A recent development regarding a rule by the Employee Benefits Security Administration suggests that we could have a final regulation from the Labor Department by year-end.
The regulation, submitted for review on Oct. 6 to the White House’s Office of Management and Budget as “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” in a “final rule stage” is accompanied by an abstract that reads, “This rulemaking implements Executive Order 13990 of January 20, 2021, titled Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis, and Executive Order 14030 of May 20, 2021, titled Climate-Related Financial Risks.”
It then goes on to note that “Section 4 of Executive Order 14030 directs the Secretary of Labor to consider publishing, by September 2021, for notice and comment a proposed rule to suspend, revise, or rescind ‘Financial Factors in Selecting Plan Investments,’ 85 FR 72846 (November 13, 2020), and ‘Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,’ 85 FR 81658 (December 16, 2020). The Department of Labor’s Employee Benefits Security Administration therefore will undertake a review of regulations under title I of the Employee Retirement Income Security Act in accordance with these orders, including ‘Financial Factors in Selecting Plan Investments,’ 85 FR 72846 (November 13, 2020), and ‘Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,’ 85 FR 81658 (December 16, 2020).” It is described as “economically significant.”
A Little History
A little over a year ago, the Labor Department submitted to OMB a proposal for review, and then in October, it released a proposed rule that took a completely different tact than that issued by the Labor Department in the waning days of the Trump Administration (which the Biden Administration announced right out of the gates that it would not enforce). Rather than cautioning against the use of such factors in considering investments (or proxy decisions, that version called for allowing workplace retirement plan managers to consider environmental, social, and corporate governance factors when making decisions about plan investments, with a decided emphasis on the environmental aspects. At the time the Labor Department said it was concerned “uncertainty with respect to the current regulation may deter fiduciaries from taking steps that other marketplace investors would take in enhancing investment value and performance, or improving investment portfolio resilience against the potential financial risks and impacts often associated with climate change and other ESG factors.”
The ARA submitted comments on that version in December.
In the meantime, DOL had requested information on whether the department should take action to protect retirement savings from risks associated with climate changes, on which the ARA also weighed in, contending that the DOL should not call out climate-related risks for special attention.
Nomination Nexus?
The issue had arisen in considering the nomination of Lisa Gomez as Assistant Secretary of Labor, with some Republican senators expressing concern about her stance on ESG. However, that nomination was recently confirmed (albeit on a narrow party-line vote).
As for what set all this in motion, on Nov. 13, 2020, the DOL under the Trump Administration published a final rule on Financial Factors in Selecting Plan Investments, which adopted amendments to the “Investment Duties” regulation under Title I of ERISA. The changes stepped away from using the terms environmental, social and governance (ESG) factors, but instead generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.”
Then, on Dec. 16, 2020, the DOL published a final rule on Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, which also adopted amendments to the Investment Duties regulation to address obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.
The regulatory agenda shows a December 2022 target date for release of a final rule—and with the delivery to OMB, what once seemed uncertain now seems likely.
Stay tuned.
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