The Department of Labor will not enforce two high-profile rules promulgated during the Trump administration, it announced Wednesday.
The rules — one called "Financial Factors in Selecting Plan Investments," which stipulates that ERISA plan fiduciaries cannot invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk; and the other, "Fiduciary Duties Regarding Proxy Voting and Shareholder Rights," which outlines the process a fiduciary must undertake when making decisions on casting a proxy vote — drew sharp criticism from the plan sponsor and sustainable investing community.
"These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights," said Ali Khawar, principal deputy assistant secretary for the Employee Benefits Security Administration, in a news release. "We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations."
The financial factors rule was finalized in November and took effect Jan. 12, just days before the Biden administration took office. President Joe Biden signed an executive order on his first day in office ordering a review of the rule. It's often referred to as the "ESG rule" because the initial proposal, which was unveiled in June, focused on environmental, social and governance investment factors, but the final rule walked back the ESG language.
The proxy-voting rule was finalized in December and took effect Jan. 15.
The Labor Department said it has heard from a wide variety of 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.
Stakeholders have also taken issue with the pace at which the rules were finalized. Both proposals had 30-day comment periods as opposed to the more common 60- or 90-day comment periods.
With its announcement, the Labor Department said it will not enforce either final rule or otherwise pursue enforcement actions against a plan fiduciary that does not comply with the rules with respect to an investment, including a qualified default investment alternative, or investment course of action or with respect to an exercise of shareholder rights.
The financial factors rule excludes a fund from being a QDIA if its investment objectives, goals or principal investment strategy include or consider the use of one or more non-pecuniary factors.
The Labor Department's announcement is exactly what many stakeholders were asking for, said Michael P. Kreps, a principal at Groom Law Group, in an email. "The non-enforcement policy will help calm the markets while the department does a careful review of the ESG and proxy-voting rules. I am hopeful that the administration can thread the needle in such a way that it permanently ends the cycle of changing the rules every time a new president takes office."