Fiduciary issues

Washington Pulse: Finally Final: Court’s Mandate Terminates DOL Fiduciary Guidance

The U.S. Fifth Circuit Court of Appeals has finally made it official: the 2016 Department of Labor (DOL) fiduciary investment advice final regulations and accompanying guidance are repealed. On June 21, 2018, the Fifth Circuit issued the formal mandate that implements its March 2018 ruling “vacating” (i.e., making null and void) this much-contested guidance, whose purpose was to provide retirement savers with greater protection from conflicted and potentially exploitive investment advice. Attempts during the March-to-June interval to appeal the Fifth Circuit’s ruling and save the fiduciary guidance ultimately proved unsuccessful.

It is not completely clear what this outcome will mean for investment advisors and advisory firms in their future relationships with retirement savers. DOL regulations dating back to 1975—intended for replacement by the now-repealed 2016 guidance—may once again provide the standard that determines fiduciary status. 1996 and 2005 DOL sub-regulatory guidance may also shed additional light. It is hoped that the DOL will release formal guidance soon in order to provide greater clarity regarding future investment fiduciary standards.

How the DOL Investment Fiduciary Guidance Was Defeated

Several earlier District Court challenges to the fiduciary guidance ended with multiple lower courts all upholding it. One of these was a Texas District Court decision, which was appealed to the Fifth Circuit Court of Appeals. There the fiduciary guidance suffered its first defeat. Perhaps more important, the Fifth Circuit’s March ruling had sufficient authority to vacate “in toto” the final regulations and several accompanying prohibited transaction exemption (PTE) components. All were eliminated, in all legal jurisdictions nationwide. The Fifth Circuit judge writing for the majority rebuked the DOL for over-stepping its authority in issuing the 2016 guidance.

The Fifth Circuit’s decision was not unanimous. The three-judge Fifth Circuit panel (the full Fifth Circuit Court of Appeals has nine members) that rendered the decision was split 2-1. Had this ruling occurred during the Obama administration, with the same DOL leadership that had issued the guidance, the loss would in all probability have been appealed. With the Trump administration and its new DOL leadership committed to revising or withdrawing the guidance, the Fifth Circuit’s ruling was welcomed by the DOL, rather than challenged. Others—including the states of California, Oregon, and New York, in concert with the American Association of Retired Persons (AARP)—sought standing to appeal, but were denied. The ultimate deadline of June 13, 2018, for a DOL appeal to the Supreme Court passed as expected, and eight days later came the Fifth Circuit mandate that sealed the fiduciary guidance’s fate.

What Happens Next?

Over the slightly more than two years since the DOL investment fiduciary final regulations and exemptions were issued in April 2016, many financial organizations and investment advisors have made changes to their business models, compensation practices, and investment lineups to comply with new rules. Some even acknowledged fiduciary status as part of the new compliance regime. Will these changes be modified or reversed?  Can a firm or advisor disclaim a fiduciary role after having embraced it?  Does any DOL guidance issued from 2016 to the present have continued purpose or bearing on investment advising relationships?

Other DOL Investment Fiduciary Guidance; More is Needed 

Financial organizations, investment advisors, and service providers who serve them are wondering what past guidance can—or should—be relied on now that the 2016 final regulations and accompanying PTEs have become invalid. Possibilities include the following.

  • The DOL 1975 regulations specified a five-part test to determine if investment advice is fiduciary in nature, but generally apply only to advising that is associated with employer-sponsored retirement plans, not IRAs.
  • Interpretive Bulletin (IB) 96-1 clarified what constitutes investment information versus investment advice. IB 96-1 describes safe harbors to help employers guard against unintentionally providing information that could be construed as investment advice.
  • DOL Advisory Opinion 2005-23A addressed limited circumstances in which a person who is already a fiduciary to an employer-sponsored retirement plan could become an investment fiduciary when plan assets are rolled over from the plan to an IRA. According to this 2005 guidance, an individual who is not already a plan fiduciary may provide IRA rollover advice without becoming an investment fiduciary.
  • DOL Field Assistance Bulletin (FAB) 2018-02 was written after the Fifth Circuit’s March ruling vacating the final investment fiduciary regulations and exemptions. Anticipating this guidance to be eliminated, FAB 2018-02 provided for a transition period during which relaxed impartial conduct standards are to apply, accompanied by lenient enforcement. The impartial conduct standards require that those who provide investment advice for a fee
  • make no misleading statements,
  • receive only reasonable compensation, and
  • act in a client’s best interest.

