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January 25, 1990
TO: PENSION MEMBERS NO. 3-90
INVESTMENT ADVISER MEMBERS NO. 5-90
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 5-90
RE: DEPARTMENT OF LABOR LETTER CONCERNING PROXY VOTING
RESPONSIBILITIES UNDER ERISA
__________________________________________________________
As you know, the Department of Labor issued a letter in
February 1988 describing the Department's views concerning the
fiduciary obligations of investment managers under the Employee
Retirement Income Security Act ("ERISA") with respect to the
voting of proxies on plan-owned stock. (See Institute Memorandum
to Pension Members No. 15-88, Investment Adviser Members No. 9-
88, and Investment Adviser Associate Members No. 8-88, dated
March 3, 1988). The Department stated that the voting of proxies
appurtenant to the shares is a fiduciary act because such voting
is part of managing plan assets.
According to the 1988 letter, section 403(a) of ERISA
requires that the trustee of an employee benefit plan must have
exclusive authority and discretion to manage and control plan
assets, unless the trustee is explicitly subject to the direction
of a named fiduciary or the authority to manage the plan assets
is delegated by the named fiduciary to an investment manager. If
such an investment manager is appointed, the Department takes the
position that the investment manager must decide how to vote any
proxies with respect to plan-owned shares unless, in delegating
management authority, the named fiduciary reserves to itself or
to the trustee the right to vote proxies.
The Department also stated that the named fiduciary must
monitor the activities of the manager, including the voting of
proxies. This monitoring requirement necessitates that the
investment manager keep accurate records as to the voting of
proxies.
Attached is a copy of a letter from the Department
providing further guidance on three specific issues concerning
proxy voting raised in a letter from Institutional Shareholder
Services, Inc., a copy of which is also attached. First, the
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Department's letter addresses the effect of language in the
investment management agreement upon the allocation of proxy
voting responsibility. If the investment management agreement
provides that the manager is not required to vote proxies but
does not expressly preclude the manager from voting, the
Department takes the position that a delegation to the manager of
proxy voting responsibility will have occurred. On the other
hand, if either the plan or the investment management contract
(in the absence of a specific plan provision) expressly precludes
the investment manager from voting proxies, then proxy voting
will be the trustee's exclusive responsibility.
Second, the letter states that the fiduciary who has the
authority to vote proxies has an obligation under ERISA to take
"reasonable steps under the particular circumstances" to ensure
that proxies are received. Accordingly, the investment manager
must determine whether it has developed procedures for
reconciling proxies which satisfy its fiduciary obligations. If
the investment manager determined to make no effort to reconcile
proxies, however, the manager would fail to satisfy its fiduciary
obligations under ERISA.
Finally, the letter discusses the monitoring
responsibilities of the named fiduciary and the corresponding
recordkeeping responsibilities of the investment manager. In
order for the named fiduciary to carry out his fiduciary
responsibilities, he must be able to review periodically not only
the manager's voting procedures but also the actions taken in
individual situations. The named fiduciary must carry out this
responsibility without regard to his relationship to the plan
sponsor.
We will keep you informed of further developments.
Kathy D. Ireland
Associate General Counsel
Attachments