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Contentious ‘Do-Good’ Investing Rule Gets White House Review

Oct. 15, 2020, 3:20 PM

The Labor Department is moving to finalize a controversial rule that could make it harder for fiduciaries to invest retirement plans in funds focused on environmental, social, and governance issues.

The Employee Benefits Security Administration subagency on Wednesday submitted the final regulation to the White House Office of Information and Regulatory Affairs for review, according to an online posting. That is an important step toward final publication of the regulation.

The rule, “Financial Factors in Selecting Plan Investments,” would require fiduciaries who invest in ESG options to document in detail the basis for “concluding that a distinguishing factor could not be found and why the selected investment was chosen,” the proposal says.

Senior administration officials previously said when the rule was introduced in July that the proposal reinforces the protections enshrined in the Employee Retirement Income Security Act of 1974 by reminding fiduciaries they must never sacrifice the financial security of participants in order to promote other objectives.

The DOL says that ESG-related investments require higher fees and produce lower returns and ultimately would pose a greater risk for retirement plan participants.

The agency’s other regulatory efforts to curtail investments in so-called “do-good” funds—an option that many in the retirement industry argue has high returns and no known negative impacts on retirement plans—have also been subject to criticism.

As part of a trio of big-ticket rules issued this summer, the “economically significant” proposal came with a 30-day public comment period—a severely abbrieviated schedule, according to many in the retirement and benefits industry.

An “economically significant” rule has an estimated annual impact on the economy of $100 million or more.

The public comment period allows outsiders to weigh in on new rules from a federal agency. An agency is supposed to read each comment, absorb the concerns shared with the administration, and address them before issuing a final rule.

Stakeholders fear the short comment period and quick turnaround of this proposal in particular could expose the agency to legal challenges.

To contact the reporter on this story: Jaclyn Diaz in Washington at jdiaz@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; John Lauinger at jlauinger@bloomberglaw.com

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