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DOL’s Khawar Previews Reg Plans; SEC Enforcement Chief Steps Down

Regulatory Agencies

The Department of Labor will revisit Prohibited Transaction Exemption 2020-02 and the rules on Financial Factors in Selecting Plan Investments and proxy voting issued in the final weeks of the Trump administration, DOL Acting Assistant Secretary Ali Khawar confirmed April 29.

Speaking at an American Savings Education Council meeting on savings considerations for minorities in America, the Acting Assistant Secretary for the Labor Department’s Employee Benefits Security Administration provided a preview on upcoming regulatory guidance. 

Fiduciary Rulemaking  

Khawar explained that after meeting with numerous stakeholders at the beginning of the Biden administration, a conclusion was reached that they would allow PTE 2020-02 to go into effect, with the current period serving as a “runway” through mid-December before people really need to be in full compliance. 

Khawar noted that the department’s current area of focus is to put out guidance as soon as possible addressing incoming questions and issues identified for the department. “As people are starting up systems and taking other steps to come into compliance and fully implement that exemption, we want to make sure that they have the benefit of our thinking earlier in the process, because I can envision any number of scenarios where we might put out guidance in December, but unquestionably, it’s more helpful to people the earlier in that runway period we put out guidance,” he said.  

Khawar reiterated that the DOL’s February announcement also made clear that they do not believe their work is done. “The other things that we’re looking at are the question of whether there is really a level playing field right now, because that, of course, is one of the things the Trump administration didn’t do is to amend the other preexisting exemptions, which investment advisors can also take advantage of,” Khawar explained. “And so, that’s one set of issues we’re thinking about—to what extent other changes are needed to the other preexisting exemptions, and then, of course, it probably goes without saying, but the rule itself and defining who is a fiduciary is another area of focus for us.”

ESG and Proxy Voting

In reiterating the March announcement that the DOL will not enforce the final rules on Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, Khawar confirmed that there’s more to come.  

In doing outreach on the financial factors’ regulation and the pecuniary versus non-pecuniary issues, Khawar notes that one of the things that they consistently heard in talking to consumer groups, service providers, plan sponsors and other stakeholder groups was that the Trump administration rule had a “chilling effect” on investment behavior. This was true, he said, even in circumstances that appear to be squarely within the realm of the kinds of activities the rules said were appropriate to consider in making investment decisions. 

“The atmospherics around this rule really are giving fiduciaries pause and wondering whether they were exposing themselves to excessive liability by taking these kinds of factors into account, even when it was being viewed just as a financial factor, not as a kind of collateral issue that they were trying to promote,” Khawar explained. He noted that the department is continuing to conduct stakeholder outreach, which will ultimately lead to additional rulemaking in the not-too-distant future. 

Cybersecurity Best Practices

Regarding the DOL’s recent cybersecurity guidance outlining best practices and tips for participants, service providers and sponsors, Khawar explained that they didn’t establish standards in this guidance, but thought it was important to share best practices the department would like to see in terms of what each stakeholder group should be doing. For example, Khawar noted, best practices they’d like to see in the service provider community are things like whether their IT security is being audited by an outside vendor and what their patch maintenance looks like. 

Khawar also noted that this is an important area and that the guidance is just the beginning of the department’s work. “The way that I think about this issue is that we have a shared responsibility on the part of government, on the part of the regulated community and on the part of participants. And as we’ve seen in just the last several months, the cybersecurity bad actors can be very sophisticated and the assets under management in this space are also very significant … so we think it’s important that we’re all working on this issue together.”

Expanding Coverage and Lifetime Income

In the area of expanding coverage, the Khawar noted that he’s hopeful that pooled employer plans (PEPs) will help lower the threshold to entry for those employers that believe starting a 401(k) is either too complicated, too expensive or isn’t a priority for them. And in turn, he’s hopeful this will help move the needle in terms of expanding coverage. Khawar noted that they are taking a close look at the plans and are working on some things in this space with the hope that they will bring more participants into the system. 

Khawar also believes that current state-based initiatives hold a lot of promise in bringing more people into the system, which will have positive impacts on state and local budgets, and more of a financial safety net available to individuals.

Responding to a question about the timing for the lifetime income disclosure regulation, Khawar noted that a Request for Information has already been issued and that the department intends to issue guidance ahead of the September 2021 deadline under the SECURE Act. 

SEC Enforcement Chief Steps Down

Meanwhile, Securities and Exchange Commission director of enforcement Alex Oh resigned April 28 after only a week in that post. News reports suggest that the underlying cause was Oh’s conduct when she was part of a legal defense team representing ExxonMobil in a lawsuit seeking to hold the company liable for human rights abuses allegedly committed by its security personnel in Indonesia.

Melissa Hodgman, who served as the Enforcement Division’s Acting Director from January 2021 through this month, will return to the role of Acting Director of the Division of Enforcement.