Fiduciary Issues

The Securities and Exchange Commission (SEC) has issued a proposed rule to address cybersecurity risks.

A resolution for congressional disapproval of the Department of Labor’s rule “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” passed the House in a 216-204 vote.

The Securities and Exchange Commission (SEC) has issued a final rule “Shortening the Securities Transaction Settlement Cycle.”

The Securities and Exchange Commission (SEC) has issued a proposed rule “Safeguarding Advisory Client Assets.”

Effective February 1, 2022, the federal prime interest rate increased from 7.50 percent to 7.75 percent. The prime interest rate is largely determined by the federal funds rate, as set by the Federal Reserve’s Federal Open Market Committee (FOMC).

Retirement plan assets should be invested prudently to obtain the best possible financial returns, of course. But what if your plan invests in a company that conducts business in a way that violates your ethical values? For example, is it okay for a plan administrator to buy stock in a company with a record of environmental violations and polluting with impunity? Should that behavior affect whether a company qualifies as a suitable retirement plan investment? Is it possible, or even likely, that a company that responsibly produces a similar product may actually be a better choice, measured both by investment returns and by other factors?

The Securities and Exchange Commission (SEC) proposed rule titled, Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, has been published in the federal register. With publication in the register, comments on the proposal are due by February 14, 2023. Highlights of the proposal were previously announced.

The Department of Labor’s final rule titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, which was previously announced, has been published in the Federal Register. Today’s publication establishes a January 30, 2023, effective date. Certain provisions related to proxy voting, however, will not be applicable until December 1, 2023.

The U.S. District Court for the Eastern District of Pennsylvania has dismissed an ERISA fiduciary lawsuit against electronics manufacturer, Ricoh USA. The plaintiffs had claimed that the employer breached its fiduciary duty to a 401(k) plan it sponsors when it selected the plan’s recordkeeper. As evidence, the plaintiffs pointed to a dozen recordkeepers offering similar services at lower costs than what the fiduciaries selected for the plan. The court dismissed the lawsuit because it found that the plaintiffs did not provide enough detail in their complaint about the lower-cost competitor services to demonstrate that those services were actually comparable to those the plan employed. The court said in the absence of this detail, it was unable to determine whether the comparison between the plan’s service provider and the competitors is actually an “apples to oranges” comparison rather than an “apples to apples” comparison. The plaintiffs were given an opportunity to amend their complaint to address this issue.

The Department of Labor (DOL) has announced the release of a final rule to remove barriers in considering environmental, social, and governance (ESG) factors in plan investments. 

The DOL emphasizes in the executive summary that the final rule does not change two longstanding principles. First, the final rule retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan. Second, the fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights relative to those shares, including the right to vote proxies. The final rule makes several other changes that are highlighted in the summary.

• Amends the current regulation to delete the “pecuniary/non-pecuniary” terminology based on concerns that the terminology causes confusion and a chilling effect to financially beneficial choices.
• Confirms that a fiduciary may include as part of a risk and return analysis the economic effects of ESG on a particular investment determination or course of action.
• Amends the current regulation to remove the stricter rules for QDIAs, such that, under the final rule, the same standards apply to QDIAs as to investments in general.
• Amends the current regulation’s “tiebreaker” test to provide that when a fiduciary concludes prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon—the fiduciary is not prohibited from selecting the investment or investment course of action based on collateral benefits other than investment returns.
• Adds a new provision clarifying that fiduciaries do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans.
• Eliminates the statement in paragraph (e)(2)(ii) of the current regulation that “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right”, as it may be misread as suggesting that plan fiduciaries should be indifferent to the exercise of their rights as shareholders, even if the cost is minimal.
• Removes two “safe harbor” examples for proxy voting policies permissible under paragraphs (e)(3)(i)(A) and (B) of the current regulation. The DOL believed that these examples encouraged abstention as the normal course and failed to recognize the importance that prudent management of shareholder rights can have in enhancing the value of plan assets or protecting plan assets from risk.
• Modifies requirements in order to more generally cover monitoring obligations, and address concerns that could be read as requiring obligations above and beyond the statutory duties of prudence and loyalty that generally apply to monitoring the work of service provider.
• Amends to eliminate from paragraph (e)(2)(ii)(E) of the current regulation a specific requirement on maintaining records on proxy voting activities and other exercises of shareholder rights, due to perception of treating proxy voting and other exercises of shareholder rights as carrying a greater fiduciary obligation than other fiduciary activities.

The final rule is effective 60 days after publication in the federal register.