[Code of Federal Regulations]

[Title 29, Volume 9]

[Revised as of July 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 29CFR2509.94-2]



[Page 360-363]

 

                             TITLE 29--LABOR

 

 CHAPTER XXV--EMPLOYEE BENEFITS SECURITY ADMINISTRATION, DEPARTMENT OF 

                                  LABOR

 

PART 2509_INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE RETIREMENT 

INCOME SECURITY ACT OF 1974--Table of Contents

 

Sec.  2509.94-2  Interpretive bulletin relating to written statements of 

investment policy, including proxy voting policy or guidelines.



    This interpretive bulletin sets forth the Department of Labor's (the 

Department) interpretation of sections 402, 403 and 404 of the Employee 

Retirement Income Security Act of 1974 (ERISA) as those sections apply 

to voting of proxies on securities held in employee benefit plan 

investment portfolios and the maintenance of and compliance with 

statements of investment policy, including proxy voting policy. In 

addition, this interpretive bulletin provides guidance on the 

appropriateness under ERISA of active monitoring of corporate management 

by plan fiduciaries.



                            (1) Proxy Voting



    The fiduciary act of managing plan assets that are shares of 

corporate stock includes the voting of proxies appurtenant to those 

shares of stock. As a result, the responsibility for voting proxies 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 Sec.  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 Sec.  403(a)(2). Where the 

authority to manage plan assets has been delegated to an investment 

manager pursuant to Sec.  403(a)(2),



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no person other than the investment manager has authority to vote 

proxies appurtenant to such plan assets except to the extent that the 

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 voting of proxies. In this regard, a named fiduciary, in 

delegating investment management authority to an investment manager, 

could reserve to itself the right to direct a trustee with respect to 

the voting of all proxies or reserve to itself the right to direct a 

trustee as to the voting of only those proxies relating to specified 

assets or issues.

    If the plan document or investment management agreement provides 

that the investment manager is not required to vote proxies, but does 

not expressly preclude the investment manager from voting proxies, the 

investment manager would have exclusive responsibility for voting 

proxies. Moreover, an investment manager would not be relieved of its 

own fiduciary responsibilities by following directions of some other 

person regarding the voting of proxies, or by delegating such 

responsibility to another person. If, however, the plan document or the 

investment management contract expressly precludes the investment 

manager from voting proxies, the responsibility for voting proxies would 

lie exclusively with the trustee. The trustee, however, consistent with 

the requirements of ERISA Sec.  403(a)(1), may be subject to the 

directions of a named fiduciary if the plan so provides.

    The fiduciary duties described at ERISA Sec.  404(a)(1)(A) and (B), 

require that, in voting proxies, the responsible fiduciary 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. These duties also require 

that the named fiduciary appointing an investment manager periodically 

monitor the activities of the investment manager with respect to the 

management of plan assets, including decisions made and actions taken by 

the investment manager with regard to proxy voting decisions. The named 

fiduciary must carry out this responsibility solely in the interest of 

the participants and beneficiaries and without regard to its 

relationship to the plan sponsor.

    It is the view of the Department that compliance with the duty to 

monitor necessitates proper documentation of the activities that are 

subject to monitoring. Thus, the investment manager or other responsible 

fiduciary would be required to maintain accurate records as to proxy 

voting. Moreover, if the named fiduciary is to be able to carry out its 

responsibilities under ERISA Sec.  404(a) in determining whether the 

investment manager is fulfilling its fiduciary obligations in investing 

plans assets in a manner that justifies the continuation of the 

management appointment, the proxy voting records must enable the named 

fiduciary to review not only the investment manager's voting procedure 

with respect to plan-owned stock, but also to review the actions taken 

in individual proxy voting situations.

    The fiduciary obligations of prudence and loyalty to plan 

participants and beneficiaries require the responsible fiduciary to vote 

proxies on issues that may affect the value of the plan's investment. 

Although the same principles apply for proxies appurtenant to shares of 

foreign corporations, the Department recognizes that in voting such 

proxies, plans may, in some cases, incur additional costs. Thus, a 

fiduciary should consider whether the plan's vote, either by itself or 

together with the votes of other shareholders, is expected to have an 

effect on the value of the plan's investment that will outweigh the cost 

of voting. Moreover, a fiduciary, in deciding whether to purchase shares 

of a foreign corporation, should consider whether the difficulty and 

expense in voting the shares is reflected in their market price.



                   (2) Statements of Investment Policy



    The maintenance by an employee benefit plan of a statement of 

investment policy designed to further the purposes of the plan and its 

funding policy is consistent with the fiduciary obligations set forth in 

ERISA section 404(a)(1)(A) and (B). Since the fiduciary act of managing 

plan assets that are shares of corporate stock includes the voting of 

proxies appurtenant to those shares of stock, a statement of proxy 

voting policy would be an important part of any comprehensive statement 

of investment policy. For purposes of this document, the term 

``statement of investment policy'' means a written statement that 

provides the fiduciaries who are responsible for plan investments with 

guidelines or general instructions concerning various types or 

categories of investment management decisions, which may include proxy 

voting decisions. A statement of investment policy is distinguished from 

directions as to the purchase or sale of a specific investment at a 

specific time or as to voting specific plan proxies.

