On March 20, 2023, President Biden vetoed legislation that would have blocked the enactment of the U.S. Department of Labor (DOL) final rule released on Nov. 22, 2022. Commonly known as the ESG rule, it clarifies fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) for selecting investments and exercising shareholder rights such as proxy voting.
Background About the Bill
Congress passed a joint resolution to overturn the DOL rule, titled “Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” which came into effect on Jan. 30, 2023.
The Congressional Review Act allows Congress to overturn a final rule by a federal agency in the first 60 legislative days after the rule comes into effect. The bill to overturn the Final Rule passed largely along party lines, with Republicans supporting the bill and Democrats opposing it in the House 216-204, and Senator Joe Manchin (D-West Virginia) and Senator Jon Tester (D-Montana) joining Republicans to oppose the rule in the Senate. Republicans argued that the rule placed advancing a political agenda ahead of the goal of maximizing risk-return to ensure the retirement savings of American workers.
Overriding Biden’s veto requires two-third’s majority voted in the House and Senate, which is unlikely.
Bottom Line
In the face of political challenges, the DOL, including Assistant Secretary for Employee Benefits Security Lisa Gomez, has repeatedly stated that the Final Rule does not prescribe that ESG factors must be considered and has the intent of being neutral on ESG consideration and integration in ERISA plan investments. Moreover, the bedrock principles of the duties of prudence and loyalty to plan participants and beneficiaries remain unchanged.
The topic of ESG is increasingly politicized at the federal and state political levels, and legal challenges to the Final Rule remain, including a lawsuit from 25 Republican state attorneys general. Callan will continue to follow emerging guidance on the Final Rule on behalf of our clients.
Disclosures
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