DoL’s Proposed Proxy Voting Rule a Step in the Wrong Direction
The DoL’s new proposal to curb proxy voting rights of plan fiduciaries is likely to adversely affect the long-term performance of retirement plans. If implemented, the proposal will not only drive up the cost of various investment plans but also disenfranchise plan participants. We urge the DoL to withdraw the proposal to keep costs low, to maximize the value of plan assets and to protect the interests of plan participants and beneficiaries.
On 4 September 2020, the United States Department of Labor (DoL) proposed a new rule that could negatively affect the private sector retirement plans that come under the ambit of the Employee Retirement Income Security Act of 1974 (ERISA). The objective of the proposed Fiduciary Duties Regarding Proxy Voting and Shareholder Rights rule is to impose certain requirements on proxy votes made by plan fiduciaries – individuals or entities who manage an employee benefit plan and its assets under ERISA. According to the proposed rule, plan fiduciaries cannot participate in shareholder voting and engage with portfolio companies unless these activities are understood to be enhancing the economic value of the plan.
State Street's Stance on the Proposed Rule on Proxy Voting
State Street's assessment regarding the proposed rule is that it will materially reduce the impact of proxy voting, which we deem to be a vital tool in creating long-term shareholder value. The rule also has the potential to eliminate proxy voting in certain cases by seemingly prejudging the voting of proxies as imprudent unless the applicable proposals relate to certain enumerated events. These include corporate events, corporate repurchases of shares, issuances of additional securities with dilutive effects on shareholders or contested elections for directors.
Considering these consequences, State Street sent a comment letter to the DoL, where we argued that by imposing requirements that will discourage proxy voting in retirement plans covered by ERISA, the financial interests of ERISA plan beneficiaries will be compromised in the long term. We additionally elaborated that the proposed rule would increase, rather than decrease, costs for ERISA plans, thereby further eroding the long-term value that plan participants and their beneficiaries can potentially realize.
It goes without saying that voting rights held by shareholders have a positive value – it is easy to understand this by comparing the value of voting and non-voting shares in companies that have dual class structures. It is equally clear to shareholders that some voting opportunities are more effective in terms of value than others. But the steps mandated by the rule have the consequence of rendering votes on categories other than the ones enumerated for proxy proposals as imprudent. We therefore believe that the value of plan assets is best maximized by the withdrawal of this proposal.
Unintended Consequences of Regulation
The unintended consequences of regulations are often the most damaging. In the case of this proposed rule, the effect at the margin is likely to be a shift in influence from informed fiduciaries working within an ERISA framework to other shareholders. This means, some shareholders will be deemed “more equal” than others with unpredictable consequences for the silenced disenfranchised minority of ERISA shareholders.
Although there might have been an intent to design the rule to reduce the likelihood or impact of relatively frivolous or costly proposals, these are no less likely to succeed (unless they would have been overwhelmingly supported by ERISA fiduciaries). It goes without saying that along with the frivolous, there are the genuinely important resolutions that have the potential to increase long-term value and may get affected on account of this proposed rule.
Such important shareholder resolutions may include those that relate to Environmental, Social or Governance (ESG) considerations. It should be remembered in this context that State Street had taken exception to a June 2020 DoL proposal that discouraged pension plans from considering ESG parameters when choosing investments. In fact, when it comes to proxy voting, considering ESG as an example, State Street judges each proposal on its merits and casts its votes independently and frequently differently from other plan fiduciaries who may or may not consider the importance of ESG in driving long-term shareholder value.
Our belief is that ERISA plan fiduciaries are well equipped to make the judgements necessary to maximize the value of their assets by appropriately voting their proxies. Although we see the value in undertaking a cost-benefit analysis in deciding when and how to vote on certain matters, we believe that the barriers created by the proposed rule would increase costs significantly for our clients without providing any new benefits beyond the analysis we already undertake today.
We are accountable to our clients – for instance, our Global Proxy Voting and Engagement Guidelines for Environmental and Social Issues ascertain that our primary fiduciary obligation to clients is to maximize the long-term returns of their investments. We also believe that a healthy system should enable the flourishing of debates and discussions regarding the materiality of each resolution. Unfortunately, the proposed rule will not only curb healthy debates but also lessen the advantages that an open and public financial market confers on a sophisticated economic system such as that of the United States.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of Richard F Lacaille through 14 October 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For EMEA Distribution: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Disclaimer: The Goldener Bulle award given by Finanzen.net on 02 February 2018 which recognises from investors who demonstrate our highest rated ETF range of all ETF companies. The award/ranking given is chosen based on investor's feedback for the time period of 01.01.2017 - 31.12.2017.
Important Risk Information:
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies. SPDR ETFs may not be available or suitable for you.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further, there is no guarantee an ETF will achieve its investment objective.
SHARES IN THE FUNDS OF THE SPDR® ETF SICAV, SSGA SPDR ETFS EUROPE I AND SSGA SPDR ETFS EUROPE II PLC MAY NOT BE AVAILABLE FOR OR SUITABLE FOR YOU. THE VIEWS EXPRESSED IN THIS SITE DO NOT CONSTITUTE INVESTMENT ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. Further information and the prospectus/KIID describing the characteristics, costs and risks of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website and from your local SSGA office.