Department of Labor's Letter on ERISA Fiduciary Standards

(`the Avon letter')

February 23, 1994

Re:Employees' Retirement Plan

Dear

The Pension and Welfare Benefits Administration (PWBA) of the Department of Labor is responsible for administration and enforcement of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) Title I establishes standards governing the operation of employee benefit plans and includes fiduciary responsibility rules governing the conduct of plan officials and others who exercise discretionary authority or control with respect to the assets of employee benefit plans such as the Employees' Retirement Plan (the Plan) which are subject to ERISA.

PWBA has concluded its investigation of the Plan and of your activities as a fiduciary of the Plan, in connection with certain activities concerning the voting of proxies appurtenant to shares held in the accounts of the Plan's investment managers The facts adduced during this investigation are not conclusive However, because of the possibility that violations have occurred, and in view of the recurring nature of this aspect of plan asset management we believe that it would 'be appropriate to apprise you of the Department's views concerning the general fiduciary obligations of a named fiduciary and an investment manager appointed pursuant to section 402(c)(3) of ERISA with respect to the voting of proxies on plan - owned stock Since we expect that this information will be useful to the other members of the Plan's retirement board and to the investment-manages of' the Plan we are providing them with copies of this letter.

I. THE APPLICABILITY PROVISIONS OF ERISA

Taken together the provisions of ERISA sections 402 403 404 and 405 are intended to among other things provide a basis for certainty regarding the identity and responsibilities of those parties involved in managing and operating the plan as well as each party's liability for mismanagement

Section 402(a) of ERISA provides that every employee benefit plan shall be established and maintained pursuant to a written instrument. This instrument must provide for one or more named fiduciaries who have authority to control and manage the operation and administration of the plan. The named fiduciaries may be either named in the plan instrument or chosen, through a procedure specified in the plan, by the plan sponsor .

Section 402(b)(2) of ERISA requires plans to describe any procedure for allocating responsibilities for operation and administration of the plan, including any procedure described in section 405(c)(1).

Section 405(c)(1) of ERISA provides, in part, that the named fiduciaries may designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan. Section 405(c)(3) of ERISA defines "trustee responsibility to mean any responsibility provided in the plan's trust instrument to manage fiduciary to appoint an investment manager in accordance with section 402(c)(3).

Section 403(a) of ERISA provides, in part, that all assets of an employee benefit plan must be held in trust by one of more trustees. The trustees(s) must have exclusive authority and discretion to manage and control such assets, with two exceptions: {1) when the plan expressly provides that the trustee(s) are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees are subject to proper directions made in accordance with the terms of the plan and not contrary to ERISA, and (2) when the authority to manage, acquire or dispose of assets of the plan is delegated to one or more investment managers pursuant to section 402(c)(3).

Section 402(c)(3) of ERISA states that a plan may provide that with respect to control or management of plan assets a named fiduciary may appoint an investment manager or managers to manage (including the power to acquire and dispose of) plan assets.

Section 3(38) of ERISA defines "investment manager" as any fiduciary (other than a trustee or named fiduciary) (A) who has the power to manage, acquire, or dispose of any plan asset; (B) who is (i) a registered investment adviser under the Investment Advisers Act of 1940: (ii) a bank: or (iii) an insurance company; and (C) who has acknowledged in writing that he is a fiduciary with respect to the plan.

Section 405(c)(2) of ERISA provides, in part, that if a plan expressly provides for a procedure described in section 405(c)(1), and pursuant to such procedure a person is designated to carry out a fiduciary responsibility of a named fiduciary, then such named fiduciary shall not be liable for an act or omission of such person in carrying out such responsibility except to the extent that (A) the named fiduciary violated section 404(a)(1) -- (i) with respect to such designation, (ii) with respect to the establishment or implementation of the procedure under 405(c)(1), or (iii) in continuing the designations or (B) the named fiduciary would otherwise be liable under ERISA section 405(a).

Section 404(a)(1)(B) of ERISA requires a fiduciary to discharge his duties to a plan with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

Section 404(a)(1)(D) of ERISA requires a fiduciary to discharge has duties in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Titles I and IV of ERISA.

II. PROXY VOTING BY PLAN FIDUCIARIES

In general, the fiduciary act of managing plan assets which are shares of corporate stock would include the voting of proxies appurtenant to those shares of stock For example, it is the Department's position that the decision as to how proxies should be voted with regard to the issues presented by the fact pattern are fiduciary acts of plan asset management a proposal to change the state of incorporation of a corporation in which a plan owned shares (thereby possibly affecting shareholders' rights to participate in the decision-making process of the corporation which, in turn, affects the value of their investment) and a proposal to rescind "poison pill" arrangements with regard to various corporations in which a plan is invested. Moreover, because voting such proxies involves plan asset management, section 403(a) requires that plan trustees have the exclusive authority and responsibility for voting these proxies, unless one of the two exceptions stated in section 403(a) applies.

