates that plan fiduciaries or investment 
managers will require a half hour annually and a half hour of help from 
clerical staff to maintain or document the required information. This 
is likely an overestimate, because many, if not most, plans use 
investment managers. These investment managers provide similar services 
for many plans. This results in

[[Page 81690]]

an annual cost burden estimate of $6,050,762.\122\
---------------------------------------------------------------------------

    \122\ The burden is estimated as follows: 63,911 plans * 0.5 
hours = 31,955.4 hours for both a plan fiduciary and clerical staff. 
A labor rate of $134.21 is used for a plan fiduciary and a labor 
rate of $55.14 for clerical staff (31,955.4 * $134.21 = $4,288,739 
and 31,955.4 * $55.14 = $1,762,023).
---------------------------------------------------------------------------

    These paperwork burden estimates are summarized as follows:
    Type of Review: New collection.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Fiduciary Duties Regarding Proxy Voting and Shareholder 
Rights.
    OMB Control Number: 1210-0165.
    Affected Public: Businesses or other for-profits.
    Estimated Number of Respondents: 63,911.
    Estimated Number of Annual Responses: 63,911.
    Frequency of Response: Occasionally.
    Estimated Total Annual Burden Hours: 0.
    Estimated Total Annual Burden Cost: $6,050,762.
3. Regulatory Flexibility Act
    The Regulatory Flexibility Act (RFA) \123\ imposes certain 
requirements with respect to federal rules that are subject to the 
notice and comment requirements of section 553(b) of the Administrative 
Procedure Act \124\ and are likely to have a significant economic 
impact on a substantial number of small entities. Unless the head of an 
agency certifies that a final rule is not likely to have a significant 
economic impact on a substantial number of small entities, section 604 
of the RFA requires the agency to present a final regulatory 
flexibility analysis of the final rule.\125\
---------------------------------------------------------------------------

    \123\ 5 U.S.C. 601 et seq. (1980).
    \124\ 5 U.S.C. 551 et seq. (1946).
    \125\ 5 U.S.C. 604 (1980).
---------------------------------------------------------------------------

    For purposes of analysis under the RFA, the Employee Benefits 
Security Administration (EBSA) considers employee benefit plans with 
fewer than 100 participants to be small entities.\126\ The basis of 
this definition is found in section 104(a)(2) of ERISA, which permits 
the Secretary of Labor to prescribe simplified annual reports for plans 
that cover fewer than 100 participants. Under section 104(a)(3) of 
ERISA, the Secretary may also provide for exemptions or simplified 
annual reporting and disclosure for welfare benefit plans. Pursuant to 
the authority of section 104(a)(3), the Department has previously 
issued (see 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46, 
and 2520.104b-10) simplified reporting provisions and limited 
exemptions from reporting and disclosure requirements for small plans, 
including unfunded or insured welfare plans, that cover fewer than 100 
participants and satisfy certain requirements. While some large 
employers have small plans, small plans are maintained generally by 
small employers. Thus, the Department believes that assessing the 
impact of this final rule on small plans is an appropriate substitute 
for evaluating the effect on small entities. The definition of small 
entity considered appropriate for this purpose differs, however, from a 
definition of small business based on size standards promulgated by the 
Small Business Administration (SBA) \127\ pursuant to the Small 
Business Act.\128\ The Department solicited comments on this assumption 
in the proposed rule; however, no comments were received.
---------------------------------------------------------------------------

    \126\ The Department consulted with the Small Business 
Administration Office of Advocacy in making this determination, as 
required by 5 U.S.C. 603(c) and 13 CFR 121.903(c) in a memo dated 
June 4, 2020.
    \127\ 13 CFR 121.201 (2011).
    \128\ 15 U.S.C. 631 et seq. (2011).
---------------------------------------------------------------------------