    In plans where investment management responsibility is delegated to 

one or more investment managers appointed by the named fiduciary 

pursuant to ERISA Sec.  402(c)(3), inherent in the authority to appoint 

an investment manager, the named fiduciary responsible for appointment 

of investment managers has the authority to condition the appointment on 

acceptance of a statement of investment policy. Thus, such a named 

fiduciary may expressly require, as a condition of the investment 

management agreement, that an investment manager comply with



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the terms of a statement of investment policy which sets forth 

guidelines concerning investments and investment courses of action which 

the investment manager is authorized or is not authorized to make. Such 

investment policy may include a policy or guidelines on the voting of 

proxies on shares of stock for which the investment manager is 

responsible. In the absence of such an express requirement to comply 

with an investment policy, the authority to manage the plan assets 

placed under the control of the investment manager would lie exclusively 

with the investment manager. Although a trustee may be subject to the 

directions of a named fiduciary pursuant to ERISA Sec.  403(a)(1), an 

investment manager who has authority to make investment decisions, 

including proxy voting decisions, would never be relieved of its 

fiduciary responsibility if it followed directions as to specific 

investment decisions from the named fiduciary or any other person.

    Statements of investment policy issued by a named fiduciary 

authorized to appoint investment managers would be part of the 

``documents and instruments governing the plan'' within the meaning of 

ERISA Sec.  404(a)(1)(D). An investment manager to whom such investment 

policy applies would be required to comply with such policy, pursuant to 

ERISA Sec.  404(a)(1)(D) insofar as the policy directives or guidelines 

are consistent with titles I and IV of ERISA. Therefore, if, for 

example, compliance with the guidelines in a given instance would be 

imprudent, then the investment manager's failure to follow the 

guidelines would not violate ERISA Sec.  404(a)(1)(D). Moreover, ERISA 

Sec.  404(a)(1)(D) does not shield the investment manager from liability 

for imprudent actions taken in compliance with a statement of investment 

policy.

    The plan document or trust agreement may expressly provide a 

statement of investment policy to guide the trustee or may authorize a 

named fiduciary to issue a statement of investment policy applicable to 

a trustee. Where a plan trustee is subject to an investment policy, the 

trustee's duty to comply with such investment policy would also be 

analyzed under ERISA Sec.  404(a)(1)(D). Thus, the trustee would be 

required to comply with the statement of investment policy unless, for 

example, it would be imprudent to do so in a given instance.

    Maintenance of a statement of investment policy by a named fiduciary 

does not relieve the named fiduciary of its obligations under ERISA 

Sec.  404(a) with respect to the appointment and monitoring of an 

investment manager or trustee. In this regard, the named fiduciary 

appointing an investment manager must periodically monitor the 

investment manager's activities with respect to management of the plan 

assets. Moreover, compliance with ERISA Sec.  404(a)(1)(B) would require 

maintenance of proper documentation of the activities of the investment 

manager and of the named fiduciary of the plan in monitoring the 

activities of the investment manager. In addition, in the view of the 

Department, a named fiduciary's determination of the terms of a 

statement of investment policy is an exercise of fiduciary 

responsibility and, as such, statements may need to take into account 

factors such as the plan's funding policy and its liquidity needs as 

well as issues of prudence, diversification and other fiduciary 

requirements of ERISA.



    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 Sec.  404(a)(1)(D) would require 

such investment manager to reconcile, insofar as possible, the 

conflicting policies (assuming compliance with each policy would be 

consistent with ERISA Sec.  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 Sec.  

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 Sec.  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 Sec.  404(a)(1)(D).



                        (3) Shareholder Activism



    An investment policy that contemplates activities intended to 

monitor or influence the management of corporations in which the plan 

owns stock is consistent with a fiduciary's obligations under ERISA 

where the responsible fiduciary concludes that there is a reasonable 

expectation that such monitoring or communication with management, by 

the plan alone or together with other shareholders, is likely to enhance 

the value of the plan's investment in the corporation, after taking into 

account the costs involved. Such a reasonable expectation may exist in 

various circumstances, for example, where plan investments in corporate 

stock are held



[[Page 363]]



as long-term investments or where a plan may not be able to easily 

dispose such an investment. Active monitoring and communication 

activities would generally concern such issues as the independence and 

expertise of candidates for the corporation's board of directors and 

assuring that the board has sufficient information to carry out its 

responsibility to monitor management. Other issues may include such 

matters as consideration of the appropriateness of executive 

compensation, the corporation's policy regarding mergers and 

acquisitions, the extent of debt financing and capitalization, the 

nature of long-term business plans, the corporation's investment in 

training to develop its work force, other workplace practices and 

financial and non-financial measures of corporate performance. Active 

monitoring and communication may be carried out through a variety of 

methods including by means of correspondence and meetings with corporate 

management as well as by exercising the legal rights of a shareholder.



[59 FR 38863, July 29, 1994]