The Labor Department Is Tearing Down a Landmark of Investor Protection

This article was written with Kurt Schacht and published by Barron's. At the time he was head of policy for CFA Institute. It was one of several articles we worked on together regarding market integrity. In addition, I negotiated a column for Mr. Schacht on where we wrote a number of articles on market integrity and other capital markets issues.

Corporate governance and shareholder rights have seldom witnessed an assault on investor protection like the current federal government’s onslaught. Whether weakened rules on broker accountability, rules designed to eliminate shareholder proposals, or those taking direct aim at neutering proxy voting, the feds’ decisions are to the great detriment of Mr. and Mrs. 401(k).

The latest move is the Department of Labor’s new proposal to undo a major landmark of fiduciary duty for proxy voting. The so-called Avon Letter was written in 1988 and stemmed from a proposition raised by shareholder-rights warrior Robert Monks when he served at the DOL. The letter said that fiduciaries that oversee retirement plans regulated by the Employee Retirement Income Security Act, or Erisa, must treat proxy voting as another of the fund’s assets. They must do so with diligence and care when analyzing and voting proxies in the best interests of beneficiaries.

The Avon Letter still serves market integrity admirably. It has led to a much more consistent and accountable proxy voting process by fund managers. Because of the letter, the industry has moved away from treating proxy voting as an afterthought, having often failed to submit votes at all. Avon started the discipline for not just Erisa funds but also many public pension funds to pay attention, review the proxy issues, and submit votes that reflect the interests of investors, not just rubber-stamping management’s views. It was an important impetus for better governance and the exercise of shareholder rights.

The Department of Labor has proposed a rule that would not only shelve the Avon Letter, but also limit voting to where a fiduciary “prudently determines that the matters being voted upon would have an economic impact on the plan.” The department has gone from a regime of holding that it is part of your fiduciary duty to vote proxies to a misguided directive to skip votes deemed nonpecuniary. It is no secret that the current department sees environmental, social, and corporate governance, or ESG, issues in the “skip” category. It rejects the use of plan assets “to be used to support or pursue proxy proposals for environmental, social, or public policy agendas that have no connection to increasing the value of investments used for the payment of benefits or plan administrative expenses.”

The Department of Labor also warns that if a fiduciary cannot establish a direct connection of such votes to a positive effect on financial returns for underlying beneficiaries, such fiduciary risks violating the new proposal. It is unclear exactly how the department would monitor, enforce, and penalize such violations, but the message is clear: be certain that your fiduciary eyes are on the primary objective, ensuring plan participants’ retirement income or investment returns.

A variety of shareholder rights activists, pension beneficiary groups, and corporate governance experts have criticized the new proxy voting proposal. It should be viewed in the context of another recent Department of Labor effort to limit the use of ESG investment strategies and products in Erisa-regulated funds. It appears to be part of an unpopular effort to reject climate change, investor activism, and shareholder rights wherever they can be rolled back.

This combination of Department of Labor restraints on ESG investing and proxy voting is not popular. Thousands of comment letters have objected to the roughshod approach and the last-minute rush to promulgate rules that will seriously diminish shareholder rights and the integrity of the corporate governance process. Neither the ESG nor the proxy voting proposal has the benefit of a public hearing. The public has all of 30 days to submit comment letters, an unreasonably short period of time.

How this all concludes is anyone’s guess. Nevertheless, this process is an insult to proper administrative oversight and lacks adequate time for consideration and inclusion of stakeholder views and concerns. The rush to destroy the longstanding corporate-governance benefits derived from the Avon directive is deeply misguided. For investor-rights and market-integrity enthusiasts, let’s hope the Department of Labor doesn’t get its way.

Kurt N. Schacht is the head of policy for the CFA Institute and former chair of the SEC Investor Advisory Committee.

Click here to read the article on Barron’s.

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