The Washington Report
April 25, 2018
DOL Releases FAB Clarifying Issues Regarding Proxy Voting, Shareholder Engagement, and Economically Targeted Investments
On April 23, 2018, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) released a Field Assistance Bulletin (FAB 2018-01) providing guidance to EBSA’s national and regional offices regarding proxy voting, shareholder engagement, and economically targeted investments by fiduciaries of private-sector employee benefit plans covered by ERISA.
The FAB clarifies earlier interpretations set forth in Interpretive Bulletins (IB) 2015-01 and 2016-01. In IB 2015-01, the DOL held that fiduciaries may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance (ESG) policy goals when making investment decisions. In IB 2016-01, the DOL addressed issues surrounding written statements of investment policy, proxy voting, and other exercises of shareholder rights by fiduciaries when managing plan assets that are corporate stock.
FAB 2018-01 advises that fiduciaries of ERISA-covered plans must avoid too readily treating ESG issues as being economically relevant to any particular investment choice. It further advises that ERISA does not necessarily require plans to adopt investment policy statements with express guidelines on ESG factors. The FAB addressed issues that arise in the use of ESG-themed investment alternatives in 401(k)-type plans, and as qualified default investment alternatives. The FAB also clarifies that plan fiduciaries (including investment managers) may not routinely incur significant plan expenses to pay for the costs of shareholder resolutions or special shareholder meetings, or to initiate or actively sponsor proxy fights on environmental or social issues.
FAB 2018-01 is available here.
The DOL news release is available here.
SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals
On April 18, 2018, the Securities and Exchange Commission (SEC) voted to propose a package of rulemakings and interpretations designed to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.
Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.
For additional information about the rulemaking, please see the Aon bulletin Passing of the Baton? DOL Fiduciary Investment Advice Rule May Be Supplanted by SEC’s New Regulatory Initiative in the Publications section. The bulletin focuses on the Regulation Best Interest and its relationship to the DOL Fiduciary Investment Advice Rule.
The SEC news release and fact sheet is available here.
Passing of the Baton? DOL Fiduciary Investment Advice Rule May Be Supplanted by SEC’s New Regulatory Initiative
On April 18, 2018, the Securities and Exchange Commission (SEC) published a set of proposals “To Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals” (the Proposals). According to the SEC, the Proposals are aimed at strengthening the standard of conduct that broker-dealers owe to their customers, reaffirming and clarifying the standard of conduct that investment advisers owe their clients, and providing additional transparency and clarity for investors through enhanced disclosure regarding these respective roles.
One of the Proposals includes proposed text and extensive explanations for a new “Regulation Best Interest,” which would be applicable to brokers that provide retail customers with “investment recommendations” (specifically, “a recommendation of any securities transaction or investment strategy involving securities”). The Regulation Best Interest addresses standards of conduct with regard to investment advice. This new SEC proposal parallels and in some ways contrasts with the regulations (and related guidance) published by the Department of Labor (DOL) in 2016 (the DOL Fiduciary Investment Advice Rule). Other changes to the SEC’s regulation of broker-dealers and investment advisers are addressed in the Proposals.
The bulletin, which focuses on the Regulation Best Interest and its relationship to the DOL Fiduciary Investment Advice Rule, is available here.
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