Comment Letter to the DOL: Fiduciary Duties Regarding Proxy Voting and Shareholder Rights (RIN 1210-AB91)

Abstract

This comment letter provides support for the Department of Labor's proposed rule, Fiduciary Duties Regarding Proxy Voting and Shareholder Rights (RIN 1210-AB91). Part I of this comment letter provides a theoretical framework for shareholder voting and the creation of voting recommendations. This Part focuses on the collective action problem found in shareholder voting and its ramifications for both voting and the creation of voting recommendations by proxy advisors. I discuss this framework in more detail in my law review article The Risks and Rewards of Shareholder Voting (forthcoming, SMU Law Review). Part II recommends, as a means to help mitigate the collective action problem found in shareholder voting, that proxy advisors, such as Institutional Shareholder Services (ISS) and Glass Lewis, be designated investment advice fiduciaries under Section 3(21)(A)(ii) of ERISA. This is something I discuss in detail in my law review article Now Is the Time to Designate Proxy Advisors as Fiduciaries under ERISA (Stanford Journal of Law, Business and Finance). Part III supports the proposed rule’s approach of increasing the role of board voting recommendations in the voting policies of ERISA plans. My support is based mainly on another recent law review article I wrote, Enhancing the Value of Shareholder Voting Recommendations (Tennessee Law Review). Part IV provides support for the proposed rule’s approach to shareholder voting proposals. Part V discusses an issue that is not currently in the proposed rule but that should be considered for inclusion, i.e., how an ERISA plan manager is to incorporate into its decision-making the shareholder activism of investment advisers of mutual funds and exchange-traded funds (ETFs) with large amounts of delegated voting authority. This activism is reflected in an investment advisor’s rhetoric disclosing the objectives of its activism, shareholder voting, and engagement with portfolio companies. The incorporation of this new consideration would occur when deciding to invest in such funds or considering them as options for self-directed accounts. This Part argues that a plan manager’s duty of prudence requires it to investigate how this shareholder activism will be used prior to making these decisions. The fiduciary objective in this investigation is to ensure that the investment adviser is utilizing shareholder activism consistent with a plan manager’s duty of loyalty, i.e., “solely in the interest of the participants and beneficiaries” and for the exclusive purpose of providing financial benefits to them. If that is not happening, these funds should be excluded from an ERISA plan. This Part has at its foundation a recent white paper that I wrote, The Conflict between BlackRock’s Shareholder Activism and ERISA’s Fiduciary Duties.