The DOL proposed amendments to ERISA Rule 2550.404a-1 ("Investment Duties") "to clarify the application of ERISA's fiduciary duties of prudence and loyalty to selecting investments and investment courses of action."

The proposal effectively reversed the DOL's 2020 interpretation of fiduciary investment. The previous interpretation of the application of fiduciary investment duties addressed "perceived confusion about the implications of non-regulatory guidance with respect to ESG considerations, ETIs, and shareholder rights;" specifically, that "some ERISA plan fiduciaries might be making improper investment decisions, and that plan shareholder rights were being exercised in a manner that subordinated the interests of plans and their participants and beneficiaries to unrelated objectives."

The proposed amendments follow President Joe Biden's issuance of Executive Order 14030 ("Climate-Related Financial Risk"), which directs federal agencies to establish policies for protecting financial stability and the pensions of Americans from the financial risks arising from climate change. The proposal clarifies "that a fiduciary's duty of prudence may often require an evaluation of the effect of climate change and/or government policy changes to address climate change on investments' risks and returns." The proposal would eliminate barriers preventing plan fiduciaries from considering environmental, social and governance [factors], including climate change, other factors when making investment decisions and exercising shareholder rights.

The DOL also removed a statement indicating that the voting of every proxy or exercise of every shareholder right is not required to exercise the fiduciary duty of managing shareholder rights with respect to stock shares. The DOL indicated that it has a "similarly longstanding position that the fiduciary act of managing plan assets that involve shares of corporate stock includes making decisions about voting proxies and exercising shareholder rights. Over the years the Department repeatedly has issued non-regulatory guidance to assist plan fiduciaries in understanding their obligations under ERISA in these areas."

SIFMA expressed support for the proposal, stating that it is "pleased to see the [DOL] headed in the right direction, which will help investors prepare for their retirement."

Comments on the proposal must be received by December 13, 2021.

Commentary

The Biden Administration had made clear that it intended to reverse the prior administration's positions with respect to the consideration of ESG factors in investment decisions, as well as imposing additional pressure on ERISA fiduciaries to exercise proxies. See, e.g., DOL Will Not Enforce Fiduciary Investment Duty Rules Issued Late Last Year. The action on proxy voting is consistent with a recent SEC proposal that would require many investment advisers to make additional disclosures as to their proxy voting records, with considerable emphasis on ESG voting issues. See, e.g., SEC Proposes Expansion of Proxy Voting Disclosure Reporting Requirements.

Primary Sources

  1. DOL Press Release: U.S. Department of Labor Proposes Rule to Remove Barriers to Considering Environmental, Social, Governance Factors in Plan Management
  2. Federal Register: Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights
  3. SIFMA Statement: Department of Labor ESG Proposal

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