    The Department has determined that this final rule could have a 
significant impact on a substantial number of small entities during the 
first year. Therefore, the Department has prepared a Final Regulatory 
Flexibility Analysis that is presented below.
3.1. Need for and Objectives of the Rule
    The Department believes that this final rule is an appropriate way 
to provide clarity and certainty regarding the application of fiduciary 
obligations of loyalty and prudence with respect to exercises of 
shareholder rights, including proxy voting. Despite past efforts to 
make clear fiduciary obligations in this regard, the Department is 
concerned that its existing sub-regulatory guidance may have 
inadvertently created the perception that fiduciaries must vote proxies 
on every shareholder proposal to fulfill their obligations under ERISA. 
This belief may have caused some fiduciaries to pursue proxy proposals 
that have no connection to increasing the value of investments used to 
pay benefits or defray the reasonable plan administrative expenses.
    Both of these concerns point to the risk that a plan's proxy voting 
activity will sometimes impair rather than advance participants' 
economic interest in their benefits. This final rule aims to ensure 
that the costs plans incur to vote proxies and exercise other 
shareholder rights are economically justified, and that responsible 
fiduciaries' use of third-party advice supports rather than jeopardizes 
their adherence to ERISA's fiduciary requirements.
    The Department is monitoring other federal agencies whose statutory 
and regulatory requirements overlap with ERISA. In particular, the 
Department is monitoring SEC rules and guidance to avoid creating 
duplicate or overlapping requirements with respect to proxy voting.
3.2. Significant Issues Raised by Public Comments in Response to the 
IFRA and Changes Made to the Proposed Rule in Response
    One of the most significant issue raised by commenters was that 
paragraphs (e)(3)(i) and (ii) of the proposal require a fiduciary to 
undertake an economic impact analysis in advance of each issue that is 
the subject of a proxy vote in order to even consider voting. A 
commenter further noted that a fiduciary may not discover until after 
the analysis is performed that the cost involved in determining whether 
to vote outweighed the economic benefit to the plan. The Department 
recognizes the concerns expressed regarding potential increased costs 
and liability exposure associated with these provisions, as well as 
potential risks to plan investments that could result from fiduciaries 
not voting when prudent to do so. Therefore, after carefully 
considering comments, the Department was persuaded to eliminate 
paragraphs (e)(3)(i) and (ii) and adopt a more principles-based, less 
prescriptive approach in the final rule that reduces the cost burden 
associated with the proposed rule. This revision to the proposal is 
further discussed in Section 3.5 below.
    In the proposal, the Department included an illustration to try to 
capture the cost burden on service providers from the rule. This 
illustration was based on certain assumptions the Department described 
as speculative in the proposal, and many of the commenters criticized 
its basis. In response to the commenters and changes made to the rule 
since the proposal, the Department has removed this illustration. For a 
more detailed description about the Department's decision, please refer 
to the Cost section above.
    Some commenters were concerned that the rule would be burdensome on 
small plan sponsors. One commenter expressed concern that the 
requirements of the regulation will have a significant impact on small 
entities because of their limited staff resources. The Department 
acknowledges this concern as well as the concern that smaller plans may 
not be able to absorb the additional burden of the regulation as easily 
as larger plans. As described in the Cost section

[[Page 81691]]

above, the Department has amended the proposed rule's requirements and 
adopted a less prescriptive, principles-based approach in the final 
rule that mirrors and supplements requirements contained in the 
Department's prior sub-regulatory guidance and industry best practices. 
These changes will substantially reduce the Department's estimate of 
the proposed rule's cost impact.
    Another commenter expressed concern that the Department 
substantially underestimated costs for small plans, as many small plans 
would need to hire a service provider to produce additional 
documentation to supplement existing investment policy statements. The 
Department recognizes that plans may need to make various changes to 
compliance policies and procedures to respond to the rule, so it has 
added an additional cost for the time it takes to develop or update 
such policies and procedures in the final rule.
3.2. Affected Small Entities
    This final rule will affect ERISA-covered pension, health, and 
welfare plans that hold stock either through common stock or employer 
securities. This includes plans that indirectly hold stocks through 
collective trusts, master trusts, pooled separate accounts, and other 
similar plan asset investment entities. Plans that only hold their 
assets in registered investment companies, such as mutual funds, will 
be unaffected by the final rule.
    There is minimal data available about small plans' stock holdings. 
The primary source of information on assets held by pension plans is 
the Form 5500. Schedule H, which reports data on stock holdings, is 
filed almost exclusively by large plans. While the majority of 
participants and assets are in large plans, most plans are small plans 
(plans with fewer than 100 participants). It is likely that many small 
defined benefit plans hold stock. Many small defined contribution plans 
hold stock only through mutual funds, and consequently would not be 
affected by this final rule. In 2018, there were 39,142 small defined 
benefit plans and 590,254 small defined contribution plans. The 
Department lacks sufficient data to estimate the number of small plans 
that hold stock, but it assumes that small plans are significantly less 
likely to hold stock than larger plans. The Department did not receive 
any comments or additional data from commenters regarding the number of 
small plans that hold stock directly or indirectly. As discussed 
elsewhere, while the Department assumes that small affected entities 
will spend some time familiarizing themselves with the rule, it expects 
that even in the case of small plans that hold stock directly or 
indirectly, these costs will be small, because the required activities 
are reflected in common practice. Therefore, for purposes of 
determining whether a substantial number of small plans are affected, 
the Department presumes that five percent of small plans hold stock 
resulting in as assumed 31,470 affected small plans.
    The Department recognizes that service providers, including small 
service providers who act as asset managers, could also be impacted by 
this rule, if they provide compliance assistance to the plans they 
serve. The Department does not have complete information on the number 
of affected small service providers. However, the Department does not 
believe that there will be more service providers than the 63,911 
affected plans. The Department assumes the number of service providers 
who will experience a substantial impact from the final rule will be 
significantly smaller as only about 7.5 percent of service providers in 
the NAICS categories that could be affected have revenues below 
$100,000.\129\ As discussed in Table 2, below, the Department estimates 
that compliance costs in the first year are less than $900. Therefore, 
only service providers with revenues less than $100,000 could 
experience a cost that is more than one percent of revenues. If service 
providers incur compliance costs, they could pass some of these costs 
onto plans and experience a smaller impact.
---------------------------------------------------------------------------

