Executive Order Addresses Proxy Voting: 

As background, proxy advisors advise shareholders about whether certain corporate proposals should be approved (e.g., executives’ compensation packages, board candidates’ election, and various other proposals included in a proxy ballot). In the ERISA context, mutual funds have long constituted retirement plans’ main investment vehicle. Thus, those plans hold trillions of dollars of proxy voting power. The Department of Labor (“DOL”) believes that voting proxies is a fiduciary function. Unless voting is passed through to plan participants, proxies are typically voted by plan fiduciaries or by a plan’s fiduciary investment manager. To help comply with their ERISA duties, fiduciaries often engage a proxy advisor.

In this connection, on December 11, the White House published an Executive Order (the “Order”) to address the following situation: “Unbeknownst to many Americans, two foreign-owned proxy advisors, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, play a significant role in shaping the policies and priorities of America’s largest companies through the shareholder voting process.”   

The Order states that those firms, “which control more than 90 percent of the proxy advisor market, advise their clients about how to vote the enormous numbers of shares their clients hold and manage on behalf of millions of Americans in mutual funds and exchange traded funds. Their clients’ holdings often constitute a significant ownership stake in the United States’ largest publicly traded companies, and their clients often follow the proxy advisors’ advice.” Consequently, those proxy advisors influence capital markets and thus value of Americans’ investments (e.g., retirement plan account values).

The Order then states that those proxy advisors “regularly use their substantial power to advance and prioritize radical politically-motivated agendas — like “diversity, equity, and inclusion” and “environmental, social, and governance” — even though investor returns should be the only priority.” To address that concern, per the Order:

• The Securities and Exchange Commission (“SEC”) must review all rules and regulations regarding  proxy advisors. After that review, the SEC shall (1) consider revising or rescinding those rules and regulations if they implicate “diversity, equity, and inclusion” and “environmental, social, and governance” policies; (2) consider requiring proxy advisors to provide increased transparency for their recommendations regarding “diversity, equity, and inclusion” and “environmental, social, and governance” factors; and (3) direct its staff to examine whether the practice of Registered Investment Advisers engaging proxy advisors to advise on, and following such proxy advisors’ recommendations for, non-pecuniary factors in investing is inconsistent with their fiduciary duties.
• The DOL must revise all regulations and guidance regarding the fiduciary status of people who manage (or, like proxy advisors, who advise those who manage) the rights for shares held by ERISA-covered plans, including proxy votes, consistent with the Order. The DOL must also consider whether such proposed revisions should specify that any individuals who have a relationship of trust and confidence with their client (e.g., proxy advisors) and who provide advice for a fee or other compensation with respect to the exercise of the rights for shares held by ERISA plans, are ERISA investment advice fiduciaries. Additionally, the DOL must assess whether proxy advisors “act solely in the financial interests of plan participants and the extent to which any of their practices undermine the pecuniary value of the assets of ERISA plans.” 

Plan sponsors may wish to confirm that they understand, monitor, and document their plan’s proxy voting process. The goal is to help ensure that their plan assets’ voting policies and procedures align with ERISA, as well as other applicable laws, regulations, and guidance.