Challenges to Trustee Management of Plan Assets

August 11, 2025

Public pension plans’ proxy voting practices, including the use of proxy advisory services, have been the subject of much criticism on Capitol Hill by the Republican Congressional majority, and legislation is advancing in the House of Representatives to strictly regulate proxy advisors. The Council of Institutional Investors (CII) — warning that such regulations would increase costs that “will be passed along to investors and ultimately borne by pensions’ beneficiaries and retail investors” – has therefore prepared a new publication that addresses what it calls “several largely unsubstantiated claims leveled at proxy advisors that are used as a pretext for regulation.” Recent actions by the Securities and Exchange Commission (SEC) concerning formal SEC investigations have also underscored the importance of the few remaining ways in which shareholders can effectively protect and preserve their rights and their investments, such as securities class actions and derivative lawsuits. Therefore, don’t miss the breakout session on this important subject at NCTR’s 103^rd Conference, October 4-7, in Salt Lake City, Utah. Registration is open, so act now to secure your spot!

Managing plan assets — a fiduciary action — includes the management of voting rights as well as other shareholder rights that accompany ownership of shares of stock. In carrying out these duties, fiduciaries must act “prudently” and “solely in the interest” and “for the exclusive purpose” of providing benefits to participants and their beneficiaries.

However, as NCTR has previously reported, proxy voting and proxy advisors have been “under the gun” in several House committee hearings in recent months, and a number of House Republicans have also introduced legislation to regulate proxy advisors, arguing that “American retirement accounts are at stake.” Charles Crain, Managing Vice President with the National Association of Manufacturers (NAM), has told Congress that proxy advisors effectively dictate corporate governance policies for America’s capital markets, and Jamie Dimon, CEO of JPMorgan Chase, has called for Glass Lewis and ISS – the two largest proxy advisory firms — to be eliminated, saying they are “incompetent,” and “should be gone and dead, done with.” (For more information, see the “NCTR FYI” for May 8, 2025, entitled “CII: Proxy Advisors in Crosshairs on Capitol Hill.”)

CII is pushing back. Their new brief — entitled “Proxy Advisors and Institutional Investors: Facts and Clarifications” – explains that large investors such as public pensions own shares in thousands of companies around the world, and that, “[c]onsistent with their fiduciary responsibilities, every year these institutional shareowners exercise their right to vote on tens of thousands of annual meeting ballot items.” This can include everything from the election of directors to advisory compensation votes (AKA “say-on-pay”) to “precatory” (i.e., nonbinding) proposals submitted by other shareholders, and primarily occurs “in a compressed time frame” during the spring “proxy season” when most companies in the United States and around the world hold their annual shareholder meetings.

CII begins by making a number of straightforward points regarding the proxy voting process and the role of proxy advisors:

While most investors utilize proxy advisory services, investors make their own voting decisions; “they do not just follow proxy advisors’ voting recommendations,” CII stresses.
No investor is forced to hire proxy advisors, and no investor is forced to follow their recommendations.
Most investors rely on proxy advisors for research, analysis and data, not voting recommendations.
Most investors, particularly the largest shareholders with the greatest number of shares, employ experienced analysts who vote their shares often after engaging with companies.
Proxy advisors “highlight risks but don’t determine vote outcomes even on the most complicated issues,” CII underscores, noting that in 2024, 99 percent of say-on-pay proposals at S&P 500 companies were approved by shareholders in spite of recommendations by the largest proxy advisory services to vote “no” on between eight and eleven percent of such proposals.
“Purported ‘errors’ are most often due to differences in methodology while true errors are rare; rarer still are material errors that affect voting decisions,” CII points out.
Investors who pay for the research do not want more regulation, with almost 70 percent of investor respondents to a CII investor survey opposing more regulation, CII notes.
“Investors are the best judge of the quality and reliability of proxy advisors’ research and data,” CII observes.