FAB 2018-02 states that these standards are to apply “until after regulations or exemptions or other administrative guidance has been issued.”

The DOL has remained silent following the Fifth Circuit’s June 21, 2018, mandate officially invalidating the investment fiduciary guidance. Within the investment advisory and retirement industries it is widely hoped that the DOL will soon release more definitive guidance, providing greater clarity and assurance regarding the agency’s investment fiduciary standards and compliance expectations.

Proposed SEC Fiduciary Guidance

As the fate of the DOL investment fiduciary guidance was being determined in the judicial system, the Securities and Exchange Commission (SEC) in April issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. The agency did so eight years after the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the agency a directive to consider issuing standards of conduct for investment recommendations.

The proposed rules generally do not apply to banks or credit unions unless they are (or own) a broker-dealer or a registered investment advisor. The rules do appear to cover individual plan participants receiving direct investment recommendations, but exclude employer plans per se as a business exception. The guidance is also believed to cover investors in individual tax-advantaged accounts, such as IRAs, health savings accounts, and education savings accounts, but only for securities investments, which greatly limits the reach of this SEC guidance. The proposed SEC package contains three items.

  1. A “Regulation Best Interest” for broker-dealers
  2. A rule requiring disclosure of the nature of the advising relationship (fiduciary or not), and restraints on use of the term “advisor”
  3. Clarifications on fiduciary standards applicable to investment advisors

Although the full impact of the SEC proposed guidance is undetermined at this time, the SEC has indicated that the final guidance will generally include advice given to retirement savers who are invested in securities and are receiving investment advice from broker-dealers or registered investment advisors. The SEC is accepting public comments for a 90-day period, which began on May 9, 2018.

Still unknown at this time is the extent to which there will be coordination—and hopefully commonality—between the SEC and DOL guidance that will ultimately govern investment advising relationships.

NOTE: See SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance, for more information on the proposed SEC guidance or visit www.ascensus.com for the latest developments.


Appeals Court Issues Mandate Repealing DOL Fiduciary Investment Advice Guidance

The U.S. Fifth Circuit Court of Appeals has released its official mandate document vacating (repealing) the Department of Labor’s (DOL’s) 2016 fiduciary investment advice final regulations and accompanying prohibited transaction exemptions. This action officially seals the repeal of this guidance, which has been the subject of intense debate and opposition for the last several years. Multiple attempts had been made by the DOL during the Obama administration to arrive at guidance that would provide greater protection for retirement investors, while considering the challenges faced by the investment advising industry.

The Fifth Circuit Court’s mandate has been expected since the deadline for a possible appeal passed earlier this month. The original Fifth Circuit Court ruling striking down the DOL fiduciary guidance was issued in March. When the DOL failed to appeal the Court’s decision and attempt to save the guidance, several states joined the American Association of Retired Persons (AARP) in seeking standing to appeal, but were denied.

Multiple delays in full implementation and enforcement of the 2016 fiduciary guidance had followed the transition from the Obama administration-led DOL to the present administration and its DOL leadership, which advocated the guidance’s reexamination or rollback. A temporary relaxed enforcement policy was announced in May, to be in effect until full implementation and enforcement, which officially were scheduled for July 1, 2019. Some industry watchers, however, doubted that the 2016 fiduciary guidance was likely to take full effect in its current form.

No statement on today’s Fifth Circuit Court mandate vacating the guidance has yet been issued by the DOL.


Three States Denied in Their Appeal Seeking to Intervene in Fiduciary Litigation

One week after filing an appeal in an attempt to save the DOL’s ill-fated investment fiduciary guidance (the Department of Labor conflict-of-interest regulations), the states of California, New York, and Oregon are denied that opportunity by the U.S. Fifth Circuit Court of Appeals. This Court had ruled in March 2018 that the Department of Labor’s (DOL’s) fiduciary investment advice guidance for retirement savers went beyond the agency’s authority, and vacated—essentially nullified in its entirety—the DOL’s final regulations and related exemptions. When the DOL failed to appeal this ruling, these states and the American Association of Retired Persons (AARP) filed a motion on April 26 seeking the right to intervene in support of the DOL fiduciary guidance, on the grounds that investors and the states would be harmed by the Appeals Court’s action vacating the guidance.

