DOL Shares ESG, Crypto, Cybersecurity, Fiduciary Status and More

Speaking July 26 at the 2022 NAPA DC Fly-In Forum, the Acting Assistant Secretary of the DOL Benefits Security Administration outlined the department’s top priorities, including finalizing the ESG Rule, a fiduciary rule update, crypto and cybersecurity.

Ali Khawar, who has served as acting assistant secretary since the start of the Biden administration, told attendees that finalizing the ESG rule is a high priority and that they can expect it in the “not-so-future.” too distant” – while not being precise about the actual moment.

Khawar explained that environmental, social and governance (ESG) factors have been a priority since the start of the Biden administration, following feedback from a wide range of stakeholders that the previous administration’s rule had a “counterproductive and crippling” effect – an effect that some had gone so far as to say caused plan trustees to make “sub-optimal decisions”.

The Acting Assistant Secretary also explained that the DOL had received strong feedback in response to the department’s proposed new rule, which was released in October 2021 following the implementation of a non-enforcement policy regarding the Trump administration’s ESG rule earlier in the year. An example of the type of feedback they received – even from stakeholders who support the proposal – concerned the tie breaker provision, where feedback ran the gamut from support for the DOL’s approach, to opposition to the approach they took, to quite recommend a different approach. It took time to sort through to come to a consensus that made sense, Khawar noted.

Khawar also explained that the DOL issued a request for information (RFI) on climate change and other ESG concerns in response to the executive order, but much of the feedback they received was simply to “do” the ESG proposal.

Fiduciary advice

Although Khawar did not directly address the issue in his remarks – noting that he fully expected to get some in the Q&A portion of the session regarding the application of Prohibited Transaction Exemption 2020-02, especially with respect to those who may work outside of its parameters. Noting that we are now in full implementation of 2020-02, Khawar explained that aside from rollovers, DOL’s application in this area is somewhat limited, as the system is still very fragmented.

“It continues to be a choice as to whether or not you’re going to be fiduciary for some companies, but not all, and many companies have chosen to comply and that’s a good thing. But one problem that we have squarely on our radar screen is that you have this kind of fragmented system right now where in some states you have the adoption of the NAIC model, maybe with some permutations, but in other states , there is no adoption. You have Reg BI and you have 2020-02,” he explained.

For the participant, Khawar believes, this is a big problem. “When you look at the market and when you look at people getting advice on their retirement assets, there is no uniform standard. And that’s not to say 2020-02 is bad, but from the participants’ perspective, it’s kind of a nonsensical part. »

Khawar also observed that from a firm standpoint, he is bothered that there is no level playing field as to why the system encourages one business model over another. When you look at Reg BI, PTE 2020-02 and PTE 84-24, they are not the same in terms of the amount of protections required and in terms of the rigor required in terms of compliance, Khawar explained, noting that it is the heart of the question they are asking themselves as they continue to work on this.

Crypto tips

Addressing the “elephant in the room” crypto, Khawar explained that the DOL addressed the issue of what it means to have a cryptocurrency available in the 401(k) context after learning of cases where it was aggressively marketed to plan fiduciaries.

This sparked a number of conversations in which the DOL took steps to understand the other side of the arguments of those in favor of including cryptocurrency in 401(k) plans, Khawar noted. , which culminated in the DOL. issue directives. This guidance came shortly after President Biden issued a Executive Order Directing Federal Agencies to Determine How the United States Fits into the Global Digital Assets and Cryptocurrency Framework. Since a regulatory framework is not yet in place, Khawar explained, the DOL felt it was important to approach the issue from a consumer protection perspective.

cyber security

Khawar stressed that cybersecurity is a priority for the DOL, explaining that it is a systemic risk to the pension system, which is based on the fundamental principle of trust, he noted. And because the voluntary defined-contribution system is an attractive target given the amount of assets under management and foreign adversaries looking to harm the United States, the nation could be one threat away from being a significant problem.

“If you think about what a really big cybersecurity breach would do, it has the potential to be cataclysmic, and all the work that we do through tax grants, educating participants, working with employers , will disappear because people will say , ‘I don’t want to do this anymore; I saw what happened.

As such, Khawar encouraged participants to consider orientation issued by the DOL and to ensure that they make every effort to protect the pension system and participant data as much as possible. He also noted that the DOL has asked the ERISA Advisory Board to review the matter, in the hope that the Board will come up with recommendations that can help form the basis of additional guidance for plan sponsors and others. stakeholders.

Proposed Amendment to QPAM

Khawar also pointed to a proposed amendment to the 84-14 Class Prohibited Transaction Exemption, also known as the Qualified Professional Asset Manager (QPAM) Exemption, which the DOL published early in the day.

Khawar noted that much of the proposal seeks to clarify whether foreign criminal convictions are disqualifying for QPAM purposes. He explained that the proposal reverses an earlier decision by the Trump administration and clarifies that foreign convictions would prevent companies from using QPAM.

“Going back to the concept of entities operating with a high level of integrity, the goal was really to get back to basics and make sure these entities hold themselves to the standards that they hold themselves to, so that we can be assured that how the market uses these entities is consistent with how these entities actually operate,” Khawar told attendees.

VFCP

The DOL is well advanced in finalizing a proposal to modernize the Voluntary Fiduciary Correction Program (VFCP) to make it more useful, Khawar revealed, noting that the DOL hopes to submit the proposal soon to the Office of Management and budget and that there will be an opportunity to comment on it.