Kurt Schacht: The Labor Department Is Tearing Down a Landmark of Investor Protection

Kurt N. Schacht, head of policy for the CFA Institute and former chair of the SEC Investor Advisory Committee. writes in Barron’s:

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.” 

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. 

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