    \129\ To capture the number of potentially affected service 
providers, the Department looked at the number of small entities 
with the following North American Industry Classification System 
(NAICS) Codes: 523110 Investment Banking and Securities Dealing; 
523920 Portfolio Management; 523930 Investment Advice; 523991 Trust, 
Fiduciary, and Custody Activities; and 525910 Open-End Investment 
Funds. Small entities were identified based on their revenue and the 
size standards from the SBA. According to data provided by the SBA, 
the Department estimates there are 8,616 small entities in these 
industries with revenues less than $100,000. This accounts for 7.5 
percent of all firms in these industries. The calculation of the 
number of firms by industry is based on: NAICS. Businesses by NAICS, 
https://www.naics.com/business-lists/counts-by-company-size/.
---------------------------------------------------------------------------

3.4. Estimate Cost Impact of the Final Rule on Affected Small Entities
    This final rule will benefit small plans, by providing guidance 
regarding how ERISA's fiduciary duties apply to proxy voting and the 
monitoring of proxy advisory firms, and in particular, when fiduciaries 
should refrain from voting. Plan fiduciaries will be able to better 
conserve plan assets by having clear direction to refrain from 
researching and voting on proposals that they prudently determine have 
no material effect on the investment performance of the plan's 
portfolio (or investment performance of assets under management in the 
case of an investment manager). The final rule also will benefit plans 
by improving the frequency with which voting resources are expended on 
matters that the fiduciary has prudently determined are substantially 
related to the issuer's business activities or are expected to have a 
material effect on the value of the investment. Cost savings and other 
benefits to small plans will flow to plan participants and 
beneficiaries in the form of more secure retirement income.
    As discussed under the Costs section above, while the Department 
assumes that small affected entities will spend some time familiarizing 
themselves with the rule, it expects that these familiarization costs 
will be small, because the required activities are reflected in common 
practice. The Department estimates it will take four hours for an in-
house attorney to review the rule, at an hourly labor cost of 
$138.41,\130\ resulting in an average cost of $536.84. The Department 
believes small plans are likely to rely on service providers to monitor 
regulatory changes and make necessary changes to the plan, so this is 
likely an overestimate of the costs incurred by small plans to 
familiarize themselves with the rule.
---------------------------------------------------------------------------

    \130\ Labor costs are based on statistics from Labor Cost Inputs 
Used in the Employee Benefits Security Administration, Office of 
Policy and Research's Regulatory Impact Analyses and Paperwork 
Reduction Act Burden Calculation, Employee Benefits Security 
Administration (June 2019), www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
---------------------------------------------------------------------------

    Fiduciaries of plans must ensure that all investments are prudently 
monitored. The final rule provides that fiduciaries responsible for the 
exercise of shareholder rights must maintain records on proxy voting 
activities and other exercises of shareholder rights in order to 
demonstrate compliance with ERISA's fiduciary provisions. The 
Department assumes that, because the documentation of fiduciary 
decision-making is a common practice, responsible fiduciaries are 
likely already recording and maintaining documentation related to their 
own and investment managers' actions, including voting proxies and 
exercising other shareholder rights.
    The final rule will have a small impact on plans that are not 
currently in full compliance, because their

[[Page 81692]]

fiduciaries will be required to maintain records or document decisions 
related to voting proxies or exercising other shareholder rights. Much 
of the information required to comply with this requirement is 
generated by affected entities in the normal course of business; 
however, additional time may be required to maintain the proper 
documentation. The Department estimates that compliance with this final 
regulation will require 30 minutes of a plan fiduciary's time and 30 
minutes of a clerical worker's time. The Department assumes an hourly 
rate of $134.21 for a plan fiduciary and an hourly rate of $55.14 for a 
clerical worker,\131\ resulting in an estimated per-entity annual cost 
of $94.68.\132\
---------------------------------------------------------------------------

    \131\ Labor costs are based on statistics from Labor Cost Inputs 
Used in the Employee Benefits Security Administration, Office of 
Policy and Research's Regulatory Impact Analyses and Paperwork 
Reduction Act Burden Calculation, Employee Benefits Security 
Administration (June 2019), www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
    \132\ This cost is estimated as: 0.5 hours * $134.21 + 0.5 hours 
* $55.14 = $94.68.
---------------------------------------------------------------------------

