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DOL Finalizes ESG Fund Rule, with Modifications

November 2, 2020

The Department of Labor has finalized a rule seen as limiting the ability of retirement plan fiduciaries to include environmental, social and governance investments in plans, according to news reports.

The agency submitted a proposal in June requiring retirement plans to prove that the ESG funds they select are “economically indistinguishable” from other investments. Senior DOL officials said in the proposal that retirement plans choosing ESG funds with higher fees, lower returns or greater risk would violate the protections established by the Employee Retirement Income Security Act of 1974.

The DOL has received more than 8,000 comments on the proposal, most of which oppose it, FA-IQ sister publication Ignites writes. The final rule includes “modifications in response to public comments,” according to Ignites, which cites a Friday announcement from the agency.

Critics of the DOL’s proposal slammed it as leading to unintended consequences, resulting in additional costs for beneficiaries and setting a double standard by forcing more scrutiny on ESG funds than on non-ESG alternatives.

The announcement of the final rule does not explicitly reference ESG or ESG-themed funds, but focuses on the requirement that retirement plan fiduciaries abide by the “pecuniary” standard, Ignites writes.

“Many commenters expressed concern that the proposal could be read as improperly singling out, deterring or prohibiting consideration of ESG factors even in cases where they were relevant to a risk-return evaluation of an investment or investment course of action,” the announcement says, according to the publication.

As in the proposed rule’s preamble, the DOL says, ESG factors “could be pecuniary in nature and that, in such cases, fiduciaries properly could consider the factors as part of their investment analysis,” according to Ignites.

The rule goes into effect 60 days after publication in the Federal Register, but the compliance deadline for retirement plans is Apr. 30, 2022, the publication writes.

Some have also criticized the DOL for going through the finalization process at “warp speed." That could lead to legal challenges under the Administrative Procedure Act, Bryan McGannon, director of policy and programs at US SIF, a Washington-based group that supports sustainable investment businesses, said last month. Meanwhile, some say that a win for Joe Biden in this year’s U.S. presidential election would likely result in the rule getting overturned.

DOL chief reining in enforcement staff

Separately, Bloomberg Law reports that Labor Secretary Eugene Scalia is putting curbs on the agency’s enforcement lawyers and investigators, who he thinks have become too aggressive during Barack Obama’s presidency, according to Ignites.

Top officials at the agency, such as Solicitor Kate O’Scannlain, have been ordered to increase scrutiny of DOL enforcement officials, which in some cases has led to their legal work getting watered down, several unnamed sources tell Bloomberg Law, according to Ignites.

Among the more controversial personnel decisions, meanwhile, was the transfer of Janet Herold, the regional solicitor for San Francisco and head of branch offices in Los Angeles and Seattle — and an Obama appointee — to the DOL’s Office of the Solicitor to the occupational safety agency in Chicago, Ignites writes. Herold later accused Scalia of retaliation for her complaints about his intervention in a DOL lawsuit against Oracle, according to the publication.

In addition, DOL officials have urged lawyers at companies under investigation by the agency to file complaints to the central office about “tenacious” investigators, Ignites writes, citing Bloomberg Law.

Patrick Pizzella, the deputy DOL secretary and Scalia’s “point man for the enforcement review,” tells Bloomberg Law that the actions have been necessary to restore a relationship with employers that suffered under the previous administration, according to Ignites.

President Donald Trump appointed Scalia to take over as head of the DOL last year, following the resignation of labor secretary Alexander Acosta over backlash against his handling of a decade-old plea deal with convicted sex offender Jeffrey Epstein.

While Scalia was in private practice, he represented industry trade groups in their legal challenge to the Obama-era fiduciary rule, which required retirement account advisors to put clients’ interests first. The Fifth U.S. Circuit Court of Appeals vacated the rule last year.

Do you have a news tip you’d like to share with FA-IQ? Email us at editorial@financialadvisoriq.com.

By Alex Padalka
  • To read the Ignites article cited in this story, click here if you have a paid subscription.
  • To read the Ignites article cited in this story, click here if you have a paid subscription.
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Tags:  Regulatory/legal issues , Investment strategies

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