Shadow Shareholders

• In Event: Tax and Finance

Abstract

This Article exposes the growth of collective investment trusts (CITs) as institutional investors with the power to influence capital markets and corporate governance while avoiding the reach of U.S. securities laws. While there is extensive scholarship on the rise of institutional investors generally, and mutual funds in particular, such scholarship has overlooked the emergence of CITs as the investment vehicle rapidly replacing mutual fund investments in public and private-sector retirement plans. Drawing on newly collected data, this Article is the first to demonstrate that CITs have accumulated significant stakes in public companies.

As such large shareholders, CITs have the power to shape the governance of public companies by voting to elect corporate directors, bringing shareholder proposals, and casting ballots on a host of matters put before the shareholders. Unlike mutual fund managers subject to U.S. securities laws, CIT trustees are not required to disclose publicly how they vote their shares. However, unlike their mutual fund counterparts, CIT trustees that hold retirement assets from the private sector are subject to fiduciary obligations under the Employee Retirement Income Security Act of 1974 (ERISA). As such, CIT trustees must make decisions as shareholders in a manner that conforms to the “prudence” and “loyalty” requirements under ERISA, including the latest Department of Labor guidance on the consideration of environmental, social, and governance factors in selecting and managing investments. The Article thus suggests that ERISA law has become a kind of shadow corporate law.

The implications of retirement law functioning as corporate law are significant for theory and practice. While ERISA fiduciary litigation has historically targeted employers and plan administrators, large assets managers have become ERISA fiduciaries by managing collective investment trusts, and they may face considerable exposure under ERISA for their proxy voting decisions. Such litigation exposure is likely to impact subsequent voting decisions. Furthermore, the size and influence of CIT holdings put additional pressure on the disparate disclosure regimes for mutual funds and CITs. As the Article shows, the rise of shareholders subject to ERISA challenges the existing narrative on decision-making by institutional shareholders and sets forth a series of empirical questions about their influence in corporate elections.

Author

• Natalya Shnitser, Boston College Law School