DOL Proposes New ESG & Proxy Voting Rule

By: George Michael Gerstein and Wesley Davis

Plan sponsors and financial services firms that act as fiduciaries to ERISA plans and “plan asset” funds should take note of a new rule proposal that the U.S. Department of Labor (DOL) announced today. The proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” would address ERISA fiduciaries’ duties with regard to considering climate change and other environmental, social and governance (ESG) factors when selecting investments and exercising shareholder rights.

This rule, if adopted, would have significant implications for financial services firms that act as ERISA fiduciaries. The comment period will run for 60 days after the rule’s publication in the Federal Register. We will be preparing a detailed analysis in the coming days.

 

SEC To Consider Proxy Vote Reporting Amendments

The SEC has scheduled an open meeting for 10 am on Wednesday, September 29, at which the agenda will consist of the following:

Wednesday, September 29, 2021

ITEM 1: Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers

OFFICE: Division of Investment Management

STAFF: Sarah ten Siethoff, Brian M. Johnson, Angela Mokodean, Nathan Schuur

The Commission will consider whether to propose form amendments to enhance the information certain registered investment companies report about their proxy votes. The Commission will also consider proposing a new rule and form amendments to require institutional investment managers subject to section 13(f) of the Securities Exchange Act of 1934 to report proxy votes relating to executive compensation matters, as required by section 14A of the Exchange Act.

For further information, please contact Brian M. Johnson and Angela Mokodean, Division of Investment Management, at (202) 551-6792.

Biden Proposal Hints at ‘Nudge’ Toward ESG Retirement Investing

Join Aliza Dominey and NextGen D.C. for a Webinar: Trading, Technology, Policy and Markets

What lies ahead for trading and technology in the equity markets? Which skills are keys to success in public policy development, securities regulation and advocacy in the financial services industry?

Gain insights as Hope Jarkowski, Head of Equities at the New York Stock Exchange (NYSE), reviews the state of tech and reflects on her experiences in the markets and in government. Jarkowski will also offer advice for the next generation of women finance professionals.

This hybrid virtual/in-person event will celebrate the launch of 100 Women in Finance NextGen Washington, D.C., a peer network of 100WF members in the first decade of their finance careers.

The virtual event is open to all 100WF members globally, who are welcome to invite an industry friend or colleague who would be interested in NextGen programming.

Following the program, local attendees are invited to speak with Jarkowski and extend their networks at an outdoor rooftop event. Meet members of the 100WF NextGen D.C. Committee and hear their vision for the group’s future, including how you and other interested volunteers can join the committee.

Please RSVP (required) promptly as space is limited and email any questions to nextgendc@100women.org.

When: Wednesday , July 14, 2021 at 4:00 PM ET

Speakers:

Amanda Pullinger, Chief Executive Officer, 100 Women in Finance
Hope Jarkowski, Head of Equities, New York Stock Exchange
Aliza S. DomineyModerator, Attorney, Stradley Ronon
Melissa Tuarez HerrModerator, Attorney, K&L Gates LLP

Register for the In-person event here

Register for the Virtual event here

Greetings from Texas USA. Retro postcard with patriotic stars and stripes

Texas and Maine Approaches to Fossil Fuel Divestment a Cautionary Tale for Investment Managers

State and local governmental plans, which are excluded from ERISA, are subject to idiosyncratic legal requirements, including specific investment restrictions. These plans are also not immune to the political winds blowing in that state. Nowhere is this more apparent than recent developments out of the States of Texas and Maine with respect to fossil fuel divestment. Investment managers of any governmental plan, especially those that take environmental, social and governance (ESG) factors into account, should pay close attention to these developments. Private equity and other fund managers, for the reasons stated below, should also take note.

Texas
On June 14, 2021, Texas Governor Greg Abbott signed into law SB 13. This new law, which goes into effect on September 1, 2021, generally prohibits state governmental entities, including the Employees Retirement System of Texas and the Teacher Retirement System of Texas, from directly or indirectly holding the securities of a publicly-traded financial services, banking or investment company that “boycotts” companies that (i) explore, produce, utilize, transport, sell or manufacture fossil fuel-based energy and (ii) do not “commit or pledge to meet environmental standards beyond applicable federal and state law….” The concept of “boycott” is not limited to divestment; rather, it picks up activity that is designed to inflict economic harm on the energy company. The exercise of certain shareholder rights could possibly amount to a “boycott” of a company.

The law also generally prohibits governmental entities from contracting with a service provider unless the contract provides a written verification from the service provider that it does not boycott energy companies and will not boycott energy companies during the term of the contract. This applies to contracts entered into on or after September 1, 2021.

Fiduciaries of these Texas governmental plans remain subject to countervailing fiduciary duties under Texas law, including the Texas Constitution. The new law crucially allows for breathing space between these core fiduciary duties and the state’s interest in protecting significant portions of its economy.

The law provides that these governmental entities are not required to divest from any holdings in “actively or passively managed investment funds or private equity funds.” However, the governmental entities are required to submit letters to the managers of these funds requesting that they remove from the portfolio financial companies that the state comptroller has designated as boycotting energy companies. The Texas governmental entities will alternatively request that the managers “create a similar actively or passively managed fund with indirect holdings devoid of listed financial companies.” Investment managers should be on the lookout for these letters starting this coming Fall.

Maine
Meanwhile, in Maine, the House of Representatives recently passed a bill that calls for the divestment of fossil fuel companies by the Maine Public Employees Retirement System (Maine PERS) and other permanent state funds by 2026. As with Texas, the law is sensitive to the overriding fiduciary duties that apply to the management of these assets. An official for Maine PERS recently testified that, “[p]ermanently striking broad portions of the financial market is incompatible with earning optimal returns for member retirements, will not change corporate behavior, and may not advance the social goals sought because investments are rarely one dimensional.”

Takeaways
Governmental plans invested in separate accounts or commingled funds managed by an investment manager have always posed risks to that manager, as these plans are subject to their own fiduciary duties and investment restrictions. Though the state laws applicable to governmental plans may contain ERISA-like language, we caution investment managers from relying on ERISA or DOL guidance as a failsafe way to manage governmental plan assets. As evidenced from the disparate approaches the States of Texas and Maine have taken, investment managers should pay close attention to the specific rules applicable to these plans to avoid running afoul of state law. With the calls for fossil fuel divestment growing louder in some quarters, and as other ESG issues come to the fore, careful due diligence on the part of investment managers is essential.

Please contact George Michael Gerstein to discuss these matters or other due diligence issues related to governmental plans.