    Additionally, the Department estimates that to comply with the 
rule, many plans will need to either develop or update proxy-voting 
policies and procedures. This is particularly true for plans choosing 
to adopt one of the final rule's safe harbors. The Department estimates 
that it will take two hours for a legal professional to develop or 
update relevant policies and procedures. The Department assumes an 
hourly rate of $134.21 for a legal professional, resulting in an 
estimate per-entity cost of $268.42 in the first year.
    Under these assumptions, the Department estimates the additional 
requirements of the rule will increase costs by $899.94 per plan in the 
first year and $94.68 per plan in subsequent years, on average. This is 
illustrated in Table 2 below.

                              Table 2--Costs for Plans To Comply With Requirements
----------------------------------------------------------------------------------------------------------------
                 Affected entity                    Labor rate         Hours        Year 1 cost     Year 2 cost
----------------------------------------------------------------------------------------------------------------
Documentation: Plan Fiduciary...................         $134.21             0.5          $67.11          $67.11
Documentation: Clerical workers.................           55.14             0.5           27.57           27.57
Rule Familiarization: Plan Fiduciary............          134.21               4          536.84               0
Develop or Update Proxy-Voting Policies and               134.21               2          268.42               0
 Procedures.....................................
                                                 ---------------------------------------------------------------
    Total.......................................  ..............  ..............          899.94           94.68
----------------------------------------------------------------------------------------------------------------
Source: DOL calculations based on statistics from Labor Cost Inputs Used in the Employee Benefits Security
  Administration, Office of Policy and Research's Regulatory Impact Analyses and Paperwork Reduction Act Burden
  Calculation, Employee Benefits Security Administration (June 2019), www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.

    To put these costs in perspective, the Department looked at how the 
additional cost from the proposed rule would compare to the average 
total plan cost of 401(k) plans by assets. Plan costs include 
investment fees as well as administrative and recordkeeping fees. The 
way plan costs are paid vary by plan. A 2019 survey of 240 plan 
sponsors found that 33 percent of defined contribution (DC) plans paid 
all recordkeeping and administrative fees through investment revenue, 
while 52 percent of DC plans paid recordkeeping and administrative fees 
through a direct fee.\133\ Accounts from the industry purport that per-
participant recordkeeping fees are becoming the best practice standard; 
this trend has been driven by digital recordkeeping technology that 
requires the same amount of resources for large accounts as small 
accounts.\134\
---------------------------------------------------------------------------

    \133\ Deloitte. ``2019 Defined Contribution Benchmarking Survey 
Report: the Retirement Landscape has Changed--Are Plan Sponsors 
Ready?'' www2.deloitte.com/us/en/pages/human-capital/articles/annual-defined-contribution-benchmarking-survey.html.
    \134\ Manganaro, John. ``Recordkeeping Fees Under the Microscope 
Retirement Plans of All Sizes are Seeing Their Recordkeeping Fee 
Schedules Questioned, Especially When Those Fees are Expressed as a 
Percentage of Assets.'' Planadviser. (November 2019). 
www.planadviser.com/recordkeeping-fees-microscope/.
---------------------------------------------------------------------------

    Fees paid by plans also vary by firm size. A survey of 361 defined 
contribution plans for the Investment Company Institute calculated an 
``all-in'' fee that included both administrative and investment fees 
paid by the plan and the participant. They found that small plans with 
10 participants pay approximately 50 basis points more than plans with 
1,000 participants. Further, small plans with 10 participants are 
paying about 90 basis points more than large plans with 50,000 
participants.\135\ Another study documented the same trend, noting that 
larger plans tend to have lower fees because larger plans tend to have 
a greater share of assets invested in index funds, which tend to have 
lower expenses. Additionally, large 401(k) plans are able to spread the 
fixed costs across more participants, lowering the per participant 
fee.\136\
---------------------------------------------------------------------------

    \135\ Deloitte Consulting and Investment Company Institute, 
``Inside the Structure of Defined Contribution/401(k) Plan Fees, 
2013: A Study Assessing the Mechanics of the `All-in' Fee'' (Aug. 
2014).
    \136\ BrightScope, ICI. ``The BrightScope/ICI Defined 
Contribution Plan Profile: a Close Look at 401(k) Plans, 2017.'' 
(August 2020).
---------------------------------------------------------------------------

    For this analysis, the Department relies on data from BrightScope 
to establish a baseline of total plan fees, before the implementation 
of this rule. In August of 2020, BrightScope released updated total 
plan costs based on 2017 data. Their total plan cost includes asset-
based investment management fees, asset-based administrative and advice 
fees, and other fees from the Form 5500 and audited financial 
statements of ERISA-covered 401(k) plans.\137\ This data does not 
include plans with fewer than 100 participants, the standard set for a 
small plan in this analysis. However, the Department believes that the 
median total plan costs, provided by BrightScope, serves as a helpful 
reference point when considering the additional burden from this rule.
---------------------------------------------------------------------------

