On Wednesday, March 10, after engaging in conversations with stakeholders, the U.S. Department of Labor’s Employee Benefits Security Administration issued an enforcement policy statement in which it declined to enforce two DOL rules put in place by the Trump administration in 2020.
The first of these rules placed limitations on the ability of plans subject to ERISA to invest in environmental, social and governance (“ESG”) funds. In particular, it provided that a fiduciary’s duty of loyalty and prudence under ERISA would only be satisfied if investments were selected solely on the basis of pecuniary factors (defined as factors that have a material effect on the risk and return of an investment), and that ESG factors could only be considered to the extent they created economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The ESG rule, which many regarded as making ERISA plan investments in ESG-oriented funds prohibitively difficult, received overwhelmingly negative comments from both financial institutions and the public at large. This latest development is not surprising, as the Biden administration had previously signaled that it would be reexamining this rule.
A related second rule provided that ERISA plan fiduciaries could not harness plan assets to vote on policy-related, political or ESG issues in proxy resolutions that are not solely in the economic interests of plan participants and beneficiaries or likely to enhance the economic value of the plan’s investment. Previous sub-regulatory guidance (DOL Interpretive Bulletin 2016-01) had indicated that the fiduciary duty to manage shareholder rights required the voting of most proxies or the prudent exercise of other shareholder rights. The current rule instead requires plan fiduciaries to consider the costs of voting proxies (including the cost of research to determine how to vote) and to refrain from voting in those circumstances where the costs of voting outweighed benefits to plan participants and beneficiaries. Additionally, the rule requires plan fiduciaries to make a determination that proxy advisory firms’ voting guidelines were consistent with the rule before delegating authority to vote proxies to, or adopting a practice of following the recommendations of, such firms.
In addition to substantive critiques, both the ESG and proxy-voting rules were subject to procedural criticism at the time of proposal, as both rules had only 30-day, rather than the more common 60- or 90-day, comment periods in which stakeholders could voice views for or against finalization.
The current administration’s enforcement policy statement indicates that the Department will continue to engage with stakeholders and is likely to reopen the rulemaking process on related issues. While the statement effectively signals a temporary return to the status quo before the previous administration’s rules were made final, the rules technically remain in effect, and although the DOL will not enforce those rules, private parties may yet pursue non-frivolous actions against certain plan fiduciaries for breach of the fiduciary rules (particularly fiduciaries of defined contribution plans, such as 401(k) plans).