81 FR 95879 - Interpretive Bulletin Relating to the Exercise of Shareholder Rights and Written Statements of Investment Policy, Including Proxy Voting Policies or Guidelines

DEPARTMENT OF LABOR
Employee Benefits Security Administration

Federal Register Volume 81, Issue 250 (December 29, 2016)

This document sets forth supplemental views of the Department of Labor (Department) concerning the legal standards imposed by sections 402, 403 and 404 of Part 4 of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) with respect to voting of proxies on securities held in employee benefit plan investment portfolios, the maintenance of and compliance with statements of investment policy, including proxy voting policy, and the exercise of other legal rights of a shareholder. In this document, the Department withdraws Interpretive Bulletin 2008-2 and replaces it with Interpretive Bulletin 2016-1, which reinstates the language of Interpretive Bulletin 94-2 with certain modifications.

[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Rules and Regulations]
[Pages 95879-95884]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-31515]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2509

RIN 1210-AB78


Interpretive Bulletin Relating to the Exercise of Shareholder 
Rights and Written Statements of Investment Policy, Including Proxy 
Voting Policies or Guidelines

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Interpretive bulletin.

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SUMMARY: This document sets forth supplemental views of the Department 
of Labor (Department) concerning the legal standards imposed by 
sections 402, 403 and 404 of Part 4 of Title I of the Employee 
Retirement Income Security Act of 1974 (ERISA) with respect to voting 
of proxies on securities held in employee benefit plan investment 
portfolios, the maintenance of and compliance with statements of 
investment policy, including proxy voting policy, and the exercise of 
other legal rights of a shareholder. In this document, the Department 
withdraws Interpretive Bulletin 2008-2 and replaces it with 
Interpretive Bulletin 2016-1, which reinstates the language of 
Interpretive Bulletin 94-2 with certain modifications.

DATES: This interpretive bulletin is effective on December 29, 2016.

FOR FURTHER INFORMATION CONTACT: Office of Regulations and

[[Page 95880]]

Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

Background

    Title I of the Employee Retirement Income Security Act of 1974 
(ERISA) establishes minimum standards for the operation of private-
sector employee benefit plans and includes fiduciary responsibility 
rules governing the conduct of plan fiduciaries. The Department's 
longstanding position is that the fiduciary act of managing plan assets 
which are shares of corporate stock includes decisions on the voting of 
proxies and other exercises of shareholder rights. To assist plan 
fiduciaries in understanding their obligations under ERISA, the 
Department issued Interpretive Bulletin 94-2 (IB 94-2) in 1994 and 
updated that guidance in 2008 in Interpretive Bulletin 2008-2 (IB 2008-
2).\1\
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    \1\ IB 94-2 was codified at 29 CFR 2509.94-2 and published with 
an explanatory preamble in the Federal Register at 59 FR 38863 (July 
29, 1994). The IB was presented as a restatement of views the 
Department had expressed in two letters addressing questions that 
arose concerning the voting of proxies on shares of corporate stock 
held by plans. The first letter was addressed to Helmuth Fandl, 
Chairman of the Retirement Board of Avon Products Inc. and dated 
February 23, 1988, and the second letter was addressed to Robert 
A.G. Monks of Institutional Shareholder Services, Inc. and dated 
January 23, 1990.
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    IB 94-2 noted that the duty to vote proxies lies exclusively with 
the plan trustee unless ``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 section 403(a)(2) of ERISA. IB 
94-2 also explained that when the authority to manage plan assets has 
been delegated to an investment manager, ``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 addition, if the plan document or the investment 
management agreement does not expressly preclude the investment manager 
from voting proxies, the investment manager has the exclusive 
responsibility for proxy voting. An investment manager is not 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. IB 94-2 pointed out that the 
maintenance of written statements of investment policy, including 
guidelines on voting proxies on securities held in plan investment 
portfolios, is consistent with Title I of ERISA and that compliance 
with such a policy would be required under ERISA to the extent that 
such compliance with respect to any given investment decision is 
consistent with the provisions of Title I and Title IV of ERISA.
    IB 94-2 also recognized that fiduciaries may engage in other 
shareholder activities intended to monitor or influence corporate 
management 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. The bulletin 
observed that 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.
    IB 94-2 reiterated the Department's view that ERISA does not permit 
fiduciaries to subordinate the economic interests of participants and 
beneficiaries to unrelated objectives in voting proxies or in 
exercising other shareholder rights, but pointed out that a reasonable 
expectation of enhancing the value of the plan's investment through 
shareholder activities may exist in various circumstances, for example, 
where plan investments in corporate stock are held as long-term 
investments or where a plan may not be able to easily dispose of such 
an investment. IB 94-2 explained that active monitoring and 
communication activities could 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 identified in the 
bulletin included 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.\2\
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    \2\ The Department has not been alone in emphasizing the 
significance of proxy voting to the value of investments. See SEC 
Final Rule, Disclosure of Proxy Voting Policies and Proxy Voting 
Records by Registered Management Investment Companies, Release Nos. 
33-8188; 34-47304; IC-25922 (Jan. 31, 2003) and SEC Final Rule, 
Proxy Voting by Investment Advisers, Release No. IA-2106 (Jan. 31, 
2003). In addition, the SEC also adopted a rule requiring 
corporations to provide additional disclosure in proxy materials 
associated with the election of directors. See SEC Final Rule, Proxy 
Disclosure Enhancements, Release Nos. 33-9089; 34-61175 (Dec. 16, 
2009).
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    On October 17, 2008, the Department replaced IB 94-2 with 
Interpretive Bulletin 2008-2 codified at 29 CFR 2509.08-2.\3\ The 
Department's intent was to clarify and update the guidance in IB 94-2 
and to reflect interpretive positions issued by the Department after 
1994 on shareholder activism and socially-directed proxy voting 
initiatives. On the same date, the Department published Interpretive 
Bulletin 2008-1 (IB 2008-1) to update Interpretive Bulletin 94-1 (IB 
94-1), which addressed issues regarding fiduciary consideration of 
investments and investment strategies that take into account 
environmental, social and governance (ESG) factors.
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    \3\ Also published in the Federal Register at 73 FR 61731 (Oct. 
17, 2008).
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    The Department believes that in the eight years since its 
publication, the changes made to IB 94-2 by IB 2008-2 have been 
misunderstood and may have worked to discourage ERISA plan fiduciaries 
who are responsible for the management of shares of corporate stock 
from voting proxies and engaging in other prudent exercises of 
shareholder rights.\4\ In particular, the Department is concerned that 
IB 2008-2 has been read by some stakeholders to articulate a general 
rule that broadly prohibits ERISA plans from exercising shareholder 
rights, including voting of proxies, unless the plan has performed a 
cost-benefit analysis and concluded in the case of each particular 
proxy vote or exercise of shareholder rights that the action is more 
likely than not to result in a quantifiable increase in the

[[Page 95881]]

economic value of the plan's investment.
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    \4\ The Department reached a similar conclusion in rescinding IB 
2008-1 on economically targeted investments (ETIs) and reinstating 
the language from its original 1994 guidance in IB 94-1. See 
Interpretive Bulletin 2015-1, 80 FR 65135 (Oct. 26, 2015). The 
Department noted that the ETI market which considers ESG factors had 
grown internationally as new tools and measures were developed 
leaving investors better equipped to evaluate the question of 
whether a given investment could both benefit the plan in financial 
terms and advance environmental, social or corporate governance 
goals. In fact, the new tools and measures have revealed that 
environmental, social and governance impacts can be intrinsic to the 
market value of an investment. Based on those developments, the 
Department concluded that its attempt to update IB 94-1 in 2008, 
rather than clarifying permissible ESG considerations, had in 
practice had a chilling effect on ERISA plans participating in the 
growth of economically targeted investing.
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    The essential point of IB 94-2, however, was to articulate a 
general principle that a fiduciary's obligation to manage plan assets 
prudently extends to proxy voting. As such, IB 94-2 properly read was 
meant to express the view that proxies should be voted as part of the 
process of managing the plan's investment in company stock unless a 
responsible plan fiduciary determined that the time and costs 
associated with voting proxies with respect to certain types of 
proposals or issuers may not be in the plan's best interest. IB 94-2 
was also intended to make it clear that fiduciary duties associated 
with voting proxies encompass the monitoring of decisions made and 
actions taken with regard to proxy voting, and that it was appropriate 
for a plan fiduciary to incur reasonable expenses in fulfilling those 
fiduciary obligations. While there may be special circumstances that 
might warrant a discrete analysis of the cost of the shareholder 
activity versus the economic benefit associated with the outcome of the 
activity, the Department did not intend to imply that such an analysis 
should be conducted in most cases. In most cases, proxy voting and 
other shareholder engagement does not involve a significant expenditure 
of funds by individual plan investors because the activities are 
engaged in by institutional investment managers appointed as the 
responsible plan fiduciary pursuant to sections 402(c)(3), 403(a)(2) 
and 3(38) of ERISA. Those investment managers often engage consultants, 
including proxy advisory firms, in an attempt to further reduce the 
costs of researching proxy matters and exercising shareholder 
rights.\5\ Thus, such a conclusion ignores the fact that many proxy 
votes involve very little, if any, additional expense to the individual 
plan shareholders to arrive at a prudent result and that, depending on 
the particular resolution and the extent of the plan's holdings, not 
voting, in fact, may in effect count one way or another.
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    \5\ In selecting an investment manager for a plan, the 
responsible plan fiduciary should include a review of any voting 
policies or guidelines that would be followed in the management of 
plan assets to ensure consistency with ERISA. Further, as plan 
fiduciaries, investment managers who utilize proxy advisory firms 
should engage in an objective process that is designed to elicit 
information necessary to assess the provider's qualifications, 
quality of services offered, and reasonableness of fees charged for 
the service. The process also must avoid self-dealing, conflicts of 
interest or other improper influence. The investment manager in 
considering any proxy recommendation should assure that it is fully 
informed of potential conflicts of proxy advisory firms and the 
steps the firm has taken to address them. See generally ``Proxy 
Voting: Proxy Voting Responsibilities of Investment Advisers and 
Availability of Exemptions from the Proxy Rules for Proxy Advisory 
Firms,'' SEC Staff Legal Bulletin No. 20 (IM/CF) (June 30, 2014) 
(discussing issues that may arise under the federal securities laws 
for registered investment advisers in connection with selection and 
monitoring of proxy advisory firms, among other things).
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    The pervasiveness of US publicly-traded stock in ERISA plan 
investment portfolios, both direct holdings and through pooled 
investment funds, including index funds, is another factor that 
contributes to the importance of proxy voting and shareholder 
engagement practices. If there is a problem identified with a portfolio 
company's management, selling the stock and finding a replacement 
investment may not be a prudent solution for a plan fiduciary. As 
Vanguard founder John Bogle put it in the context of index funds, ``the 
only weapon [index funds] have, if we don't like the management, is to 
get a new management or to force the management to reform.'' \6\
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    \6\ Interview by Christine Benz with John Bogle, Founder, 
Vanguard (Oct. 10, 2010) (available at www.morningstar.com/videos/359002/bogle-index-funds-power-in-corporate-governance.aspx).
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    The Department is also concerned that despite the guidance on ESG 
issues the Department recently provided in IB 2015-1, statements in IB 
2008-2 may cause confusion as to whether or how a plan fiduciary may 
consider ESG issues in connection with proxy voting or undertaking 
other shareholder engagement activities. The Department has rejected a 
construction of ERISA that would render ERISA's tight limits on the use 
of plan assets illusory and that would permit plan fiduciaries to 
expend trust assets to promote myriad public policy preferences. 
Rather, plan fiduciaries may not increase expenses, sacrifice 
investment returns, or reduce the security of plan benefits in order to 
promote collateral goals. However, by focusing on a ``cost-benefit 
analysis'' demonstrating a ``more likely than not'' enhancement in the 
economic value of the investment, the Department believes that IB 2008-
2 may be read as discouraging fiduciaries from recognizing the long-
term financial benefits that, although difficult to quantify, can 
result from thoughtful shareholder engagement when voting proxies, 
establishing a proxy voting policy, or otherwise exercising rights as 
shareholders.
    The existence of financial benefits associated with shareholder 
engagement is suggested by the fact that a growing number of 
institutional investors are now engaging companies on ESG issues. 
According to a 2014 survey by the US SIF Foundation, 202 institutional 
investors or money managers representing $1.72 trillion in US-domiciled 
assets filed or co-filed shareholder resolutions on ESG issues at 
publicly traded companies from 2012 through 2014.\7\ The members of the 
Investor Network on Climate Risk (INCR), a network of institutions 
representing more than $14 trillion in assets, engage with companies in 
their portfolios on climate and sustainability issues. Members include 
BlackRock, California Public Employees' Retirement System, Deutsche 
Asset & Wealth Management, Prudential Investment Management, State 
Street Global Advisors and TIAA Global Asset Management.\8\ Globally, 
over 1300 asset managers and asset owners have signed the Principles 
for Responsible Investment, the second principle of which states that 
the managers and owners will be active owners and incorporate ESG 
issues into ownership policies and practices.\9\ Companies are also 
being required to be more transparent in the way they address ESG 
issues. For example, in 2010, the Dodd-Frank Act required publicly 
traded companies to allow shareholders an advisory vote on executive 
pay plans at least once every three years.\10\ Similarly, in 2009 the 
SEC issued rules which required companies to disclose in proxy 
statements relating to the election of directors, among other things, 
their policy for consideration of diversity in the process by which 
candidates for director are considered for nomination by a company's 
nominating committee.\11\
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    \7\ US SIF FOUNDATION, Report on US Sustainable, Responsible and 
Impact Investing Trends 2014.
    \8\ See INCR membership list at www.ceres.org/investor-network/incr/member-directory.
    \9\ The Principles for Responsible Investment (PRI) has been 
supported by the United Nations since its launch. The PRI has two UN 
partners, the United Nations Environment Programme Finance 
Initiative and the United Nations Global Compact, which play an 
important role in delivering the PRI's strategy. See ``About the 
PRI'' for further explanation of PRI and their responsible 
investment effort at www.unpri.org/about.
    \10\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law No. 111-203, 124 Stat. 1376 (2010), for section 951 
requirements. See also SEC Final Rule, Shareholder Approval of 
Executive Compensation and Golden Parachute Compensation, Release 
Nos. 33-9178; 34-63768 (Jan. 25, 2011).
    \11\ SEC Final Rule, Proxy Disclosure Enhancements, Release Nos. 
33-9089; 34-61175 (Dec. 16, 2009).
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    Other market developments further substantiate the financial 
benefits from shareholder engagement. Companies themselves are seeking 
more engagement as a way of understanding and responding to their 
shareholders'

