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DOL Will Not Enforce New Rules on Proxy Voting and Financial Factors in Investment Selection Pending Review



U.S. Department of Labor Statement Regarding Enforcement of Its Final Rules on ESG Investments and Proxy Voting by Employee Benefit Plans (Mar. 10, 2021)

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The DOL has announced that it will not enforce recently issued regulations on the selection of retirement plan investments and proxy voting while it reviews the regulations for possible changes. The action was prompted by an Executive Order issued by President Biden on January 20, 2021, directing agencies to review regulations adopted during the preceding administration that are or may be inconsistent with policies set forth in the order. Those policies include promoting and protecting public health and the environment, using the best science, and ensuring the integrity of agency decisionmaking. The regulation on financial factors in investment selection responded to growth in the market for investments considering environmental, social, and corporate governance (ESG), and similar factors, by generally requiring that plan fiduciaries select investments based solely on “pecuniary factors” (see our Checkpoint article). Other factors could be considered only if a plan fiduciary was unable to distinguish between investments based on pecuniary factors alone and the fiduciary met certain documentation requirements. The regulation regarding proxy voting and the exercise of other shareholder rights clarified that fiduciaries do not have a fiduciary obligation to vote all proxies, and established a list of obligations fiduciaries must satisfy when deciding whether to vote proxies or exercise other shareholder rights (see our Checkpoint article). It also addressed proxy voting policies and voting records.

The DOL’s announcement indicates that it has received input from a wide variety of stakeholders who questioned whether the affected regulations properly reflect fiduciaries’ duties. Some also questioned whether the rules were unnecessarily rushed and failed to address evidence regarding the value of using ESG considerations in investment decisionmaking. During its review, the DOL will not enforce either rule or pursue enforcement actions for failure to comply with either rule with respect to an investment, including an investment that is a qualified default investment alternative. The DOL notes that this nonenforcement policy does not preclude the enforcement of any statutory requirement—including the duties of prudence and loyalty that underpin the investment duties regulation.

EBIA Comment: This action was not entirely unexpected, given the language of the Executive Order and the longstanding controversy regarding the relevance of ESG considerations, as reflected in past DOL guidance (see our Checkpoint article). Reactions to it, however, may be mixed because enforcement relief does not preclude private litigation, and the suspension once again leaves fiduciaries in doubt as to the extent ESG considerations can be used for investment decisionmaking. The announcement indicates that the DOL will be posting additional information on its website as it becomes available. For more information, see EBIA’s 401(k) Plans manual at Sections XXV.D (“Selecting the Plan’s Investment Funds”), XXV.L (“Proxy Voting and Shareholder Rights”), and XXVI.J (“Fiduciary Protection for Qualified Default Investment Alternative (QDIA)”).

Contributing Editors: EBIA Staff.

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