    \137\ BrightScope, ICI. ``The BrightScope/ICI Defined 
Contribution Plan Profile: a Close Look at 401(k) Plans, 2017.'' 
(August 2020).
---------------------------------------------------------------------------

    Table 3 shows total plan costs from BrightScope; plan cost 
information is based on categories of plans with assets less than $1 
million, between $1 million and $10 million, and between $10 million 
and $50 million. The Department provides as the impact of the rule the 
additional cost plans will incur as a percent of plan assets, using the 
median asset value of each category, to illustrate how the rule is 
likely to affect plans with different amounts of assets. As seen in the 
table below, the estimated burden in the first year will

[[Page 81693]]

increase the costs significantly for small plans with minimal assets. 
The cost in subsequent years is negligible--less than one percent of 
plan assets for even the smallest size category and for most plans less 
than 0.25 percent of plan assets.

    Table 3--Total First Year Plan Cost as a Percent of Plan Assets for Plans With Less Than 100 Participants
----------------------------------------------------------------------------------------------------------------
                                                         Number of plans a                          Additional
                                                 --------------------------------    Beginning    plan cost from
                                                                                   median total     the rule c
                   Plan assets                                                      plan cost b  ---------------
                                                      Defined         Defined        (percent)    Percent of mid-
                                                      benefit      contribution                   point in asset
                                                                                                       range
----------------------------------------------------------------------------------------------------------------
$1-24K..........................................              12           1,750          1.24 d           7.500
$25-49K.........................................               8           1,072          1.24 d           2.368
$50-99K.........................................              37           1,716          1.24 d           1.200
$100-249K.......................................             188           3,638          1.24 d           0.514
$250-499K.......................................             300           4,124          1.24 d           0.240
$500K-999K......................................             433           5,095          1.24 d           0.120
$1 Million to $10 Million.......................             547           6,458            1.05           0.018
$10 Million to $50 Million......................             202           2,818            0.78           0.003
----------------------------------------------------------------------------------------------------------------
\a\ Calculated as five percent of plans in each asset range, based on data from the 2018 Form 5500 for the
  distribution of pension plans with fewer than 100 participants by type of plan and plan assets. As the Form
  5500 does not allow a determination of which small plans has stock, the actual size distribution is unknown.
  The population distribution is used.
\b\ Total plan cost is BrightScope's measure of the total cost of operating the 401(k) plan and includes asset-
  based investment management fees, asset-based administrative and advice fees, and other fees (including
  insurance charges) from the Form 5500 and audited financial statements of ERISA-covered 401(k) plans. Total
  plan cost is computed only for plans with sufficiently complete information. The sample is 53,856 plans with
  $4.4 trillion in assets. BrightScope audited 401(k) filings generally include plans with 100 participants or
  more. Plans with fewer than four investment options or more than 100 investment options are excluded from
  BrightScope audited 401(k) filings for this analysis. The data does not include DB plans, but due to lack of
  comparable data it is applied to DB plans as a proxy for their plan costs. Source: BrightScope, ICI. ``The
  BrightScope/ICI Defined Contribution Plan Profile: a Close Look at 401(k) Plans, 2017.'' (August 2020).
\c\ The Department estimates that additional plan cost from the rule will be $899.94. The Department applied
  this fixed cost as a percent of mid-point in each asset range.
\d\ BrightScope did not differentiate between plans with less than $1 million in assets; however, as most of the
  small plans have less than $1 million in assets, the Department applied this broader estimate to smaller sub-
  sets of assets to illustrate how small plans are likely to affected by the rule.

