In a somewhat expected development, the US Department of Labor’s Employee Benefits Security Administration (EBSA) issued an enforcement statement on Wednesday announcing that it will not enforce the recently published final rules on “Financial Factors in Selecting Plan Investments”—commonly known as the ESG Rule—and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” (Proxy Voting Rule).
EBSA stated that until it releases further guidance, it will not pursue enforcement actions against any plan fiduciary based on a failure to comply with the duty of loyalty and prudence requirements set out in the ESG Rule with respect to an investment (including a qualified default investment alternative) or an investment course of action, or with respect to an exercise of shareholder rights under the Proxy Voting Rule.
This announcement is not surprising given that the Biden administration had already announced it was reviewing the ESG Rule (and many expected a similar scrutiny for the Proxy Voting Rule).
What happens next?
- This probably signals the end of the DOL’s current enforcement effort around ESG usage by ERISA plans, although open DOL investigations may continue to the extent the DOL is examining other fiduciary compliance issues (for example, if there is a “missing participant” or “proprietary fund” component of the investigation).
- This may be a sign that the Biden DOL will prepare a new set of rulemaking in the areas of ESG and proxy voting that replaces or modifies the Trump era rules. In making the announcement, EBSA has said: “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.”
- One remaining risk is that a private litigant could still bring an ERISA action for noncompliance with either the ESG Rule or the Proxy Voting Rule, since a nonenforcement policy leaves each rule intact. Given the possible risk of private litigation, plan fiduciaries may want to consider still seeking to comply with the standards under the ESG Rule and the Proxy Voting Rule so long as they remain in place.
Morgan Lewis will continue to monitor this evolving regulatory landscape.