GOP Senators Demand Reversal of DOL’s ESG Decision

Three US Republican senators sent a letter to Department of Labor (DOL) Acting Secretary Al Stewart demanding he enforce two final rules on proxy voting and environmental, social, and governance (ESG) investing in retirement plans subject to the Employee Retirement Income Security Act (ERISA) that the department recently said it would not enforce.

In November, the DOL published a final rule on “Financial Factors in Selecting Plan Investments,” which adopted amendments to the “Investment Duties” regulation under Title I of ERISA. The final rule took a softer stance on ESG investing than the proposed rule, but the amendments generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.”

And in December, the department published a final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which also adopted amendments to the Investment Duties regulation to address the obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments.

But earlier this month, the DOL’s Employment Benefits Security Administration (EBSA) said it will not enforce the final rules. It said that until further guidance is published, it will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with the rules.

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“These rules have created a perception that fiduciaries are at risk if they include any environmental, social, and governance factors in the financial evaluation of plan investments,” Ali Khawar, principal deputy assistant secretary for the EBSA, said in a statement. “We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social, and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations.”

The DOL said it heard from a wide variety of stakeholders, including asset managers, labor organizations, plan sponsors, and investment advisers, asking whether the two final rules properly reflect the scope of fiduciaries’ duties under ERISA. It said stakeholders have also questioned whether the department unnecessarily rushed the rulemakings and failed to adequately consider and address the evidence submitted by public comments. As a result, the department said it intends to revisit the rules.

However, the three Republican senators said in their letter that the DOL should “immediately reverse its ill-considered decision to not enforce these rules,” which they argue are the result of open and transparent notice and comment rulemaking processes.

“The final rules are based on the common-sense, unobjectionable principle that fiduciaries of retirement plans must put the financial interests of plan participants and beneficiaries first,” said the senators, who added that the DOL’s decision not to enforce the rules “will harm Americans’ retirement savings by allowing plan fiduciaries to sacrifice investment returns to promote non-pecuniary policy objectives like social justice, diversity quotas, and lower carbon emissions.”

The senators also said the DOL’s decision encourages plan fiduciaries to take actions that may make them vulnerable to class action lawsuits. They said that while the department would not take action against a plan fiduciary for such actions, plaintiffs’ lawyers could bring a class action lawsuit under ERISA.

Additionally, the senators suggested that the decision to not enforce the rules was a result of Wall Street asset managers lobbying the incoming Biden administration because ESG funds “are a growing profit center for asset managers” and that they “stand to benefit” from the decision.

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Tags: Al Stewart, Employee Retirement Income Security Act, environmental, ERISA, ESG, Governance, Mike Crapo, Pat Toomey, Richard Burr, social, United States Department of Labor (DOL)

The US Securities and Exchange Commission (SEC) has charged a Texas investment adviser firm with fraudulently raising more than $17 million from over 100 investors for an oil-and-gas investment fund, of which its owners allegedly “lined their pockets with nearly $2.7 million.”

According to the SEC’s complaint, APEG Energy GP and its owners, Patrick Duke and Paul Haarman, raised more than $17.4 million from 115 investors through the sale of limited partnership securities in APEG Energy LP. The SEC alleges the two men personally profited “through a series of misrepresentations and omissions, a deceptive scheme, and with utter disregard of the fiduciary duty owed by defendants to the fund.”

The stated purpose of the fund was to “engage solely in the business of acquiring, owning, holding, and disposing of investments in the energy sector, as may be identified from time to time.” The fund sought to realize an aggregate of 25% annualized returns for investors over the course of three to four years.

Duke and Haarman allegedly made misrepresentations and omissions in their offering documents, written communications, and oral statements regarding the risks of the investments, Duke’s purported expertise in the oil and gas industry, and their compensation for managing the fund. As APEG’s lone managers, the complaint says Haarman and Duke had exclusive control over the firm, that they reviewed and approved the fund’s private placement memorandum that was sent out to investors, and that they approved every prospective investment for the fund.

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The SEC alleges Haarman promised investors in writing and phone calls that the fund provided returns with no risk because the investments were hedged against future declines in oil prices. But this was false, according to the complaint, which said the fund faced “significant risks” such as uncertainties of oil-and-gas production revenue and the impact of oil price fluctuations on promised investor returns. And contrary to Haarman’s claims, the firm used no mechanisms to hedge against such price fluctuations, according to the SEC.

The regulator also claims Duke was presented to investors as “a sophisticated and experienced oil-and-gas exploration businessman,” when in reality his only possibly relevant experience included a part-time job in high-school with a regulatory agency and a college job with an oil-and-gas company more than 25 years before the fund offering. Nevertheless, it was based on this “expertise” that he took the lead in identifying and vetting oil-and-gas assets for the fund to acquire.

Additionally, the complaint says the fund’s private placement memorandum and partnership agreement provided that APEG’s compensation was limited to a 2% fee for managing the fund. However, Haarman and Duke allegedly structured asset acquisitions on behalf of the fund so that they personally received nearly $2.7 million in illicit payments. The SEC said they also hid these payments from the fund and its investors.

The complaint, which was filed in the Western District of Texas, charges Duke, Haarman, and APEG Energy GP with violating the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties against each defendant.