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On May 5, 2022, Senator Tuberville (R-AL) introduced the “Financial Freedom Act of 2022.” The bill would push back on recent positions the Department of Labor has taken with respect to, e.g., “climate related financial risk,” private equity, and cryptocurrency investments, particularly in participant directed defined contribution plans.
We provide a brief note on the bill and the issues to which it responds.
ERISA favors/disfavors no particular type of investment
The bill would state explicitly that, in defined contribution plans that permit participants to exercise control over the assets in their accounts, nothing in ERISA’s fiduciary rules either:
(1) “requires a fiduciary to select, or prohibits a fiduciary from selecting, any particular type of investment alternative,” so long as the participant is able to choose from a broad range of investment alternatives, or
(2) “requires that any particular type of investment be either favored or disfavored, other than on the basis of the investment’s risk-return characteristics.”
These provisions would, in effect, make explicit what has long been understood to be a basic principle of ERISA investment/prudence, that ERISA does not prohibit, or favor, any particular asset class. In doing so, it would:
Refute the claim, being made by some, that ERISA prudence may require, e.g., disinvesting companies that do not address climate change risk or favoring companies that do address that risk, as some have read DOL’s recent “Climate-Related Financial Risk” request for information to imply.
Limit the scope of DOL’s recent guidance raising ERISA prudence issues with respect to private equity investments and, especially, their inclusion in participant directed defined contribution plans.
Significantly limit the scope of DOL’s recent release threatening to investigate any plan that “offer[s] participant investments in cryptocurrencies and related products.”
Perhaps put an end to the constant arm-wrestling between Democrat and Republican Administrations over the status – favored or disfavored – under ERISA’s fiduciary rules of environmental, social, and governance (ESG) investing.
No limit on investment types that may be offered through a brokerage window
The bill would prohibit DOL from issuing any guidance “constraining or prohibiting the range or type of investments that may be offered through [a self-directed] brokerage window.” And it would provide that ERISA’s diversification and prudence rules are not violated by the inclusion of a self-directed brokerage window as an investment alternative or a participant’s control over assets in a self-directed brokerage window.
These provisions appear to be directed primarily at the position taken by DOL in its recent cryptocurrency release that “The plan fiduciaries responsible for overseeing such [cryptocurrency] investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks.” [Emphasis added.]
DOL has for some time been uncomfortable with the absence of restrictions on brokerage window investment options and has tried to find “creative” ways of asserting its authority over them. The proposal in the bill would, in effect, make it clear that it has no such authority.
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In the current context – with Democrats in control of both houses of Congress at least through 2022 and of the White House through 2024 – it is unlikely that this bill will go anywhere. But it does represent a start on a counter position to the one being sketched out by the Biden Administration, primarily through sub-regulatory guidance, with respect to the contested areas of ESG, private equity, and cryptocurrency investments.