To implement President Trump’s Executive Order from December directing the DOL to revisit fiduciary rules for those advising on shareholder rights (e.g., proxy voting), the DOL recently issued this technical release that provides:
1. Proxy advisors often qualify as investment advice fiduciaries under ERISA.
2. State laws requiring disclosure of non-financial factors in proxy advice are not preempted by ERISA.
Proxy advisors act as ERISA fiduciaries when they either exercise control over proxy voting for plan assets or provide fee-based advice to ERISA plans on how to vote those proxies, triggering ERISA’s fiduciary obligations. Under a longstanding five-part test, proxy advisors that provide ongoing, fee-based recommendations tailored to ERISA plans generally meet the fiduciary standard. As fiduciaries, proxy advisors must comply with ERISA’s duty of loyalty and duty of prudence.
State laws requiring proxy advisors to disclose when recommendations aren’t based on maximizing financial returns are generally not preempted by ERISA, because ERISA fiduciaries should always act to maximize risk-adjusted returns – meaning such disclosures should rarely apply to ERISA plans.
ISS and Glass Lewis may need to adjust their practices or face enforcement risk or litigation. And although focused on proxy advisors, the DOL guidance may extend to other entities like asset managers and sovereign wealth funds.
And investors themselves may have to reevaluate their own voting practices including the extent of their reliance on ISS or Glass Lewis recommendations…
Authored by
Broc Romanek