On May 2, this request by the states and AARP to intervene was denied by the Fifth Circuit Court. Two weeks later, on May 16, the state Attorneys General of California, New York and Oregon (this time absent the participation of AARP) filed an appeal. The states hoped their arguments in support of maintaining the DOL fiduciary guidance would be heard by the full 17-member panel of Fifth Circuit Appeals Court judges, rather than the three-judge panel that had vacated the guidance in March. Instead, the same three-judge panel has now denied both of the state attempts to intervene.

There appear to be no more options for the states in pursuit of maintaining the DOL investment fiduciary guidance, although the Fifth Circuit has yet to issue its official mandate implementing the March 15 decision that would vacate the guidance nationwide. It appears that the only known litigation step that could now be taken would be for the DOL itself to appeal to the U.S. Supreme Court. Given the DOL’s decision not to appeal at the Circuit Court level, most feel there is no reason to believe the agency will do so.

Unwilling to concede defeat, however, on May 17 a group of five Senate Democrats—Patti Murray (WA), Ron Wyden (OR), Elizabeth Warren (MA), Sherrod Brown (OH) and Cory Booker (NJ)—sent a letter to Secretary of Labor Alexander Acosta asking the Secretary and his agency to pursue an appeal to the U.S. Supreme Court. They pointed out that before the Fifth Circuit Court’s March 15 ruling nullifying the DOL investment fiduciary guidance, four other court challenges to the fiduciary guidance had been attempted and all had failed. Only one court—the Fifth Circuit—found that the DOL had exceeded its rulemaking authority in issuing its investment fiduciary guidance.

The senators also cited the statement by Secretary Acosta in 2017 that there was “no principled legal basis” to delay implementing the investment fiduciary guidance. The senators pointedly asked the Secretary to tell them how his agency proposes to protect the interests of retirement savers, absent the DOL’s fiduciary guidance. They have requested a response by June 1.

 


Attorneys General Appeal for Right to Intervene in Support of DOL Fiduciary Guidance

The states’ Attorneys General of California, New York, and Oregon yesterday (May 16) filed an appeal of their recent setback in litigation over the Department of Labor (DOL) fiduciary investment advice guidance. The U.S. Fifth Circuit Court of Appeals ruled in March 2018 that the DOL’s fiduciary guidance had gone beyond the agency’s authority and vacated—essentially nullified—the DOL’s final regulations and related exemptions in their entirety.

Background and New Filing

When the DOL failed to appeal this ruling, these three states and the American Association of Retired Persons (AARP) filed a motion on April 26 seeking the right to intervene in support of the DOL fiduciary guidance on the grounds that investors and the states would be harmed by the Appeals Court’s action vacating it. On May 2, this joint request for the right to intervene in support of the guidance was denied by the Fifth Circuit Court.

Yesterday (May 16, 2018) was the deadline for an appeal of this denial, and as noted earlier, the three Attorneys General did file another appeal yesterday asking the Fifth Circuit Court of Appeals to reconsider its May 2 decision. This appeal, however, does not include the AARP.

Possible Consideration by Full 15-Member Appeals Court

The March ruling that vacated the DOL fiduciary guidance was rendered by a three-judge panel, rather than the full membership of judges (15) on the Fifth Circuit Appeals Court. The states would ultimately prefer to make their case for retaining the DOL fiduciary guidance before the entire 15-member Appeals Court. The Attorneys General wrote in their filing, “If the panel declines to reconsider its order denying intervention, the States ask that the Court direct the Clerk to permit the filing of a petition seeking review of that order by the full Court.”

What Next?

If this attempt by the states to intervene on behalf of the fiduciary guidance fails, it appears that the only step that could be taken to preserve the fiduciary guidance would be for the DOL itself to appeal to the U.S. Supreme Court.  Given the DOL’s decision not to appeal at the Circuit Court level, there is no reason to believe it would do so.


SEC Investment Advice Proposed Guidance in Federal Register; 90-Day Comment Period Begins

More than two weeks after releasing them to the public, the Securities and Exchange Commission (SEC) today (May 9) published in the Federal Register its proposed regulations intended to govern relationships between investment professionals and the investors they serve. Also published is a proposed disclosure to be used by broker-dealers and registered investment advisers (RIAs) in defining the scope of their relationships with clients, and a standard-of-conduct for RIAs.

This SEC guidance is seen by many as an alternative to the Department of Labor (DOL) investment fiduciary regulations and prohibited transaction exemption guidance package, which was recently vacated (nullified) by a U.S. appeals court. (The DOL provided interim guidance this week advising standards of conduct until further notice is provided by the DOL.) Opponents of the DOL’s fiduciary investment advice guidance had long argued that it is more properly the province of SEC to regulate investment advising relationships, including advice given to retirement savers.

