Legislative and Judicial Actions

Art by Laila Ekboir

Climate-Related Financial Risk

The Department of Labor has issued a request for information seeking public comment on what actions, if any, it should take under federal law to protect employees’ retirement savings and pensions from risk associated with climate change.

The RFI, published by the DOL’s Employee Benefits Security Administration, follows President Joe Biden’s executive order on climate-related financial risk, which directs the department to identify actions it can take under the Employee Retirement Income Security Act, the Federal Employees’ Retirement System Act of 1986, and other relevant laws to safeguard the life savings and pensions of U.S. workers and families from the threats of such risk. Together, ERISA and FERSA provide oversight to more than $13 trillion in plan assets.

In October 2020, EBSA proposed a rule that would remove barriers to retirement plan fiduciaries’ ability to consider climate change and other environmental, social and governance factors when selecting investments and exercising shareholder rights.

EBSA says the RFI deals with a broader set of questions than does the proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” and is a different initiative. The RFI solicits general input on agency actions that can be taken under ERISA, FERSA and other pertinent laws and poses specific questions related to data collection and fiduciary issues under ERISA and FERSA’s Federal Thrift Savings Plan, as well as to other miscellaneous topics.

The RFI’s comment period runs for 90 days, starting from its publication in the Federal Register on February 14, and includes instructions on how to submit comments.

New Cybersecurity Rules Possible

The Securities and Exchange Commission voted in early February in favor of proposing new rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 related to the cybersecurity policies of registered investment advisers and fund companies.

Under the proposal, which is detailed in regulatory text stretching to nearly 250 pages, RIAs and fund companies will need to adopt and implement written cybersecurity policies and procedures “reasonably designed to address cybersecurity risks.”

The commission also proposed a new rule and form under the Advisers Act to require advisers to report “significant cybersecurity incidents” affecting the adviser, or his fund or private fund clients, to the regulator. Additionally, the SEC proposed amendments to various forms regarding disclosures related to significant cybersecurity risks and incidents that could affect advisers, funds, their clients and shareholders. Further, the SEC proposed new recordkeeping requirements under the two acts related to cybersecurity.

The SEC’s annual priorities list advises that the agency’s enforcement division will “continue to evaluate whether regulated entities have established, maintained and enforced written cybersecurity policies and procedures as required.” The list indicates that areas of focus will include information technology governance, IT asset management, cyber-threat management/incident response, business continuity planning and third-party vendor management, including utilization of cloud services.

Demonstrating its resolve, last year the SEC announced a series of sanctions against eight RIA firms for failures in their cybersecurity policies and procedures that resulted in what the agency describes as “email account takeovers,” which exposed the personal information of thousands of customers and clients at each firm.

Warning Against Crypto Risks

On March 10, the Department of Labor published compliance assistance for 401(k) plan fiduciaries that are considering plan investments in cryptocurrencies. According to the DOL’s announcement, formally referred to as Compliance Assistance Release No. 2022-01, the goal of the compliance assistance is to protect the retirement savings of U.S. workers from extreme volatility and legal risks.

Published by the DOL’s Employee Benefits Security Administration, the compliance assistance cautions plan fiduciaries to exercise “extreme care” as they consider adding a cryptocurrency option to a 401(k) plan’s investment menu. As EBSA points out, the Employee Retirement Income Security Act requires plan fiduciaries to act solely in the financial interests of plan participants and adhere to the standards of professional care in considering investment options for them.

EBSA says cryptocurrencies are often promoted as innovative investments that offer investors unique potential for outsized profits. These investments, therefore, can all too easily attract inexpert plan participants with great expectations of high returns and little appreciation of the risks the investments pose to their plan account. The release emphasizes that cryptocurrencies are very different from typical retirement plan investments, and it can be extraordinarily difficult, even for expert investors, to evaluate these assets and separate the facts from the hype.

Other concerns cited by EBSA relate to custodial and recordkeeping considerations, which are extremely important in the ERISA fiduciary context. EBSA says cryptocurrencies are not held like traditional plan assets are, in trust or custodial accounts, or are they readily valued compared with other assets, or available to pay benefits and plan expenses. With some cryptocurrencies, EBSA warns, simply losing or forgetting a password can result in the loss of the asset forever, while other methods of holding cryptocurrencies can be vulnerable to hackers and theft.

According to EBSA, the rules and regulations governing the cryptocurrency markets may be evolving, and some market participants may be operating outside of existing regulatory frameworks or failing to comply with them. Fiduciaries that are considering whether to include a cryptocurrency investment option will have to cite in their analysis how regulatory requirements may apply to issuance, investments, trading or other activities and how those requirements might affect investment in the option by 401(k) plan participants.

