DOL Sees Proxy Advisors as ERISA Fiduciaries in New Guidance
The Department of Labor (DOL) on Wednesday issued a technical release that would consider proxy advisors as fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA).
The Employee Benefit Security Administration (EBSA) warned proxy advisory firms that certain actions, like exercising or controlling shareholder rights attributable to shares that are ERISA plan assets, including the voting of proxies, and providing advice for a fee to ERISA plans about how such plans should exercise proxy voting rights attributable to shares of stock they own, could subject them to federal fiduciary requirements.
The agency also signaled support for future state regulation that would subject proxy advisors to state-level regulations. Currently, state laws on proxy disclosures as not preempted by ERISA, according to the DOL.
Proxy advisory firms make recommendations regarding corporate governance practices to institutional investors and provide research on corporate voting exercises. In certain cases, proxy firms may also cast votes for institutional investors.
Under ERISA’s five-part test, a person is a fiduciary if they (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property; (2) on a regular basis; (3) pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary that; (4) the advice will serve as a primary basis for investment decisions with respect to plan assets; and that (5) the advice will be individualized based on the particular needs of the plan.
The DOL argues that in proxy advisory services, “if rendered for a fee pursuant to a mutual understanding, will ordinarily satisfy the five-part test, though the ultimate analysis depends on the facts and circumstances.”
The release comes several months after President Donald Trump signed an executive order that would halt what he described as an “outsized influence” of proxy advisors who prioritize social factors in retirement plans over investor returns.
That order had directed certain federal agencies, including the DOL, to review and possibly rescind guidance on diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG) factors. It also directed the agency to apply stricter fiduciary rules under ERISA and increase fiduciary transparency when working with proxy advisors.
The order had specifically called out Institutional Shareholder Services (ISS) and Glass Lewis for recommending votes for “racial equity audits, aggressive GHG emission cuts, and other actions,” that allegedly “advance radical politically motivated agendas like DEI and ESG.”
ISS and Glass Lewis currently control 90% of the proxy advisor market according to the Journal of Financial Economics.
ISS declined to comment while Glass Lewis did not respond to a request.
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with nearly a decade of experience and a passion for telling stories and reporting news. She is originally from Queens, New York, but now resides in Denver, Colorado.