ERISA established the broad fiduciary requirements related to private pension plans and was designed to protect the pension and welfare benefit rights of workers and their beneficiaries. The act requires a plan fiduciary to act “…solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits” to them and to act “…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.” Failure to act in accordance with these requirements might constitute a breach of fiduciary duty. Breaches of the fiduciary duty to act solely in the interest of plan participants and beneficiaries with respect to proxy voting could arise when a fiduciary has a conflict of interest. Conflicts of interest occur in a variety of ways in proxy voting. Conflicts occur when a plan fiduciary or proxy voter has either business or personal interests that compete with the interests of participants. When conflicts are not appropriately managed, they could lead to a breach of fiduciary responsibility or, at least, may raise concern that a breach has occurred. For example, an SEC investigation showed that DeIB division had an undisclosed business relationship with HP, which may have influenced the proxy voter’s vote cast by DeAM about a merger between HP and Compaq Computer Corporation. ERISA’s fiduciary requirements apply to plan sponsors, trustees, managers, and others who act as fiduciaries. These requirements do not explicitly address proxy voting; however, DOL—having responsibility for the investigation and enforcement of violations of ERISA, which includes provisions related to fiduciary responsibility—has stated that the fiduciary act of managing plan assets that are shares of corporate stock generally includes the voting of proxies pertaining to those shares of stock. The provisions of ERISA were enacted to address public concerns that funds of private employee benefit plans were being mismanaged and abused. DOL can take several actions to correct fiduciary violations it identifies. These include acceptance of voluntary fiduciary agreements to implement corrective actions, initiation of civil litigation in federal district court, and referral of certain violations to other enforcement agencies. On the matter of proxy voting, DOL has issued several letters and bulletins discussing the duties of pension plan fiduciaries. For example, the “Avon Letter,” released in 1988, stated that the voting of a proxy is a fiduciary duty and that the responsibility for voting falls on the plan’s trustee unless otherwise delegated. Through its “ISS letter,” issued in 1990, among other things, DOL stated that with respect to monitoring activities, that the plan fiduciary, in order to carry out his or her fiduciary responsibilities, must be able to periodically review voting procedures and actions taken in individual situations so that a determination can be made whether the investment manager is fulfilling its fiduciary responsibility. Furthermore, DOL issued Interpretive Bulletin (IB) 94-2 in 1994, which clarified the guidance in the previous two letters and also stressed the importance of statements of investment policy, including voting guidelines. While DOL said that maintenance of such statements of investment policy are consistent with ERISA, DOL officials said that they do not have the statutory authority to require plans to maintain such statements. SEC, under the Investment Company Act of 1940, regulates companies, including mutual funds, that engage primarily in certain operations, such as investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. A primary mission of SEC is to protect investors and maintain the integrity of the securities markets through disclosure and enforcement. Employees in participant-directed pension plans might be given the choice of investing in securities, including employer securities, as well as a variety of mutual funds. Because plan participants may have such investment options, securities law protections applicable to investors are relevant to plan participants. In addition, some pension plans use investment managers to oversee plan assets and these managers may be subject to securities laws. Congress previously studied the issue of DOL’s enforcement and proxy voting. In the 1980s, reports emerged that fiduciaries were not voting their proxies or that conflicts of interest may have influenced the decisions of some plan fiduciaries. The Congress consequently became concerned about whether fiduciaries were fulfilling their responsibility to protect the interests of pension plan participants and beneficiaries. Because ERISA does not specifically lay out what the fiduciary responsibility is regarding proxy voting, many fiduciaries were thought to be unclear about their responsibility to vote proxies and maintain voting guidelines. This was cited as one of the major factors that led the Subcommittee on Oversight of Government Management, Senate Committee on Governmental Affairs, to conduct an investigation of and hold hearings in 1986 on DOL’s enforcement of ERISA. Among other things, the Subcommittee concluded that disclosure of proxy votes would facilitate the DOL’s enforcement efforts by providing the agency and other interested parties with much needed information. DOL officials believe that the agency does not have the statutory authority to require plan fiduciaries to publicly disclose their proxy votes and guidelines. Some experts we interviewed said that conflicts of interest exist in the proxy