[[Page 95882]]

views.\12\ There have also been market events that were catalysts for 
the growth of shareholder engagement. The financial crisis of 2008 
exposed some of the pitfalls of shareholder inattention to corporate 
governance and highlighted the merits of shareholders taking a more 
engaged role with the companies.
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    \12\ Blackrock and Ceres, 21st Century Engagement: Investor 
Strategies for Incorporating ESG Considerations into Corporate 
Interactions (2015). See also Joseph McCahery, Zacharias Sautner & 
Laura T. Starks, Behind the Scenes The Corporate Governance 
Preferences of Institutional Investors, 71 The Journal of Finance 
2905-2932 (Dec. 2016).
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    This is not a trend unique to the United States. Other countries 
have recognized these developments and taken steps to provide guidance 
on proxy voting and shareholder engagement in the form of ``stewardship 
codes.'' The first stewardship code was published in 2010 by the UK's 
Financial Reporting Council, which traces its origins to principles 
published by the UK's Institutional Shareholders Committee in 2002 and 
later the International Corporate Governance Network Principles on 
Institutional Investor Responsibilities in 2007.\13\ Other such codes 
have followed, including in Canada, Italy, Japan, Singapore, South 
Africa, Switzerland, the Netherlands, and Malaysia.\14\
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    \13\ BLACKROCK AND CERES, supra footnote 12, at 34.
    \14\ Id.
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    For all the above reasons, the Department is concerned that the 
changes to IB 94-2 in IB 2008-2 are out of step with important domestic 
and international trends in investment management and have the 
potential to dissuade ERISA fiduciaries from exercising shareholder 
rights, including the voting of proxies, in areas that are increasingly 
being recognized as important to long-term shareholder value. In fact, 
the Department believes the principles originally articulated in IB 94-
2, with certain updates to reflect the trends on shareholder engagement 
discussed above, are a better expression of a fiduciary's obligations 
under sections 402(c)(3), 403(a) and 404(a)(1)(A) of ERISA on these 
issues. The Department therefore has decided to withdraw IB 2008-2 and 
replace it with Interpretive Bulletin 2016-1 which reinstates the 
language of IB 94-2 with minor updates.
    The following Interpretive Bulletin deals solely with the 
applicability of the prudence and exclusive purpose requirements of 
ERISA as applied to fiduciary decisions with respect to voting of 
proxies on securities held in employee benefit plan investment 
portfolios, the maintenance of and compliance with statements of 
investment policy, including proxy voting policy, and the 
appropriateness under ERISA of shareholder engagement with corporate 
management by plan fiduciaries. The bulletin does not supersede the 
regulatory standard contained at 29 CFR 2550.404a-1, nor does it 
address any issues which may arise in connection with the prohibited 
transaction provisions under ERISA section 406 or the statutory 
exemptions under ERISA section 408 from those provisions. This 
Interpretative Bulletin is a restatement of IB 94-2 with certain 
updates to the examples of areas where monitoring or communication with 
management is likely to enhance the value of the plan's investment in 
the corporation.

