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DOL Announces It Will Not Enforce Recently Issued Final Rules on ESG Investments and Proxy Voting
Practical Law Legal Update w-030-0943 (Approx. 6 pages)
DOL Announces It Will Not Enforce Recently Issued Final Rules on ESG Investments and Proxy Voting
by Practical Law Employee Benefits & Executive Compensation
| Published on 11 Mar 2021 • USA (National/Federal) |
The Department of Labor (DOL) has issued an enforcement policy statement under Title I of the Employee Retirement Income Security Act of 1974 (ERISA), which explains that the DOL will not enforce its recently issued final rules on environmental, social, and governance (ESG) investments and proxy voting until the publication of further guidance.
On March 10, 2021, the DOL issued an enforcement policy statement under Title I of ERISA, which explains that the DOL will not enforce its recently issued final rules on environmental, social, and governance (ESG) investments and proxy voting until the publication of further guidance. The DOL also issued a press release on the nonenforcement of these two rules.
Recently Issued Final Rules
The DOL's enforcement policy statement applies to two final rules:
- Financial Factors in Selecting Plan Investments, which amends DOL Regulation Section 2550.404a-1 (29 C.F.R. § 2550.404a-1) to address when retirement plan fiduciaries may consider non-pecuniary factors, such as ESG factors, in selecting plan investments without violating their fiduciary duties under Sections 403 and 404 of ERISA (85 Fed. Reg. 72846 (November 13, 2020); see Legal Update, Final DOL Rule Addresses Use of Non-Financial Factors in Selecting Retirement Plan Investments).
- Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, which addresses fiduciary duties under ERISA as they relate to the voting of proxies on securities held in employee benefit plan investment portfolios and exercising other shareholder rights (85 Fed. Reg. 81658 (December 16, 2020); see Legal Update, DOL Issues Final Regulation on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios).
Temporary Nonenforcement
President Biden's Executive Order 13990, Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis, directs all executive departments and agencies to immediately review and take action to address federal regulations and other actions promulgated, issued, or adopted between January 20, 2017, and January 20, 2021, that are or may be inconsistent with, or present obstacles to, the environmental protection goals in Section 1 of that order (86 Fed. Reg. 7037 (January 25, 2021)).
Furthermore, the DOL has received feedback on both rules from many stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers, and investment advisers, who have:
- Asked whether these two final rules properly reflect the scope of fiduciaries' duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries (for more information on ERISA's fiduciary standards, see Practice Note, ERISA Fiduciary Duties: Overview).
- Questioned whether those rulemakings were rushed unnecessarily and failed to adequately consider the substantial evidence submitted by public commenters on the use of ESG considerations in improving investment value and long-term investment returns for retirement investors.
- Told the DOL that the rules, and investor confusion about the rules, have already had a chilling effect on appropriate integration of ESG factors in investment decisions, even in circumstances that the rules can be read to explicitly allow.
Therefore, until it publishes further guidance, the DOL will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with the final rules with respect to an investment, including a Qualified Default Investment Alternative (QDIA), or an investment course of action or the exercise of shareholder rights (see Practice Note, Qualified Default Investment Alternatives (QDIAs)). However, the DOL will still enforce statutory requirements under ERISA, including the statutory duties of prudence and loyalty in ERISA Section 404 (29 U.S.C. § 1104).
The DOL will update its website as more information becomes available regarding these rules and their enforcement.