voting system and limited disclosure makes proxy voting vulnerable to conflicts of interest. Conflicts of interest occur because of the various business relationships that may influence a plan fiduciary’s or proxy voter’s vote. For example, when a company provides investment advisory services for a company-sponsored pension plan and also provides investment banking services to the company sponsoring that pension plan. Although conflicts will exist, limited disclosure makes proxy voting vulnerable to them. Because of this lack of transparency, participants do not have the information needed to raise questions regarding whether proxy votes were cast solely in their interest. Business associations between a proxy voter and any entity that may influence their vote presents a conflict of interest. Some experts we interviewed explained that these associations may form whether proxies are internally or externally managed because company management has direct access to the proxy voter who is either an employee, in the case of internally voted proxies, or is a service provider, in the case of externally voted proxies. When a portion of a company’s pension plan assets are invested in its own company stock, the proxy voter may be particularly vulnerable to conflicts of interest because management has the ability to directly influence its voting decisions and, since company stock held in the company’s own pension plan is typically managed internally, the proxy voter may at times be more concerned about their own interests. While ERISA states that fiduciaries must act solely in the interest of pension plan participants, there is no requirement that an independent fiduciary be appointed to provide additional protections for participants with company stock in their pension plans. Several experts explained that conflicts of interest that occur in this type of arrangement are considerably problematic. For example, one expert said that since proxy voting and other decisions relating to company stock are much more likely to be handled in-house, votes may be cast in accordance with the wishes of the company’s senior management. In such cases, the company’s management may not consider the best interest of plan participants and beneficiaries independently from management’s opinion of what is best for the company. The Enron case provides an example of how management’s own concerns may come before that of participants and beneficiaries. In addition, some experts said that when proxies are internally managed, the proxy vote may be influenced by the fiduciary’s own personal concerns, particularly in instances when casting a vote solely in the interests of plan participants and beneficiaries means voting against company management. Specifically, if the plan fiduciary is a lawyer, investment analyst, or a member of the management team for the company, their proxy vote on management proposals such as a merger and acquisition or for individuals they have chosen to serve on the board of directors could be influenced by concerns about their personal standing, or job security, in the company. A few experts said that a fiduciary in this situation is not likely to vote against a management proposal such as an executive compensation package because of their own personal concerns. Additionally, DOL officials said that conflicts for an internal fiduciary could arise when the company is experiencing problems, which, if publicly known, would cause stock value to decline. In order to protect participants, fiduciary duty might require the fiduciary to publicly disclose the information to participants and other shareholders and sell shares of the company stock. Insider trading rules would, however, prevent the fiduciary from taking action on nonpublic information. However, making this information public could cause a rapid decline in share value as investors sell off their shares of stock, thereby, potentially harming the company and the fiduciary’s own personal standing in the firm. Because company management could influence the fiduciary responsible for voting the proxies related to the company’s own stock, management may have a significant amount of influence over the outcome of a proxy contest. In order to assess the influence management could have in a proxy contest, we conducted an analysis of Fortune 500 companies. (See appendix I for further information on our methodology.) In our analysis, we compared the number of voting shares of company stock held in a company’s pension plans to the total voting shares held in the market. About 272 of the Fortune 500 companies that reportedly had their own company stock in their pension plans and in separate accounts, such as master trust agreements held over $210 billion in employer securities in plan year 2001. Of those companies, 27 percent held at least 5 percent or more of company stock in their company’s pension and benefit plans, while another 26 percent held between 2 and 5 percent. None of the Fortune 500 firms we analyzed held more than 21 percent of the total voting power of their company’s stock in their pension and welfare benefit plans, while 47 percent held less than 2 percent of company stock in their company’s pension and benefit plans. While the results showed that the pension and welfare benefit plans of the Fortune 500 companies we analyzed were not holding large percentages of the total voting power of a company’s shares, these findings may still be significant.