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DOL Submits Final ESG Rule to OMB

Release of the Department of Labor’s final rule addressing environmental, social and governance (ESG) factors in selecting plan investments appears to be imminent. 

Following a 30-day comment window that ended July 30 and more than 8,000 comment letters, the DOL on Oct. 14 submitted a final rule, entitled “Financial Factors in Selecting Plan Investments,” to the White House’s Office of Management and Budget for review. 

The OMB generally has up to 90 days to vet the final rule and either approve it for release or send it back for modifications, which doesn’t seem likely in this case, being that rule appears to be on a fast track. Additionally, OMB review can often take less than 30 days, suggesting that the rule could be released in the next few weeks.  

The text of the final rule is not yet available, so it’s not clear whether the DOL made changes based on the feedback it received on the proposed rule. 

The proposed rule was released on June 23 in what the department said at the time was to “provide clear regulatory guideposts” for plan fiduciaries in light of recent trends involving ESG investing. DOL Secretary Eugene Scalia had stated that, “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan.” The DOL noted that it was concerned that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes “distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.”

Until now, there’s really only been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. The 2016 IB was read as encouraging consideration of ESG factors (or at least discouraging the discouraging); the 2018 FAB pulled back on that stance.

The proposed rule seeks to add new regulatory text codifying the Department’s longstanding position that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action. 

In general, it would maintain the “all things equal” test, but would require a new level of investment analysis and documentation requirements in what it characterized as “the rare circumstances when fiduciaries are choosing among truly economically ‘indistinguishable’ investments.” The proposed rule also took the position that ESG is not suitable as a qualified default investment.

Industry Pushback

Many of the comment letters submitted to the DOL blasted the proposed rule, arguing, among other things, that it is out of step with best practices that asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections. 

The American Retirement Association cautioned that the proposal “could stifle investment selection, decrease participant savings rates and diminish portfolio diversification.” 

Despite the DOL’s proposed rule, interest in ESG remains high among institutional money managers, advisors and the investing public, including retirement plan participants. Even with the various barriers to adoption, a recent report from Cerulli revealed that most DCIO asset managers expect to increase their DC-focused ESG marketing and distribution efforts during the next 12 months. 

Will the DOL’s Rule Really Be Final?

One wild card that remains is that, even if the rule is made final in the next few weeks, it still potentially could be challenged under the Administrative Procedures Act (APA) and the Congressional Review Act (CRA). 

The APA governs the process by which federal agencies propose and establish new regulations, and lays out the process for judicial review of rules in federal court. The CRA establishes a process for congressional review of new regulations issued by federal agencies. In general, the CRA provides Congress with the ability to reject any newly issued regulation if completed within a certain timeframe. In this case, the likelihood of using the CRA process would be highly dependent on the outcome of the elections.