Under the proposed SEC regulations, broker dealers would be required to put investors’ interests before their own. In addition, the proposal clarifies the SEC’s views on the fiduciary duties and standards that investment advisers owe their clients. The regulations also aim to clarify investor confusion about their relationships with investment professionals, and propose to restrict some broker-dealers and their associated financial professionals from using the term “adviser” or “advisor” as part of their name.

Public comments will be accepted for a 90-day period beginning with today’s publishing. See the Ascensus Washington Pulse for analysis of the SEC guidance.


Temporary Enforcement Policy Applies After Court Invalidates DOL Fiduciary Guidance

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued Field Assistance Bulletin (FAB) 2018-02, which outlines a temporary enforcement policy that follows the agency’s investment fiduciary final regulations and exemptions package being vacated by the U.S. Fifth Circuit Court of Appeals.

Fifth Circuit Court Action

In March of 2018 the Fifth Circuit Court ruled that the DOL’s fiduciary guidance had exceeded the agency’s authority under the Employee Retirement Income Security Act (ERISA). The Court’s ruling to vacate the regulations and exemptions essentially nullified the guidance in its entirety, nationwide.

When it appeared the DOL would not appeal the ruling by an April 30 deadline, the American Association of Retired Persons (AARP) and the attorneys general of California, New York, and Oregon attempted to intervene and appeal on behalf of those they believed might be harmed by loss of the DOL guidance. They were denied that option by the Fifth Circuit Court. The DOL still has the right to appeal the decision to the U.S Supreme Court, but it is unlikely that FAB 2018-02 would have been issued had that course of action been planned.

DOL Status Before Fifth Circuit Court Action

Before the Fifth Circuit Court vacated the guidance, those who provide investment advisory services to retirement investors had been under relaxed standards for complying with the DOL fiduciary advice rules. Those standards were to be in effect for the period June 9, 2017, through July 1, 2019. During that period, firms and representatives were to observe what are known as “impartial conduct standards,” which required the following.

  • Receive only reasonable compensation
  • Make no misleading statements
  • Act in the best interest of the retirement investor

FAB 2018-02

The temporary enforcement policy now outlined in FAB 2018-02 essentially continues the application of the above standards until further notice, and applies to all elements of the DOL’s fiduciary guidance. This includes the DOL final regulations, the Best Interest Contract (BIC) exemption, and several other related prohibited transaction exemptions (PTEs).

As stated in FAB 2018-02, “…for the period from June 9, 2017, until after regulations or exemptions or other administrative guidance has been issued, the Department will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted…” by the DOL guidance that was vacated by the Fifth Circuit Court.

The Treasury Department and the IRS have also confirmed that no action will be taken to assess civil penalties for prohibited transactions for fiduciary investment advice covered by the DOL relief in FAB 2018-02.

FAB 2018-02 further states that investment advice fiduciaries may choose to rely on other, prior prohibited transaction exemptions that have been issued by the DOL for fiduciary investment advice they provide, but this is not considered necessary if the advisor or advisory firm meets the conditions of the impartial conduct standards.


AARP and 3 States Are Denied Opportunity to Defend DOL Fiduciary Guidance

In a ruling handed down yesterday, May 2, the U.S. Fifth Circuit Court of Appeals denied motions by the American Association of Retired Persons (AARP) and the attorneys-general of California, New York, and Oregon that they be allowed to intervene in Department of Labor (DOL) fiduciary guidance litigation. In mid-March, the Fifth Circuit Court vacated in its entirety the DOL’s 2016 fiduciary advice regulations and exemptions package, ruling that the DOL had exceeded its authority under ERISA. Defendants—the Department of Labor—had until Monday April 30 to appeal the ruling.

Because the DOL had given no indication of its intent to appeal—given a very much changed DOL position under the current administration—AARP and the states’ attorneys general requested that the Court allow them to intervene, essentially seeking to appeal in the DOL’s stead. The motions filed by AARP and the states also requested an “en banc” rehearing of the case, which would have included all of the Fifth Circuit Appeals Court judges, not just the three that ruled in March to vacate the DOL guidance.

The effective date for the Fifth Circuit Court’s vacating of the DOL fiduciary guidance, which is currently in a relaxed and simplified compliance status, is expected to be on or about May 7. The DOL technically still has the ability to appeal to the U.S. Supreme Court. However, that is considered highly unlikely, given the DOL having foregone the opportunity to appeal at the Fifth Circuit level.