    The Department believes that this is likely an overestimate of the 
costs faced by small plans, as small plans are likely to rely on 
service providers. The Department believes these service providers 
offer economies of scale in meeting the requirements of the final rule; 
however, the Department does not have data that would allow it to 
estimate the number of service providers acting in such a capacity for 
these plans.
    The time required to make necessary changes to compliance policies 
and procedures in response to the rule may vary widely between plans, 
the Department believes the requirements in the final rule closely 
resemble existing prior guidance and industry best practices. The 
Department believes that, on average, the marginal cost to meet the 
additional requirements regulation, outside of existing fiduciary 
duties, will be small because the required activities are reflected in 
common practice and the requirements are similar to prior guidance. 
Further, plan fiduciaries would be able to conserve plan assets by 
refraining from researching and voting on proposals that they prudently 
determine do not have a material effect on the value of the plan's 
investment. Thus, the final rule would result in cost savings and other 
benefits for small plan sponsors.
3.5. Steps the Agency Has Taken To Minimize the Significant Economic 
Impact on Small Entities
    As discussed above, the Department's longstanding position is that 
the fiduciary duties of prudence and loyalty under ERISA sections 
404(a)(1)(A) and 404(a)(1)(B) apply to the exercise of shareholder 
rights, including proxy voting, proxy voting policies and guidelines, 
and the selection and monitoring of proxy advisory firms. These duties 
apply to all affected entities-large and small. Accordingly, no special 
actions were taken into consideration for small entities.
    As discussed above, after carefully considering comments, the 
Department was persuaded to eliminate paragraphs (e)(3)(i) and (ii) and 
adopt a more principle-based, less prescriptive approach in the final 
rule that will reduce much of the cost burden associated with the 
proposed rule. Paragraph (e)(3)(i) of the proposal provided that a plan 
fiduciary must vote any proxy where the fiduciary prudently determined 
that the matter being voted upon would have an economic impact on the 
plan after considering those factors described in paragraph (e)(2)(ii) 
of the proposal and taking into account the costs involved (including 
the cost of research, if necessary, to determine how to vote). 
Paragraph (e)(3)(ii) of the proposal provided that a plan fiduciary 
must not vote any proxy unless the fiduciary prudently determined that 
the matter being voted upon would have an economic impact on the plan 
after considering those factors described in paragraph (e)(2)(ii) of 
the proposal and taking into account the costs involved. This is a 
significant adjustment from the proposal that results in a less 
prescriptive, more principles-based approach that will reduce much of 
the cost burden associated with the proposed rule for all plans, 
including small plans. See the section above entitled ``Elimination of 
Paragraphs (e)(3)(i) and (ii) from the Proposal'' for a more detailed 
discussion of this change.
4. Unfunded Mandates Reform Act
    Title II of the Unfunded Mandates Reform Act of 1995 \138\ requires 
each federal agency to prepare a written statement assessing the 
effects of any

[[Page 81694]]

federal mandate in a proposed or final agency rule that may result in 
an expenditure of $100 million or more (adjusted annually for inflation 
with the base year 1995) in any one year by state, local, and tribal 
governments, in the aggregate, or by the private sector. For purposes 
of the Unfunded Mandates Reform Act, as well as Executive Order 12875, 
this final rule does not include any federal mandate that the 
Department expects would result in such expenditures by state, local, 
or tribal governments, or the private sector. This final rule will not 
result in an expenditure of $100 million or more in any one year, 
because the Department is simply restating and modernizing fiduciary 
practices related to voting rights and aligning its regulations to the 
extent possible with guidance issued by the SEC.
---------------------------------------------------------------------------

    \138\ 2 U.S.C. 1501 et seq. (1995).
---------------------------------------------------------------------------

5. Federalism Statement
    Executive Order 13132 outlines fundamental principles of federalism 
and requires federal agencies to adhere to specific criteria when 
formulating and implementing policies that have ``substantial direct 
effects'' on the states, the relationship between the national 
government and states, or on the distribution of power and 
responsibilities among the various levels of government. Federal 
agencies promulgating regulations that have federalism implications 
must consult with state and local officials and describe the extent of 
their consultation and the nature of the concerns of state and local 
officials in the preamble to the final rule.
    In the Department's view, this final rule does not have federalism 
implications because it does not have direct effects on the states, the 
relationship between the national government and the states, or the 
distribution of power and responsibilities among various levels of 
government. The final rule describes requirements and permitted 
practices related to the exercise of shareholder rights under ERISA. 
While ERISA generally preempts state laws that relate to ERISA plans, 
and preemption typically requires an examination of the individual law 
involved, it appears highly unlikely that the provisions in this final 
regulation would have preemptive effect on general state corporate 
laws.

Statutory Authority

    This regulation is adopted pursuant to the authority in section 505 
of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135) and section 102 
of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), 
effective December 31, 1978 (44 FR 1065, January 3, 1979), 3 CFR 1978 
Comp. 332, and under Secretary of Labor's Order No. 1-2011, 77 FR 1088 
(Jan. 9, 2012).

List of Subjects in 29 CFR Parts 2509 and 2550

    Employee benefit plans, Employee Retirement Income Security Act, 
Exemptions, Fiduciaries, investments, Pensions, Prohibited 
transactions, Reporting and recordkeeping requirements, Securities.

    For the reasons set forth in the preamble, the Department amends 
parts 2509 and 2550 of subchapters A and F of chapter XXV of title 29 
of the Code of Federal Regulations as follows:

Subchapter A--General

PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE 
RETIREMENT INCOME SECURITY ACT OF 1974

0
1. The authority citation for part 2509 continues to read as follows:

    Authority:  29 U.S.C. 1135. Secretary of Labor's Order 1-2003, 
68 FR 5374 (Feb. 3, 2003). Sections 2509.75-10 and 2509.75-2 issued 
under 29 U.S.C. 1052, 1053, 1054. Sec. 2509.75-5 also issued under 
29 U.S.C. 1002. Sec. 2509.95-1 also issued under sec. 625, Pub. L. 
109-280, 120 Stat. 780.


