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Republicans Rap Labor Department for Spiking Trump ESG Rule

March 18, 2021, 8:58 PM

Republican lawmakers accused the U.S. Department of Labor of bowing to Wall Street interests when it decided earlier this month not to enforce two Trump administration rules curbing environment, social, and corporate governance retirement investing.

The Department’s Employee Benefits Security Administration announced last week that it wouldn’t enforce the Trump-era investment duties or proxy voting rules or pursue enforcement actions against plan fiduciaries who fail to comply with them. Officials said the department would revisit the rules.

In a letter to the Employee Benefits Security Administration Thursday, Republican senators said the department’s non-enforcement policy statement would permit plan fiduciaries to make investment decisions and exercise shareholder rights at a cost to the financial interests of workers and retirees.

“Since DOL is allowing plan fiduciaries to put non-pecuniary policy objectives above the financial interests of plan participants and beneficiaries, fiduciaries are now free to include ESG funds in their plans even if they have lower returns, higher costs, and/or higher risks,” the letter said.

The letter was penned by Republican Sens. Richard Burr (N.C.), Mike Crapo (Idaho), and Pat Toomey (Pa.), respectively ranking committee chairs on the Senate panels of Health, Education, Labor and Pensions; Finance; and Banking, Housing and Urban Affairs.

A DOL representative said the agency has received the letter and will review it.

Issued during the final days of former President Donald Trump‘s administration, the department’s so-called “do good” investment duties rule limited plan fiduciaries to investment decisions based on “pecuniary factors,” or solely the financial interests of plan participants and their retirement benefits. The proxy voting powers rule similarly prohibited asset managers from voting on a pension or 401(k) retirement plan matter unless it was in the plan’s financial interest.

Time for Comment

Both rules, which took effect in late January, came under fire from industry groups and financial service firms that said the measures were rushed and failed to take into account shareholder concerns.

They were part of a flurry of economically significant regulations EBSA issued during Trump’s final days that included only a 30-day comment period, a fact that concerned many retirement and benefits industry attorneys who said it could expose the department to legal challenges.

A spokesperson for the ranking members of the Senate banking committee said that, because the department made the rules public on its website before they were published in the Federal Register, the period of time for public review was closer to 40 days—38 days for the financial factors rule and 36 days for the proxy voting rule.

Republicans say the Trump DOL heeded stakeholder comments opposing the ESG rules. The final “do-good” investment duties rule was a shell of its proposal, stripped of any explicit references to ESG factors. Instead, the department relied on a specific distinction between “pecuniary” and “non-pecuniary” factors—whether or not investment decisions are in a participant or beneficiary’s financial interests. In so doing, the DOL opened the door for the consideration of ESG factors on economic principles.

President Joe Biden has made climate change and social justice issues a key part of his agenda, and flagged the investment duties rule for review among his first actions as president.

By choosing not to enforce the rules, Republican critics say Wall Street asset managers who are increasingly relying on ESG criteria in investment decisions stand to benefit from the growing market at the expense of their clients’ retirement assets.

Moreover, the Repulican lawmakers argued, plans that do incorporate ESG funds to promote social justice, diversity quotas, or lower carbon emissions in lieu of participant or beneficiary interests could be vulnerable to litigation under the Employee Retirement Income Security Act of 1974, the law governing private-sector employer benefits.

“DOL should immediately reverse its ill-considered decision to not enforce these rules. DOL has a legal responsibility to enforce ERISA and the rules issued thereunder.”

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com

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