In summary, CII underscores that investors prefer a market-based approach whereby they are “free to choose among proxy advisors, to ignore their recommendations or not use them at all.” More regulation will raise the barrier to entry, resulting in fewer proxy advisors, and the increased costs due to more regulations will simply be ultimately borne by pensions beneficiaries and retail investors, CII warns.

Next, the CII brief explains how and why investors use proxy advisors, pointing out that most large institutional investors generally hire one or more proxy advisors to provide extensive research, data, analysis, peer- comparative information and voting recommendations on their portfolio companies and the proposals to be voted. By making the research gathering and analysis process more efficient, this helps minimize costs for the ultimate beneficiaries, including pension recipients, CII stresses.

In addition, proxy advisors help with the processing, tracking and transmitting of the thousands of ballots pension plans must vote each year as part of their fiduciary duties, including assistance with drafting and processing legal documents like the powers of attorney required for voting in certain countries. “Without the proxy advisors’ services, investors themselves would need to procure meeting information, ensure they receive their ballots in a timely fashion, analyze the issues, transmit their votes for tabulation, confirm the votes were received and, in some cases, translate meeting materials for thousands of companies in just a few months,” CII explains.

Finally, proxy advisors can assist in implementing an investor’s custom voting policies, providing a preliminary vote decision based on the investor’s policies and instructions. “The investor then either affirms or changes the vote to conform to their final vote decision before the final ballot is submitted,” CII stresses. At all times the final vote decision is determined by the investor, not the proxy advisor, CII underscores, and investors “always retain the ability to revise the suggested vote provided by the proxy advisor.”

The rest of the CII paper addresses what it calls “several largely unsubstantiated claims” concerning proxy advisors that are used as “a pretext for regulation,” with CII presenting the “reality of the situation.” These include the following:

Claim: Proxy advisors exert “outsized influence” over vote outcomes since investors “blindly” follow their recommendations instead of making their own voting decisions. Reality: Just because investors often vote the same way that advisors recommend does not mean investors are following their recommendations. “Correlation does not mean causation and the tail is not wagging the dog,” CII stresses, underlining that “[i]nvestors influence proxy advisors, not the other way around.”
Claim: Proxy advisory firms’ research is inaccurate and therefore not reliable. Reality: Claims of errors lack evidence since they are mostly anecdotal and are most often due to a difference of opinion regarding policies, CII points out.
Claim: The timing of institutional investors voting shortly after proxy advisors publish their reports is credible evidence that proxy advisors’ recommendations drive institutional investors’ voting decisions. Reality: Investors review the proxy advisors’ research reports, generally published two to three weeks prior to the shareholder meeting, to help them make informed voting decisions and therefore frequently submit their ballots in the days following the publication of those reports. Put simply, investors wait for the research for which they have paid to make their final voting decisions.
Claim: Proxy advisory firms’ research is tainted by other services they provide, presenting a conflict of interest. Reality: Proxy advisors manage and disclose potential conflicts in various ways, including agreeing to a Best Practice Principles Group (BPPG) statement committing them to disclosing actual or potential conflicts of interest or business relationships that may influence the preparation of their research, advice and voting recommendations, as well as to providing annual statements on their compliance with these commitments.
Claim: ISS and Glass Lewis having 97 percent control of the proxy advice market necessitates more regulation. Reality: Claims of the respective market shares of ISS and Glass Lewis are not based on hard data. In fact, many of the largest investors buy research reports from multiple proxy advisors making estimates of their market share problematic at best. Also, those who use proxy advisors’ research and services have not called for more regulation.
Claim: There is limited or no transparency into proxy advisors’ policies and methodologies. Reality: While approaches vary among the several proxy advisors, most provide significant information about their policies, approaches to managing and disclosing conflicts of interest, and methods of engaging with companies (including how companies can notify them of errors) on their websites and, for signatories, in their compliance statements to the Best Practice Principles Group.