Washington Pulse: SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance

Eight years after receiving a directive from Congress to consider standards of conduct for investment recommendations, the Securities and Exchange Commission (SEC) has issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. Unlike the DOL fiduciary regulations, the guidance applies only to securities; not to traditional bank, credit union, and insurance investment products. Many had hoped for a uniform standard for brokers and registered investment advisors (RIAs), however this guidance does not take that approach.

 

Who will regulate investment advising behavior?

This SEC guidance comes at a time of uncertainty for oversight of investment advising relationships. After the U.S. Department of Labor (DOL) issued final regulations on fiduciary investment advice for retirement savers, a court case recently resulted in a finding that the DOL exceeded its authority. Unless the DOL or another party successfully appeals, the DOL’s guidance will be nullified. This would leave the SEC regulations—if finalized—as the standard for broker-dealers who make investment recommendations.

 

What is in the guidance package?

The SEC has issued two proposed regulations and a proposed interpretation.

 

SEC Best Interest Standard ≠ DOL Best Interest Contract

The SEC’s proposed “regulation best interest” is not the same as the legally-enforceable “best interest contract” (BIC) in the DOL fiduciary investment advice regulations. Instead, the SEC’s best interest standard would be enforceable under its current arbitration framework. To satisfy the proposed SEC guidance, a broker-dealer must “act in the best interest of the retail customer” when a recommendation is made, and not put his own financial or other interest ahead of the customer. Broker-dealers can accomplish this by meeting the following conditions.

 

Disclosure Obligation

  • Disclose the nature of the broker-dealer/client relationship (which for brokers is not a fiduciary relationship, as it is for RIAs), and any material conflicts-of-interest—including financial incentives that might cause a broker-dealer to put his interests ahead of the customer’s.

 

Care Obligation

Exercising reasonable diligence, care, skill and prudence to:

-Understand the investment product recommended to a customer
-Determine that this recommendation could be in the interest of some customer
-Determine that a recommendation is in a particular customer’s best interest based on her investment profile
-Determine that a proposed series of transactions is also in that customer’s best interest based on her investment profile

 

Conflict of Interest: Disclosure, Mitigation, and Elimination

Establish, maintain, and enforce written policies and procedures to identify material conflicts-of-interest due to financial incentives tied to investments and either disclose and mitigate such conflicts, or eliminate them.

 

Contents of the Customer Relationship Summary

While the SEC guidance is primarily directed to broker-dealers and the securities recommendations they make, a new disclosure requirement applies to both broker-dealers and RIAs. These regulations would require both to make clear their roles in a brief “customer relationship summary” (CRS) form that includes

  • an introduction highlighting the types of investment services and accounts offered to retail investors
  • a description of the relationships and services a firm offers to retail investors, including the legal standards of conduct to be expected (e.g., RIAs are fiduciaries, broker dealers are not)
  • a description of the fees and costs a retail investor would pay the firm
  • a comparison of brokerage and RIA services (for firms that are one or the other, but not both)
  • a description of the conflicts-of-interest that may exist, including compensation that differs based on investments chosen.
  • how a customer can get additional information, including legal and disciplinary actions involving the firm or representative.
  • key questions a retail investor may want to ask for greater detail about services, specific fees, etc.

In general, the SEC advises representatives to be direct and clear about their status as a broker-dealer or RIA—or dual status—and to refrain from using language or terms formally or informally that may mislead a customer. Form CRS must be filed electronically with the SEC.

 

Fiduciary standard clarifications

While the fiduciary standard is not new for registered investment advisors, the SEC has never before formally included “best interest” obligations as part of their interpretation of the fiduciary obligations for RIAs. They define the prongs of the fiduciary standard of conduct to include:

  • Duty of Care
    • Duty to provide advice that is in the client’s best interest
    • Duty to seek best execution
    • Duty to provide services and to provide advice and monitoring over the course of the relationship
  • Duty of Loyalty
    • Duty to put its client’s interests first and not favor one client over another
    • Duty to make full and fair disclosure of all material facts relating to its relationship with its client
    • Duty to seek to avoid conflicts of interest and, at a minimum, disclose all material conflicts

 


Who is covered by the SEC guidance?

Unlike the DOL’s fiduciary investment advice regulations, the SEC broadens the pool of investors captured by its new investor protection rules. The SEC’s proposed regulations are not specific to retirement savers but instead cover the general retail investor.