To this end, EBSA cites a theoretical example wherein the sale of some cryptocurrencies could constitute the unlawful sale of securities in unregistered transactions. Plan fiduciaries must take care to avoid participating in unlawful transactions, exposing themselves to liability and plan participants to the risks of inadequate disclosures and the loss of investor protections guaranteed under securities laws.

DOL Amends Certain PTEs

The Department of Labor has announced a final notice of amendments to six class exemptions appearing in the prohibited transaction rules of the Employee Retirement Income Security Act and the Internal Revenue Code. The amendments, originally proposed in 2013, relate to the use of credit ratings as conditions in these class exemptions. Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the DOL to remove any references to, or requirements of reliance on, credit ratings from its class exemptions and to substitute standards of creditworthiness as the department determines appropriate.

According to the DOL, the reason for the Dodd-Frank provisions was Congress’ finding that, in the 2008 financial crisis, certain of the credit ratings had been inaccurate and “contributed significantly to the mismanagement of risks by financial institutions and investors. [This] in turn adversely impacted the health of the economy in the United States and around the world.” The DOL’s review of its class exemptions determined that PTEs 75-1 Parts III and IV, 80-83, 81-8, 95-60, 97-41 and 2006-16 include references to, or require reliance on, credit ratings.

Each class exemption had provided relief for a transaction involving a financial instrument, and, in each such exemption, the DOL had conditioned exemptive relief on the financial instrument, or its issuer, receiving a specified minimum credit rating.

For one example, PTE 2006-16 required foreign sovereign debt securities for foreign collateral used in securities lending transactions to be rated in one of the two highest categories of at least one nationally recognized standards reporting organization.The DOL’s proposed amendment replaces this requirement, in PTE 2006-16 Section V(f)(4), with one stating that the security be “subject to a minimal amount of credit risk and sufficiently liquid that such securities can be sold at or near their fair market value in the ordinary course of business within seven calendar days.”

The DOL says it is adopting the amendments as proposed, with minor changes to address comments received. It notes that a fiduciary may still consider credit risk when analyzing credit quality but only as one of the variety of pertinent factors.

The agency declined to define “minimal credit risk,” because, it says, “fiduciaries should be able to determine whether a security satisfies this standard based [on] its analysis of the issuer’s ability to repay its debt obligations.”

Climate-Related Disclosure Rules

On March 21, the Securities and Exchange Commission voted to propose key rule amendments that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K.

Examples of the information to be disclosed include the actual or likely material impact of climate-related risks on the registrant’s business, strategy and outlook. The registrant also must disclose its governance of climate-related risks and relevant risk management processes, along with its greenhouse gas emissions; for accelerated, and large accelerated, filers, certain greenhouse gas emissions would be subject to assurance.

The proposal has quickly generated both positive and negative feedback from stakeholders in the financial services and investment management marketplace.

‘Pension Tracker’ for Rescued Plans

Members of the House Education and Labor Committee unveiled that body’s new Multiemployer Pension Rescue Tracker—an updatable list of the plans receiving special financial assistance.

The American Rescue Plan Act of 2021 created the Special Financial Assistance Program, managed by the Pension Benefit Guaranty Corporation, to protect severely underfunded pension plans that are in danger of becoming insolvent. The ARPA allows such plans to receive a lump sum of money to make benefit payments to participants through 2051.

The tracker spotlights the number of participants who receive benefits from defined benefit plans that have been protected—10,338 participants in pension plans covering 181 businesses so far. “The committee’s Multiemployer Pension Rescue Tracker will help illustrate the impact of this transformative solution,” says Representative Robert Scott, D-Virginia, chair of the House Education and Labor Committee.

Before passage of the American Rescue Plan Act, the PBGC multiemployer program was projected to become insolvent in fiscal year 2026. The agency has said, thanks to the act, the program will now likely remain solvent for more than 30 years.

SCOTUS Refuses CalSavers Lawsuit

The U.S. Supreme Court has declined to accept an appeal of a lawsuit involving the CalSavers Retirement Savings Program. The court’s refusal stops an advocacy organization’s effort to halt the program, which provides workplace retirement savings for private-sector workers whose employers offer no retirement plan.

Launched in July 2019, CalSavers is available to self-employed individuals and to California workers with no employer plan. Under the program, savers contribute to an individual retirement account that belongs to them, with payroll deferrals being facilitated by their employer.

The move by the Supreme Court comes after the 9th U.S. Circuit Court of Appeals affirmed a lower court’s dismissal of claims by a group that sought to block the program’s implementation. The lawsuit, filed by the Howard Jarvis Taxpayers Association, aimed to block CalSavers on the grounds that the federal Employee Retirement Income Security Act pre-empts it, thereby invalidating the program.