To the extent that the documents governing the plan permit a named fiduciary to appoint an investment manager pursuant to sections 402(c)(3) and 403(a)(2) of ERISA to manage, acquire, and dispose of plan assets, there would be an ERISA violation if, during the duration of such delegation, either the trustee or the named fiduciary makes the decision how to vote any proxy appurtenant to shares owned by the plan with respect to which the investment manager has investment authority because under the plan documents neither the trustee nor the named fiduciary has authority to make that decision with regard to those shares. Indeed, under such plan provisions if any person other than the investment manager (or a person under the fiduciary supervision of the investment manager)[1] were to make the proxy voting decision, there would be a section 404(a)(1)(D) violation because that person does not have that fiduciary authority under the plan. Finally, with limited exceptions[2], the named fiduciary, having delegated such responsibility to the investment manager, no longer has the authority to decide how the investment manager voter proxies and would be engaging in a section 404(a)(1)(D) violation in doing so unless, in delegating such management responsibility to the investment manager, it reserves to itself the right to vote proxies.[3]

Moreover, ERISA contains no provision which would relieve an investment manager of fiduciary liability for any decision he made at the direction of another person Under ERISA'S construct, only trustees are able to relieve themselves of fiduciary responsibility and related liabilities by accepting directions, if plan documents so provide, and then only if such directions are "proper directions" made in accordance with the terms of the plan and not contrary to ERISA. Furthermore, neither section 3(38) nor 405(e) of ERISA grants an investment manager the powers of a named fiduciary to allocate or designate its investment management function for plan assets to other persons so as to relieve itself of its fiduciary responsibilities and related liabilities Therefore, to the extent that anyone purports to direct an investment manager as to the voting of proxies, or to the extent that an investment manager purports to delegate to another the responsibility for such voting decisions, the manager would not be relieved of its own responsibilities and related liabilities merely because it either follows the direction of some other person, or has delegated the responsibility to some other person The manager would continue to have full responsibility (and liability) for the exercise of the proxy voting decision

Finally, the Department notes that section 404(a)(1)(8) requires the named fiduciary appointing the investment manager to periodically monitor the activities of the investment manager with respect to the management of plan assets In general, this duty would encompass the monitoring of decisions made and actions taken by investment managers with regard to proxy voting In this regard, it is the opinion of the Department that section 404(a)(1)(B) requires proper documentation of the activities of the investment manager and of the named fiduciary of the plan in monitoring the activities of the investment manager Specifically, with respect to proxy voting, this would require the investment manager or other responsible fiduciary to keep accurate records as to the voting of proxies.[4]

We trust you will find the above information useful in discharging your ERISA responsibilities during the 1988 proxy season and thereafter.

Sincerely,

(Signed) Alan D. Lebowitz

Alan D. Lebowitz

Deputy Assistant Secretary




Endnotes


[1] If the investment manager attempted to delegate his responsibility for proxy voting to another, the manager would not be relieved of his fiduciary responsibilities and related liabilities with regard to the voting decisions of that delegates. (See discussion infra .)

[2] The general fiduciary responsibility provisions of ERISA, including the co-fiduciary liability provisions, remain applicable to the named fiduciary's continuation of the delegation of asset management to the investment manager. Thus, no violation of section-404(a)(1)(D) would occur to the extent that ERISA'S fiduciary responsibility provisions would require the named fiduciary to formally rescind the delegation to preclude the investment manager from engaging in a breach of fiduciary responsibility.

[3] To the extent that a named fiduciary reserves to itself the right to direct the trustee to vote proxies, the investment manager would not have Fiduciary responsibility and related liability for the exercise of the vote. Moreover, to the extent the named fiduciary retains the voting rights, it would have full Fiduciary responsibilities and related liability for the exercise of those rights.

[4] Although this letter is concerned with the procedural requirements of ERISA as applied to proxy voting where an investment manager is appointed, the Department wishes to reiterate its longstanding interpretation of the substantive requirements of section 404(a)(1) Section 404(a)(1) requires, among other things, that a fiduciary of a-plan act prudently, solely in the interest of the plan's participants and Beneficiaries, and for the exclusive purpose of providing benefits to participants and beneficiaries. To act prudently in the voting of proxies (as well as in all other fiduciary matters), a plan fiduciary must consider those factors which would affect the value of the plan's investment. Similarly, the Department has construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to, participants and beneficiaries as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives.