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News January 14, 2008 Issue

DOL Reiterates Guidance on Voting ERISA Proxies

Reminder: When voting your ERISA clientsí proxies, resist the temptation to become a corporate activist, unless you think it would improve your clientsí investment returns. If you wade into a proxy fight for any other reason, such as to advance a particular public policy, you could run afoul of ERISA.

That was the message in a December 21 advisory opinion issued by the Department of Laborís Employee Benefits Security Administration. In response to an inquiry by the U.S. Chamber of Commerce, DOL reaffirmed its view, previously expressed in DOL Interpretive Bulletin 94-2, that proxy votes for ERISA clients should be made solely with the planís investment returns in mind.

Using a planís votes to promote a particular public policy position, warned DOL, could violate ERISA. "In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory, or public policy issues through the proxy process when there is no clear economic benefit to the plan," said DOL. Plan fiduciaries that go this route should be prepared to "demonstrate in enforcement actions" how they have complied with ERISAís prudence and exclusive purpose requirements of Sections 404(a)(1)(A) and (B), it added.

DOL reminded investment managers that just because a pension plan may be a large shareholder in a corporation, that does not, in and of itself, rationalize spending plan assets on voting proxies proposal, unless the fiduciary has a reasonable expectation that doing so will enhance the value of the planís investment. "[T]he mere fact that plans are important participants in the national economy, and are generally affected by legislation, regulations, actions, and events that affect the economy as a whole, does not convert legislative, regulatory or policy proposals concerning the economy into a rationale for spending plan assets on the policy debate," said DOL.

As an example, DOL pointed to proxy votes that would require disclosure of corporate directors and officersí personal political contributions. The likelihood that such disclosure would enhance the value of plan assets "appears sufficiently remote that the expenditure of plan assets to further such a resolution or proposal clearly raises compliance issues" under ERISA.

Itís not the first time DOL has sent such a warning. In a May 2005 letter to the general counsel of the AFL-CIO, a senior DOL official warned that ERISA plan fiduciaries "may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order to promote collateral goals."