To summarize, CII says that “large institutional investors rely on proxy advisors to efficiently manage and analyze the tens of thousands of votes they cast at companies annually during the brief proxy season.” Proxy advisors provide investors with extensive research, data, analysis, peer-comparative information and voting recommendations in their reports. And they also provide value by making the research gathering and analysis process more efficient, thereby minimizing costs for the ultimate beneficiaries, including pension recipients. CII underscores that proxy advisors “serve as a resource — not a replacement — for investors’ own decision- making processes,” and their role “enhances efficiency, transparency, and informed voting, while final authority always rests with the investor.”

In short, CII says that “preserving investor choice and access to independent research is essential to protecting fiduciary responsibilities and shareholder rights.”

At the same time that the Congressional majority is threatening to increase regulation of the proxy voting process, including proxy advisors, the SEC voted along party lines on March 10, 2025, to amend their regulations in order to rescind the SEC’s delegation of authority to the Director of the Division of Enforcement to issue formal orders of investigation. (The SEC had delegated this authority to the Director of the Division of Enforcement in 2009 for a one-year period but then extended this delegation of authority indefinitely the following year.)

The delegation had permitted the Director of Enforcement to issue formal orders of investigation without the SEC’s approval, which include the power to issue subpoenas. Now, by this action, the Division of Enforcement will need approval from the SEC Commissioners in order to issue formal orders of investigation and issue subpoenas.

The SEC stated that the recission “is the result of the Commission’s experience with its nonpublic investigations” and is “intended to increase effectiveness by more closely aligning the Commission’s use of its investigative resources with Commission priorities.” Others, however, suggest there might be more than that in play.

For example, Courtney Degen, reporting in Pensions & Investments, quotes Urska Velikonja, a law professor at Georgetown University Law Center, as saying she “would like to see a better explanation for why this is necessary,” pointing out that “I haven’t heard a case for what’s wrong…such that an abrupt change is necessary at this time.”

Degan reports that according to Velikonja, the move indicates that “if the SEC comes after you and starts investigating, all you need to do is to say no” and not cooperate with the request, as the enforcement staff then has to go to the commission to gain approval for a formal investigation. Only then could subpoenas be issued.

Igor Rozenblit, managing partner at Iron Road Partners, a regulatory and compliance consulting firm, and former SEC staffer from 2010 to 2021, also told Degen that requiring the SEC Commissioners’ approval for a formal investigation will likely “reduce the number of investigations,” and “also reduce the number of complicated investigations” because it would require enforcement staff to explain that complexity to the commission. In Velikonja’s opinion, a significant motivation behind the order was, in fact, to “disempower staff,” she speculated.

[The final rule rescinding the SEC’s delegation of authority was not preceded by notice of the proposed rulemaking and an opportunity for public comment because the SEC determined that the “amendment relates solely to agency organization, procedure, or practice.” The final rule became effective on March 14, 2025.]

In any case, many believe the SEC’s actions represent a “dramatic reduction” in key investigative powers available to Enforcement Division staff. “Whether this results in simply fewer investigations across the board, or rather revised and more centralized priorities for allocating investigative resources, remains to be seen,” observes the law firm of Pryor Cashman, which also notes this action “is the latest and clearest example of the new administration’s effort to reign [sic] in the SEC’s enforcement activities.”

For some, this – and the Congressional efforts aimed at proxy voting — serve to underscore the importance of the few remaining ways in which shareholders can effectively protect and preserve their rights and their investments. Of course, one of these avenues is through the use of securities class actions and derivative lawsuits. Bernstein Litowitz Berger & Grossman , Bleichmar Fonti & Auld LLP, and Robbins Geller Rudman & Dowd LLP will be discussing this situation during a break-out session at NCTR’s 103rd Conference, October 4-7, 2025, at the Grand America Hotel in Salt Lake City, Utah. The breakout session, entitled “Investments and Corporate Governance,” will be held on Monday afternoon, October 6th, from 2:30 to 3:30 p.m.

Learn more about these challenges to trustees’ fiduciary duty to prudently manage their plans’ assets and find out what can be done about them.