List of Subjects in 29 CFR Part 2509

    Employee benefit plans, Pensions.

    For the reasons set forth in the preamble, the Department is 
amending part 2509 of title 29 of the Code of Federal Regulations as 
follows:

PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE 
RETIREMENT INCOME SECURITY ACT OF 1974

0
1. The authority citation for part 2509 continues to read as follows:

    Authority: 29 U.S.C. 1135. Secretary of Labor's Order 1-2003, 68 
FR 5374 (Feb. 3, 2003). Sections 2509.75-10 and 2509.75-2 issued 
under 29 U.S.C. 1052, 1053, 1054. Sec. 2509.75-5 also issued under 
29 U.S.C. 1002. Sec. 2509.95-1 also issued under sec. 625, Public 
Law 109-280, 120 Stat. 780.


Sec.  2509.08-2  [Removed]

0
2. Remove Sec.  2509.08-2.

0
3. Add Sec.  2509.2016-01 to read as follows:


Sec.  2509.2016-01  Interpretive Bulletin relating to the exercise of 
shareholder rights and written statements of investment policy, 
including proxy voting policies 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 engagement with 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 section 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 section 
403(a)(2). Where the authority to manage plan assets has been delegated 
to an investment manager pursuant to section 403(a)(2), 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 section 403(a)(1), may be 
subject to the directions of a named fiduciary if the plan so provides.
    The fiduciary duties described at ERISA section 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

[[Page 95883]]

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 section 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. This principle applies broadly. However, the Department 
recognizes that in some special cases voting proxies may involve out of 
the ordinary costs or unusual requirements, for example in the case of 
voting proxies on shares of certain foreign corporations. Thus, in such 
cases, 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 warrants the 
additional cost of voting. Moreover, a fiduciary, in deciding whether 
to purchase shares for which this may be the case, 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 as well as policies concerning economically targeted 
investments or incorporating environmental, social or governance (ESG) 
factors in investment policy statements or integrating ESG-related 
tools, metrics and analyses to evaluate an investment's risk or return 
or choose among equivalent investments. 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 section 402(c)(3), 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 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 
section 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 section 404(a)(1)(D). An investment manager to whom such 
investment policy applies would be required to comply with such policy, 
pursuant to ERISA section 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 section 404(a)(1)(D). Moreover, 
ERISA section 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 section 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 section 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 section 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.

[[Page 95884]]

    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 section 404(a)(1)(D) would 
require the investment manager to reconcile, insofar as possible, the 
conflicting policies (assuming compliance with each policy would be 
consistent with ERISA section 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 section 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 section 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 
section 404(a)(1)(D).

(3) Shareholder Engagement

    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 as long-term investments, where a plan may 
not be able to easily dispose of such an investment, or where the same 
shareholder engagement issue is likely to exist in the case of 
available alternative investments. 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 governance structures and practices, particularly those 
involving board composition, executive compensation, transparency and 
accountability in corporate decision-making, responsiveness to 
shareholders, the corporation's policy regarding mergers and 
acquisitions, the extent of debt financing and capitalization, the 
nature of long-term business plans including plans on climate change 
preparedness and sustainability, governance and compliance policies and 
practices for avoiding criminal liability and ensuring employees comply 
with applicable laws and regulations, the corporation's workforce 
practices (e.g., investment in training to develop its work force, 
diversity, equal employment opportunity), policies and practices to 
address environmental or social factors that have an impact on 
shareholder value, and other 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.

Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2016-31515 Filed 12-28-16; 8:45 am]
BILLING CODE 4510-29-P