The SEC guidance, however, also narrows the pool of investment recommendation providers covered by the guidance as its new rules only apply to broker-dealers and registered investment advisors. The guidance does not generally apply to personnel of banking or insurance organizations.

 

Which activities fall under the SEC guidance?

The three components address activities with respect to securities investments, such as stocks, bonds, and mutual funds, for retail clients. This includes the purchase, sale, or holding of such investments. By comparison, the DOL fiduciary rules apply to a broader class of investments than just securities. The DOL rule includes investments in certificates of deposit and certain insurance products that are not governed by the SEC framework.

While the SEC guidance is somewhat ambiguous, it appears to cover retirement plan participants receiving direct investment recommendations but exclude employer plans as a business exception. The guidance also appears to cover investors in individual tax-advantaged accounts such as IRAs, health savings accounts, and education savings accounts.

Clarifications on these and certain other issues are being sought.

 

More to come

The SEC requests comments from the public on this guidance, during a 90-day period. Based on public comments made by SEC commissioners, these SEC proposed regulations and disclosure guidelines could be just the first elements of more comprehensive guidance from the agency on investment advising relationships.  If true, more guidance may be forthcoming. Visit ascensus.com and subscribe to our Industry and Regulatory news feed for the latest developments.

 

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AARP and Attorney Generals to Challenge 5th Circuit Decision to Vacate Fiduciary Rule

As detailed in several filings today, April 26, 2018, with the 5th Circuit Court of Appeals, the AARP and attorneys general from Oregon, California, and New York have requested that they be allowed to intervene in the DOL’s fiduciary rule case. In mid-March, the 5th Circuit vacated in its entirety the DOL’s fiduciary rule, stating that the DOL had exceeded its authority under ERISA. Defendants were given until Monday, April 30, to appeal the ruling.

Because the DOL has given no sign that they intend to appeal, AARP and the attorneys general have requested that the court allow them to intervene. The motions filed by AARP and the states also request an “en banc” rehearing of the case should their requests to intervene be approved by the court. This “en banc” rehearing would involve review by the full panel of 5th Circuit judges, whereas the March ruling vacating the fiduciary rule was decided by a three judge panel.

Perhaps further complicating an already complex issue, the Securities and Exchange Commission (SEC) released their own proposed “best interest” regulations and disclosure requirements earlier this week, targeted mainly at broker-dealers. Should the DOL’s rule be upheld on appeal and the SEC’s proposed regulations put in place, the potential exists to have two unique sets of rules, greatly complicating compliance.


DOL Bulletin Clarifies Prior Guidance Regarding Fiduciary Standards for ETIs and Shareholder Rights

The Employee Benefits Security Administration (EBSA) arm of the Department of Labor (DOL) has released Field Assistance Bulletin 2018-01 (FAB 2018-01), which clarifies earlier interpretations set forth in Interpretive Bulletins 2015-01 and 2016-01. Interpretive Bulletin 2015-01 addresses fiduciary standards as they relate to so-called economically targeted investments (ETIs) (investments selected based on nonfinancial factors, such as environmental, social, or corporate governance policy goals). Interpretive Bulletin 2016-01 addresses the exercise of shareholder rights under qualified plans.

FAB 2018-01 states that ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits, specifically in cases where nonfinancial factors could potentially influence investment selection. “Fiduciaries,” FAB 2018-01 cautions, “must not too readily treat [these] factors as economically relevant [and should] be focused on financial factors that have a material effect on the return and risk of an investment.” However, as stated in Interpretive Bulletin 2015-01, these nonfinancial factors may be considered as “tie-breakers” when competing investments serve the plan’s economic interest equally well, and may be considered more than tie-breakers if they present material business risks or opportunities that are properly treated as economic considerations themselves.

FAB 2018-01 further clarifies that investment policy statements are permitted, but are not required, to contain policies concerning the use of these nonfinancial factors to evaluate investments, and that the selection of a Qualified Default Investment Alternative (QDIA) based on these factors could raise questions about the fiduciary’s compliance with ERISA’s duty of loyalty. “Nothing in the QDIA regulations suggests that fiduciaries should choose QDIAs based on collateral public policy goals,” notes the FAB.

Lastly, the FAB addresses shareholder activities that may require expenditure of plan assets (e.g., proxy voting), clarifying that Interpretive Bulletin 2016-01 was not meant to imply that plan fiduciaries should routinely incur significant plan expenses to fund advocacy, press, or mailing campaigns on shareholder resolutions, call special shareholder meetings, or initiate or actively sponsor proxy fights on environmental or social issues.