Sec.  2509.2016-01   [Removed]

0
2. Remove Sec.  2509.2016-01.

Subchapter F--Fiduciary Responsibility Under the Employee Retirement 
Income Security Act of 1974

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

0
3. The authority citation for part 2550 continues to read as follows:

    Authority:  29 U.S.C. 1135 and Secretary of Labor's Order No. 1-
2011, 77 FR 1088 (January 9, 2012). Sec. 102, Reorganization Plan 
No. 4 of 1978, 5 U.S.C. App. at 727 (2012). Sec. 2550.401c-1 also 
issued under 29 U.S.C. 1101. Sec. 2550.404a-1 also issued under sec. 
657, Pub. L. 107-16, 115 Stat 38. Sec. 2550.404a-2 also issued under 
sec. 657 of Pub. L. 107-16, 115 Stat. 38. Sections 2550.404c-1 and 
2550.404c-5 also issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also 
issued under 29 U.S.C. 1108(b)(1). Sec. 2550.408b-19 also issued 
under sec. 611, Pub. L. 109-280, 120 Stat. 780, 972. Sec. 2550.412-1 
also issued under 29 U.S.C. 1112.


0
4. Section 2550.404a-1 is amended by adding paragraph (e), revising 
paragraph (g), and republishing paragraph (h) to read as follows:


Sec.  2550.404a-1   Investment duties.

* * * * *
    (e) Proxy voting and exercise of shareholder rights. (1) The 
fiduciary duty to manage plan assets that are shares of stock includes 
the management of shareholder rights appurtenant to those shares, such 
as the right to vote proxies.
    (2)(i) When deciding whether to exercise shareholder rights and 
when exercising such rights, including the voting of proxies, 
fiduciaries must carry out their duties prudently and solely in the 
interests of the participants and beneficiaries and for the exclusive 
purpose of providing benefits to participants and beneficiaries and 
defraying the reasonable expenses of administering the plan.
    (ii) The fiduciary duty to manage shareholder rights appurtenant to 
shares of stock does not require the voting of every proxy or the 
exercise of every shareholder right. In order to fulfill the fiduciary 
obligations under paragraph (e)(2)(i) of this section, when deciding 
whether to exercise shareholder rights and when exercising shareholder 
rights, plan fiduciaries must:
    (A) Act solely in accordance with the economic interest of the plan 
and its participants and beneficiaries;
    (B) Consider any costs involved;
    (C) Not subordinate the interests of the participants and 
beneficiaries in their retirement income or financial benefits under 
the plan to any non-pecuniary objective, or promote non-pecuniary 
benefits or goals unrelated to those financial interests of the plan's 
participants and beneficiaries;
    (D) Evaluate material facts that form the basis for any particular 
proxy vote or other exercise of shareholder rights;
    (E) Maintain records on proxy voting activities and other exercises 
of shareholder rights; and
    (F) Exercise prudence and diligence in the selection and monitoring 
of persons, if any, selected to advise or otherwise assist with 
exercises of shareholder rights, such as providing research and 
analysis, recommendations regarding proxy votes, administrative 
services with voting proxies, and recordkeeping and reporting services.
    (iii) Where the authority to vote proxies or exercise shareholder 
rights has been delegated to an investment manager pursuant to ERISA 
section 403(a)(2), or a proxy voting firm or other person who performs 
advisory services as to the voting of proxies, a responsible plan 
fiduciary shall prudently monitor the proxy voting activities of such 
investment manager or proxy advisory firm and determine whether such 
activities are consistent with paragraphs (e)(2)(i) and (ii) and (e)(3) 
of this section.

[[Page 81695]]

