A torrent of opposition from Wall Street, Capitol Hill and pension funds across the country has hit the U.S. Department of Labor over its plan to restrict proxy voting for some financial advisers.
The Labor Department is expected to finalize a proposal soon that would only permit financial advisers working on 401(k)s and similar plans to vote on shareholder resolutions they can prove will "have an economic impact on the plan" — a move that critics say threatens a foundational component of the U.S. corporate governance model. The Labor Department proposal would apply to advisers for all retirement plans falling under the Employee Retirement Income Security Act of 1974.
"It's been long recognized that proxy voting and shareholder resolutions constitute critically important investor protections," Illinois State Treasurer Michael Frerichs said in an interview. "The proposed change represents an unnecessary and unprecedented intrusion on the ability of fiduciaries to act in the best interests of their plan participants and beneficiaries."
More than three decades ago, the Labor Department issued guidance known today as the Avon Letter, which said voting on proxies is a part of the fiduciary act of managing ERISA plan assets. The regulator now says there is a "misplaced belief" among ERISA fiduciaries that they need to research and vote on every resolution at the annual meeting of a company their plan invests in.
Fiduciaries instead should focus only on resolutions that they "prudently determined to have an economic impact on the plan after the costs of research and voting are taken into account," according to the agency. To help advisers make that determination, the Labor Department included several "permitted practices" in its proposal, including one in which fiduciaries adopt a voting policy that simply aligns with management's recommendations.
The Labor Department also raised concerns in the proposal about fiduciaries and proxy advisory firms using the Avon Letter as a means to justify voting in support of or pursuing proxy proposals "for environmental, social, or public policy agendas that have no connection to increasing the value of investments."
A spokesperson for the Labor Department declined to comment on active rulemaking.
Business groups such as the U.S. Chamber of Commerce, which has lobbied to overhaul the U.S. proxy plumbing system for years, applauded the Labor Department's proposal. The Chamber was supportive of new proxy rule changes made by the Securities and Exchange Commission earlier in 2020 as well.
In an Oct. 5 letter, Tom Quaadman, executive vice president of the Chamber's Center for Capital Markets Competitiveness, wrote that the proposal will "help ERISA fiduciaries navigate the ongoing evolution of the proxy system." Quaadman also pushed the Labor Department to go further by banning ERISA fiduciaries from "outsourcing their voting duties" to proxy advisory firms like Glass Lewis & Co. LLC and Institutional Shareholder Services Inc., which provide research and recommendations on how their investor clients should vote on proposals from both management and shareholders.
But the Labor Department also received dozens of letters objecting to the proposal. Among them were some of the world's largest asset managers, such as BlackRock Inc. and Vanguard Group Inc., a group of 20 sitting members of Congress and two regulators at the SEC, who questioned whether the Labor Department had justified why the rulemaking proposal was necessary at all.
In their joint Oct. 5 comment letter, SEC Commissioners Allison Herren Lee and Caroline Crenshaw, both Democrats, blasted the proposal for not including any "objective quantitative or qualitative evidence of the problem it is intended to address" or recognizing "the multitude of benefits that shareholder participation in the proxy process provides."
The SEC commissioners also questioned the Labor Department's comments about ESG investing in the proposal, writing they are "concerned about substituting regulatory judgment for that of investors and fiduciaries, and effectively putting a thumb on the scale in this manner." The Labor Department recently adopted a new rule expected to limit the prospects for ESG investments in ERISA funds.
"Before proposing rules that essentially favor or oppose a particular proxy proposal or class of proposals, there should be an objective, evidence-based record to support such a change," Lee and Crenshaw wrote. "Here, the record is notably lacking such evidence."
Under the proposal, critics worry that fiduciaries working on ERISA retirement plans will feel pressured to side with management on shareholder proposals for fear of being unable to justify voting otherwise — or, advisers may decide not to vote at all.
Critics said that chilling effect on voting proxies could reach beyond ERISA fiduciaries too, representing yet another hurdle for shareholder resolutions designed to hold executives accountable or make management teams address emerging corporate issues, like climate change and board construction.
"It goes against 'every vote counts,'" said Betty Moy Huber, co-head of Davis Polk's environmental, social and corporate governance group, in an interview. "You're basically quieting the voices of fund managers."
California State Teachers' Retirement System, one of the world's biggest pension funds, criticized the Labor Department for proposing to "undo a major landmark for proxy voting" in its Oct. 5 comment letter.
The Avon Letter established a clear benchmark decades ago for institutional investors like CalSTRs, as well as ERISA fiduciaries, to use in thinking about voting on proxies, a practice the pension fund says was once considered a liability across the industry. Investors now hold their proxy voting rights dear, Aeisha Mastagni, a portfolio manager for sustainable investment and stewardship strategies for CalSTRS, wrote in an Oct. 5 comment letter.
"Given that proxy votes are an asset, we, as fiduciaries, have a responsibility to vote," Mastagni wrote. "And we would hope that the democratic nature of our society would allow us to make our voices heard for the long-term benefit of our beneficiaries."