Investing December 23, 2020

Biden Administration Expected to Weigh In on ESG Investments

President-elect Joe Biden’s proposals on climate change and sustainability, indicate it is likely that the new administration will issue guidance on ESG investing in the next four years.

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A new administration taking office in January could mean the rollout of highly anticipated guidance and clarity on environmental, social and governance (ESG) investing.

The effects of COVID-19 renewed interest in sustainable investing for many U.S. investors. But a proposed rule the Department of Labor (DOL) released in June seemed to put a damper on ESG investing. The department’s final rule, published in October, softened that stance somewhat, saying that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type.

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President-elect Joe Biden and his administration could attempt to issue guidance supporting ESG investing despite the rule, says Aron Szapiro, head of policy research at Morningstar. Because the DOL’s final rule did not specifically implement any requirements for sustainable investments, a new administration could issue sub-regulatory support for ESG funds, he says.

“The final rule doesn’t necessarily reference ESG, except in the preamble, so that suggests to me that [the Biden administration] could come up with some sort of sub-regulatory guidance to signal that it is more accommodating toward ESG investing,” Szapiro says.

A Morningstar article, which Szapiro helped write, notes that the new administration could issue such guidance in the form of frequently asked questions (FAQs) or advisory opinions, since ESG factors could be considered pecuniary and could be reviewed by plan fiduciaries as a measure of their fiduciary duty.

Ed Farrington, executive vice president of institutional and retirement business at Natixis Investment Managers, says the preamble to the DOL rule might create confusion for plan sponsors who want to integrate ESG investments into their plans. He says he expects the Biden administration will likely address the uncertainty, even without revamping the rule.

“The rule may likely stay close as is,” he says. “But pieces might be given new indications from the department, to signal to a plan sponsor that this is something that you can, and probably should, do.”

Farrington predicts the Biden administration will emphasize sustainable investing throughout the next four years. Biden’s push to rejoin the Paris Agreement, along with his goals of achieving a net-zero economy by 2050, underscore his approach on sustainability through 2024, Farrington says. “The tone that has been set—should that be followed through with policy—sets a very [foundation] for a strong trend over the coming years,” he adds.

Similarly, the Biden administration will have the opportunity to replace the outgoing Securities and Exchange Commission (SEC) chair, along with the head of the Commodity Futures Trading Commission (CFTC). A recent piece by Russell Investments notes that a new SEC chair might be tasked with requiring public companies to disclose climate change-related financial risks and greenhouse gas emissions in their operations, further enforcing a sustainable environment.

Additionally, Morningstar says there could potentially be a 3-2 Democratic majority in the SEC in the future, including the acting chair. Such a majority could revise several rules related to proxy voting rights and climate-related financial disclosures. Even if the Democratic Party does not win the two Georgia Senate runoff elections next month, many industry experts are still optimistic about the prospect of regulatory support concerning ESG investing, Szapiro says. Yet, if that’s the case, Republican support will be integral to many of the Biden administration’s goals, especially on sustainable investing.

“I think all of the commissioners recognize some sort of additional guidance” is needed, Szapiro says, “But, what would be really meaningful change will take rulemaking that I don’t think is going to be acceptable to two of the [SEC] members right now, so you really would need a fifth vote.”

Compliance December 23, 2020

Physical Presence Requirement Relief Extended Through June

The relief is for retirement plan participant elections and spousal consent required to be witnessed by a plan representative or a notary public.

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The IRS, in Notice 2021-03, has extended the temporary relief it provided from the physical presence requirement for spousal consents under qualified retirement plans from January 1, 2021, through June 30, 2021, due to the ongoing crisis created by the COVID-19 pandemic. In addition, the requirement that participant elections be witnessed by a plan representative or notary public will also be lifted through that time.

As a way of background, the IRS notes that on March 13, President Donald Trump determined that the COVID-19 pandemic was of sufficient severity and magnitude to warrant an emergency determination under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Rather than physical presence, retirement plan sponsors can use electronic mediums to send notices to recipients or permit participants to make elections with respect to their retirement plan, the IRS says.

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However, the individual must be able to access the electronic medium and it must be reasonably designed to preclude anyone other than the appropriate person from making the election. The electronic system must also “provide the individual making the participant election with a reasonable opportunity to review, confirm, modify or rescind the terms of the election before it becomes effective and the individual making the participant election, within a reasonable time, must receive confirmation of the election through either a written paper document or an electronic medium that satisfied the applicable notice requirements,” the IRS says.

Likewise, a participant’s consent to a distribution may be provided through the use of electronic media, the IRS says.

The IRS says that “remote electronic notarizations differ from electronic notarizations in that remote electronic notarizations generally are conducted remotely over the internet using digital tools and live audio-video technologies, whereas electronic notarizations can be signed electronically but still require that certain signatures be witnessed in the physical presence of a notary public or plan representative.”

The IRS first passed the relief for participant elections in June, in response to the COVID-19 pandemic and related social distancing guidelines. The IRS said the temporary relief, which covered all of this year, was intended to facilitate the payment of coronavirus-related distributions (CRDs) and plan loans, as permitted by the Coronavirus Aid, Relief and Economic Security (CARES) Act. It also applied to any participant election that requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary.

The Treasury Department and the IRS are welcoming comments with respect to the extension of these measures through June 30. Comments should be submitted in writing and should include a reference to Notice 2021-03. They can be submitted two ways. They can be filed electronically at www.regulations.gov by typing IRS-2020-0049 in the search field. They can also be mailed to the Internal Revenue Service, Attention Notice 2021-03, Room 5303, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.

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