    (iv) A fiduciary may not adopt a practice of following the 
recommendations of a proxy advisory firm or other service provider 
without a determination that such firm or service provider's proxy 
voting guidelines are consistent with the fiduciary's obligations 
described in paragraphs (e)(2)(ii)(A) through (E) of this section.
    (3)(i) In deciding whether to vote a proxy pursuant to paragraphs 
(e)(2)(i) and (ii) of this section, fiduciaries may adopt proxy voting 
policies providing that the authority to vote a proxy shall be 
exercised pursuant to specific parameters prudently designed to serve 
the plan's economic interest. Paragraphs (e)(3)(i)(A) and (B) of this 
section set forth optional means for satisfying the fiduciary 
responsibilities under sections 404(a)(1)(A) and 404(a)(1)(B) of ERISA 
with respect to decisions whether to vote, provided such policies are 
developed in accordance with a fiduciary's obligations under ERISA as 
set forth in the applicable provisions of paragraphs (e)(2)(i) and (ii) 
of this section. Paragraphs (e)(3)(i)(A) and (B) of this section do not 
establish minimum requirements or the exclusive means for satisfying 
these responsibilities. A plan may adopt either or both of the 
following policies:
    (A) A policy to limit voting resources to particular types of 
proposals that the fiduciary has prudently determined are substantially 
related to the issuer's business activities or are expected to have a 
material effect on the value of the investment.
    (B) A policy of refraining from voting on proposals or particular 
types of proposals when the plan's holding in a single issuer relative 
to the plan's total investment assets is below a quantitative threshold 
that the fiduciary prudently determines, considering its percentage 
ownership of the issuer and other relevant factors, is sufficiently 
small that the matter being voted upon is not expected to have a 
material effect on the investment performance of the plan's portfolio 
(or investment performance of assets under management in the case of an 
investment manager).
    (ii) Plan fiduciaries shall periodically review proxy voting 
policies adopted pursuant to paragraph (e)(3)(i) of this section.
    (iii) No proxy voting policies adopted pursuant to paragraph 
(e)(3)(i) of this section shall preclude submitting a proxy vote when 
the fiduciary prudently determines that the matter being voted upon is 
expected to have a material effect on the value of the investment or 
the investment performance of the plan's portfolio (or investment 
performance of assets under management in the case of an investment 
manager) after taking into account the costs involved, or refraining 
from voting when the fiduciary prudently determines that the matter 
being voted upon is not expected to have such a material effect after 
taking into account the costs involved.
    (4)(i)(A) The responsibility for exercising shareholder rights 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 section 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 section 403(a)(2).
    (B) Where the authority to manage plan assets has been delegated to 
an investment manager pursuant to section 403(a)(2), the investment 
manager has exclusive authority to vote proxies or exercise other 
shareholder rights appurtenant to such plan assets in accordance with 
this section, except to the extent the plan, trust document, or 
investment management agreement expressly provides that the responsible 
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 exercise or management of some or all of such shareholder 
rights.
    (ii) An investment manager of a pooled investment vehicle that 
holds assets of more than one employee benefit plan may be subject to 
an investment policy statement that conflicts with the policy of 
another plan. Compliance with ERISA section 404(a)(1)(D) requires the 
investment manager to reconcile, insofar as possible, the conflicting 
policies (assuming compliance with each policy would be consistent with 
ERISA section 404(a)(1)(D)). In the case of proxy voting, to the extent 
permitted by applicable law, the investment manager must vote (or 
abstain from voting) the relevant proxies to reflect such policies in 
proportion to each plan's economic interest in the pooled investment 
vehicle. Such an investment manager may, however, develop an investment 
policy statement consistent with Title I of ERISA and this section, and 
require participating plans to accept the investment manager's 
investment policy statement, including any proxy voting policy, before 
they are allowed to invest. In such cases, a fiduciary must assess 
whether the investment manager's investment policy statement and proxy 
voting policy are consistent with Title I of ERISA and this section 
before deciding to retain the investment manager.
    (5) This section does not apply to voting, tender, and similar 
rights with respect to such securities that are passed through pursuant 
to the terms of an individual account plan to participants and 
beneficiaries with accounts holding such securities.
* * * * *
    (g) Applicability date. (1) Except for paragraph (e) of this 
section, this section shall apply in its entirety to all investments 
made and investment courses of action taken after January 12, 2021.
    (2) Plans shall have until April 30, 2022, to make any changes to 
qualified default investment alternatives described in Sec.  2550.404c-
5, where necessary to comply with the requirements of paragraph (d)(2) 
of this section.
    (3) Paragraph (e) of this section applies on January 15, 2021. 
Fiduciaries, other than investment advisers subject to 17 CFR 
275.206(4)-6, shall have until January 31, 2022, to comply with the 
requirements of paragraphs (e)(2)(ii)(D) and (E) of this section. All 
fiduciaries shall have until January 31, 2022 to comply with the 
requirements of paragraphs (e)(2)(iv) and (e)(4)(ii) of this section.
    (h) Severability. If any provision of this section is held to be 
invalid or unenforceable by its terms, or as applied to any person or 
circumstance, or stayed pending further agency action, the provision 
shall be construed so as to continue to give the maximum effect to the 
provision permitted by law, unless such holding shall be one of 
invalidity or unenforceability, in which event the provision shall be 
severable from this section and shall not affect the remainder thereof.

    Signed at Washington, DC.
Jeanne Klinefelter Wilson,
Acting Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2020-27465 Filed 12-15-20; 8:45 am]
BILLING CODE 4510-29-P