The Department of Labor late last year issued the ESG and proxy voting rule, officially called the Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights. (Here’s our blog post on the announcement of the rule.)

This blog post, based on a recent ESG Research Café with Callan’s ESG Practice Leader Tom Shingler and Richard Ashley, partner and co-chair of the US Employee Benefits and Executive Compensation practice at DLA Piper, is one in a series that focuses on the main aspects of the ESG rule and highlights some of the ways in which it is the same and ways in which it differs from the regulatory guidance issued during the Trump administration.

Tom Shingler: What are the key features as it relates to exercising shareholder rights in this rule?

Richard Ashley: I think it’s important to note that the rule starts with a basic construct. And the idea is that in connection with being an investment fiduciary, the process of maintaining your fiduciary duties will include the exercise of shareholder rights, or the decision to exercise shareholder rights with respect to an investment in common stock. In that vein, the idea of exercising shareholder rights is a consideration of both whether to exercise those shareholder rights and when to exercise those shareholder rights.

So as a fiduciary goes through that process, it has to act in accordance with the economic interests of the participants and beneficiaries and in accordance with the duties of prudence and loyalty. It has to consider the costs involved because there are situations where the costs involved in deciding to exercise a shareholder right or vote may be outweighed by the benefit associated with exercising that shareholder right.

So the costs have to be considered as a fiduciary is making a decision about whether and when to exercise shareholder rights. To the extent that a fiduciary is selecting another party to exercise or decide whether and when to exercise shareholder rights, it has to exercise prudence and diligence in the selection and the monitoring of the service that it chooses to use to exercise those rights on behalf of the plan with respect to that stock.

So the main construct and the differences here in connection with the new regulation are really around elimination of some of the recordkeeping requirements that were expressed in the original (Trump era) regulation and trying to put the exercise of shareholder rights and voting of proxies on a level that’s equal to but not greater than the other fiduciary obligations in connection with investments. The rule says that a fiduciary needs to think about adopting policies or practices.

And it cannot merely adopt a policy of deciding that it is going to follow whatever the proxy voting firm it hired will do in connection with proxy voting, but it has to look at that voting policy and then decide as it relates to the plan whether or not those voting policies are consistent with the financial objectives of the plan or in the best interest of participants and beneficiaries, and make sure that as that agreement moves forward, it is monitoring that third party to make sure that it is consistently acting in accordance with those voting policies.

The periodic review construct is one that puts a more active tone to what it means to be a fiduciary with respect to the exercise of shareholder rights.

There are additional rules that allow proxy voting firms and investment managers to adopt their own policies and to provide that plan fiduciaries that are hiring them must agree to the voting policies as a condition to the investment.

Fiduciaries are going to be in a position where they really need to evaluate what is happening on the ground and make a decision to either move toward modifying those directions or asking for proxy voting firms to comply with their own established voting policy as a condition of engagement. So there will be some additional back and forth here with respect to how proxy voting and the exercise of shareholder rights occur in connection with this fiduciary construct.