On March 10, 2021, the U.S. Department of Labor (“DOL”) released an enforcement policy statement indicating that the DOL will not enforce the Trump Administration’s recent amendments to the DOL’s longstanding investment duties regulation under ERISA. The amendments sought to suppress the consideration by investment fiduciaries of environmental, social, governance, and similar (“ESG”) issues, including in exercising proxy voting and other shareholder rights. The amendments did so by broadly requiring that investment decisions be tightly tied solely to the plan’s financial interests and by effectively imposing a higher standard of care for the consideration of ESG issues. The amendments were finalized in fall 2020 via two separate rulemakings that, with few exceptions, became effective in January 2021. 1
In its statement, the DOL noted that a wide variety of stakeholders, including investment advisers, labor organizations and other plan sponsors, consumer groups, and plan service providers, have expressed numerous concerns with the amendments. These include, for example, the rushed nature of the rulemaking, whether the DOL considered and addressed the substantial evidence submitted by commenters on how the use of ESG considerations positively affects investment value and long-term returns, and how the amendments have already had a “chilling effect” on the use of ESG considerations in investment decisions. As a result, the DOL said that it “intends to revisit the rules,” and, until then, will not enforce them or otherwise pursue enforcement actions against any plan fiduciary for violating these rules. While it is unclear what the DOL will ultimately do in connection with any changes, we would not be surprised if it amended the regulation to memorialize its prior, more flexible guidance on ESG considerations (e.g., encouraging the consideration of ESG factors that may have economic relevance and permitting ESG considerations to act as tie-breakers among a selection of otherwise prudent choices, each without burdensome preconditions).
The non-enforcement position is limited to the new standards imposed by the amendments. It does not extend to other enforcement matters involving the duties of prudence and loyalty, which presumably will continue under the principles-based standards that applied prior to the amendments.
It is unclear whether the DOL will formally suspend or close out ongoing efforts commenced by the prior administration to enforce its position on ESG considerations, many of which began before the amendments took effect. It could be, as in other contexts, that the DOL simply ceases to pursue them.
While the non-enforcement policy offers real, welcome relief for investment fiduciaries (and, by extension, fund sponsors and others that provide those fiduciaries with investment products incorporating ESG strategies or considerations), it does not extend to private litigation risk. Until the DOL formally changes the amended rule, it will remain the law and will govern fiduciary investment decisions under ERISA. As a practical matter, private litigation risk involving the amended rule will likely fall mostly on fiduciaries responsible for selecting investment options under participant-directed individual account plans. This risk may be minimal if the DOL acts quickly, but will grow as time passes without a change.
Finally, we understand that certain members of Congress are working on legislation to modify or overturn the amendment. While those efforts are nascent and their chances of succeeding are unclear at this time, we do not expect the DOL’s non-enforcement position and intent to review the rule to deter those efforts.
1 See “Financial Factors in Selecting Plan Investments,” 85 Fed. Reg. 72846 (Nov. 13, 2020) and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” 85 Fed. Reg. 81658 (Dec. 16, 2020). Our prior client alert on the first rule is available here. The DOL’s policy statement is rooted in President Biden’s Executive Order 13990, which directed federal agencies to reconsider the last administration’s regulations that may be inconsistent with public policies of promoting and protecting public health and the environment.