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

Speaking July 26 at the 2022 NAPA D.C. Fly-In Forum, the Acting Assistant Secretary for the DOL’s Employee Benefits Security Administration outlined key priorities of the department, including finalizing the ESG rule, an update to the fiduciary rule, crypto and cybersecurity. 

Ali Khawar, who has been serving as the 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-too-distant-future”—while not being specific on the actual timing. 

Khawar explained that environmental, social and governance (ESG) factors have been a priority since the start of the Biden administration, following comments from a broad cross-section of stakeholders that the previous administration’s rule had a “counterproductive and chilling” effect—one that some had gone so far as to say that it was pushing plan fiduciaries to make “suboptimal decisions.”   

The Acting Assistant Secretary also explained that the DOL received vigorous feedback in response to the Department’s new proposed rule, which was issued in October 2021  following the implementation of a non-enforcement policy with regard to the Trump administration’s ESG rule earlier in the year. One example on the type of feedback they received—even from stakeholders who support the proposal—was in relation to the tiebreaker provision, where the comments ran the gamut, from supporting the DOL’s approach, to being opposed to the approach they took, to altogether recommending a different approach. This took time to sort through to come up with 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 President’s Executive Order, but much of the feedback they received was simply to just get the ESG proposal “done.”   

Fiduciary Guidance

While Khawar did not directly address the issue in his remarks—noting that he fully expected to get some in the Q&A part of the session regarding enforcement of Prohibited Transaction Exemption 2020-02, specifically in relation to those who may be working outside its parameters. Noting that we are now at full implementation of 2020-02, Khawar explained that aside from rollovers, the DOL’s enforcement in this area is somewhat limited, as the system is still very fragmented. 

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

For the participant, Khawar believes, that’s a big problem. “When you look at the marketplace and when you look at people getting advice on their retirement assets, there is not one consistent standard. And that doesn’t mean that 2020-02 is bad, but from a participant standpoint, that’s the kind of absurd part of it.” 

Khawar also observed that from a firm standpoint, he’s bothered that there isn’t a level playing field in relation to why the system is incentivizing one business model over another. When you look at Reg BI, PTE 2020-02 and PTE 84-24, these are not the same in terms of the amount of protections that are required and in terms of the amount of rigor required in terms of compliance, Khawar explained, noting that this is the core of the question they are asking as they continue work on this.

Crypto Guidance

Addressing the crypto “elephant in the room,” Khawar explained that the DOL addressed the question of what it means to have cryptocurrency available in the 401(k) context after they became aware of instances in which it was being marketed aggressively to plan fiduciaries. 

That triggered a number of conversations in which the DOL took steps to understand the other side of the arguments from those who favor including cryptocurrency in 401(k) plans, Khawar noted, which culminated in the DOL issuing guidance. That guidance came shortly after President Biden issued an Executive Order directing the federal agencies to address how the U.S. fits within the global framework of digital assets and cryptocurrency. Since a regulatory framework is not yet in place, Khawar explained, the DOL believed it was important to address the issue from a consumer protection standpoint.  

Cybersecurity

Khawar emphasized that cybersecurity is a big focus for the DOL, explaining that it is a systemic risk to the retirement system, which is built on the fundamental principal 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 U.S., the nation could be one threat away from it being a significant problem. 

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

As such, Khawar encouraged attendees to review the guidance issued by the DOL and to focus on making sure they are working to protect the retirement system and participant data to the maximum extent possible. He also noted that the DOL has asked the ERISA Advisory Council to look at the issue, hoping that the council will make recommendations that can help form the basis of additional guidance for plan sponsors and other stakeholders.

Proposed QPAM Amendment 

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

Khawar noted that a big part of the proposal is aimed at clarifying whether foreign criminal convictions are disqualifying for purposes of the QPAM. He explained that the proposal reverses an earlier ruling by the Trump administration and makes clear that foreign convictions would disqualify firms from utilizing the QPAM.  

“Going to back to the concept of entities operating at a high standard of integrity, the goal really was to go back to basics and make sure that these entities are holding themselves up to the standards they’re holding themselves up to, so that we can be assured that the way the market uses these entities is consistent with how these entities are actually operating,” Khawar told attendees.  

VFCP

The DOL is far along 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 have the proposal to the Office of Management and Budget soon and that there will be an opportunity to comment on it. 

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