Monday, November 23, 2020

BigLaw ( Latham & Watkins) Discusses ESG Investing For ERISA Fiduciaries Under Recent DoL Rulings

You can just see the lawsuits coming. In fact a bright young specialist could probably make a career out of a single case. As we've retailed elsewhere, the lawsuit in Dickens Bleak House, "Jarndyce v Jarndyce" went on for so long that no one remembered what it was about but even that can't compare with the apparent world record which ended in 1966 having been filed in 1205.
Judgement was for the plaintiff.
Now that's commitment to the case.

From Columbia Law School's Blue Sky blog, November 23: 

Latham & Watkins Discusses Department of Labor Rule on ESG Investing

On October 30, 2020, the US Department of Labor (DOL) published Financial Factors in Selecting Plan Investments (the Rule) and a related Fact Sheet, a codification of the spirit, if not the exact words, of a controversial proposal issued by the DOL in June 2020 (the Proposal). The Rule adopts amendments to certain provisions of the “investment duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and requires fiduciaries of pension plans (and other benefit plans covered by ERISA) to choose investments “based solely on pecuniary factors” relevant to a particular investment. The net effect is to restrict plan fiduciaries from making investment decisions guided by goals or policies other than achieving the highest possible return for investors. Non-financial goals would ostensibly include any environmental, social, or governance (ESG) factors that many investors consider important to their investment decision-making.

The Rule

Despite an overwhelming number of opposing comments submitted in the 30-day comment period after the Proposal was issued, the DOL quickly finalized the Rule substantially as it was proposed. The Rule preamble largely dismisses the materiality of ESG factors in investment decisions, and adopts the controversial idea that consideration of ESG factors are somehow at odds with financial factors and fiduciary responsibilities of plan sponsors. But rather than mandate a heightened standard of care for non-pecuniary factors in investment decisions, the DOL chose to prohibit them outright, providing that plan fiduciaries must select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action. The Rule pivots on two ERISA duties imputed to fiduciaries:

  • Fiduciary Duty of Prudence: Under the Rule, a fiduciary is required to perform a financial analysis of reasonably available alternative investment options, and make decisions solely on the basis of risk of monetary loss and opportunity for monetary gain, diversification, liquidity, and projected returns. Only when a comparison among these factors yields no discernible difference in investment decision can non-pecuniary factors be considered, and then only to the extent that they are consistent with investors’ financial interests. Fiduciaries, however, are encouraged by the DOL to decide tiebreakers using their best judgment based on pecuniary factors alone. Fiduciaries that choose funds with higher fees, lower historic or projected returns, or greater risk, regardless of any other objectives or factors, would therefore violate the Rule.
  • Fiduciary Duty of Loyalty: The Rule language focuses on whether an investment factor is considered pecuniary or nonpecuniary, with pecuniary being defined as any factor that a fiduciary determines will have a material effect on risk and return based on an investment’s time horizons. A fiduciary has a duty of loyalty to investors to determine an investment course of action solely on the basis of pecuniary factors, and may not subordinate the financial interests of participants to non-financial objectives. Fiduciaries that choose funds using non-pecuniary objectives would therefore violate the Rule.

Key Differences From the Proposal

The Rule differs from the Proposal in a number of ways:....


Back to Dickens  and the lawsuit in Bleak House via Law and Politics Book Review on

"...Innumerable children have been born into the cause; innumerable young people have married into it; innumerable old people have died out of it. Scores of persons have deliriously found themselves made parties in Jarndyce and Jarndyce, without knowing how or why; whole families have inherited legendary hatreds with the suit. 
The little plaintiff or defendant, who was promised a new rocking-horse when Jarndyce and Jarndyce should be settled, has grown up, possessed himself of a real horse, and trotted away into the other world. 
Fair wards of court have faded into mothers and grandmothers; a long procession of Chancellors has come in and gone out; the legion of bills in the suit have been transformed into mere bills of mortality; there are not three Jarndyces left upon the earth perhaps, since old Tom Jarndyce in despair blew his brains out at a coffee-house in Chancery Lane..."