Smooth Implementation of China A-Shares in MSCI EM Index

We’ve been following developments re. China A Shares, as investment managers continue to ask about the fiduciary implications of entering this market.

George Michael Gerstein Sits Down With 401(k) Specialist Magazine to Discuss Fiduciary Implications of ESG Investing

Extract from 401(k) Specialist Magazine: “Does anyone have a concise definition of ESG? Anyone? Neither do we. It’s one of the main sticking points for many 401k advisors and their plan sponsor clients when constructing investment menus with environmental, social and governance (ESG) factors in mind. The DOL and similar regulatory bodies have made attempts at guidance to help clear it all up (most notable in 2008, 2015 and just last month), but true to form with government “help,” it’s too often anything but. Which is why we called George Michael Gerstein, Fiduciary Governance Group Co-Chair with legal powerhouse Stradley Ronon Stevens & Young. Gerstein has followed the issue closely and cleared much of the confusion during a presentation and panel at Fi360’s annual conference in San Diego in April. He took some time to answer the most common questions he’s getting on the topic, and the red flags 401k advisors, sponsors and participants should watch for when entering the space.” A link to the Q&A can be found here.

FX Global Code turns 1 – what does it mean for fiduciaries?

As  I articulated in Profit & Loss, “Though [the FX Global Code] does not have the force of law, it can serve as a useful springboard for fiduciaries to buttress risk controls and fiduciary awareness over an industry that seems obscure to some. The Code can catalyse a change from disengagement and insufficient understanding of common (and, in certain instances, controversial) FX practices to engagement and a deeper understanding of a market whose products are in so many investment policy statements and mandates of retirement plans.” I wrote that the Code’s voluntary nature opened the door to plan investment committees and investment managers the opportunity to gauge the level of the FX service provider’s engagement with the Code and how such engagement (or lack thereof) could implicate their fiduciary duties. I opined: “However, the genius of the Code is that not all principles apply to each market participant, and, as a result, requires at least an active review of the Code to determine which principles apply to a particular market participant, including a fiduciary. An investment committee that outsources currency hedging to a third party may have an interest in how that third party will plan to adhere to the Code. Through awareness comes engagement with service providers. Because the Code’s principles set forth good practice in the market, a plan fiduciary should become aware of the Code and internalise it.” My full op-ed can be found here.

George Michael Gerstein Interviewed by Fund Intelligence on GAO’s ESG Report

Noah Zuss of Fund Intelligence interviewed me, along with Jon Hale (Head of ESG Research at Morningstar) and David Blanchett (Head of Retirement Research at Morningstar Investment Management), regarding the practical effects of the GAO report and its relation to the DOL’s own recent ESG guidance in this developing area. The article can be found here.

Key Takeaways from the GAO Report on ESG Investing by ERISA Fiduciaries

The Government Accountability Office (GAO) yesterday released a new report on ERISA fiduciaries’ incorporation of environmental, social and governance (ESG) factors into its investment process. At 63 pages, here are the key takeaways:

  1. The report is focused only on instances where fiduciaries consider ESG factors as material risk factors that are part of an ordinary prudence analysis. In other words, the GAO did not focus on other strategies (e.g., impact investing), such as those that select an ESG factor for moral reasons, etc., which is the historical association of ESG investing. In this sense, the GAO deserves a lot of credit for focusing on this sophisticated approach to ESG.  You may recall that my paper on climate change risk focused on this very issue.
  2. Rather unfortunately, the report was largely completed prior to the DOL’s issuance of Field Assistance Bulletin (FAB) 2018-01, which we discussed here. The principal recommendation by the GAO is for the DOL to issue guidance on whether a fiduciary can incorporate ESG factors into the management of a default investment option in a defined contribution plan. As you may know, FAB 2018-01 seemed to do just that, though not in an entirely clear manner. Nevertheless, the GAO addressed FAB 2018-01 at the end of the report and narrowed its initial recommendation, namely, that the DOL better explain how fiduciaries can utilize the integration strategy in a QDIA. In the DOL’s defense, FAB 2018-01 seems to address (to some extent) whether a QDIA can utilize the integration strategy; the DOL instead hit the breaks on offering a themed ESG product as a QDIA.
  3. According to the GAO, the DOL is amenable to issuing additional guidance on ESG investing, provided there is enough interest by fiduciaries. The DOL is mum on its Form 5500 project, and whether any ESG disclosures on a revised 5500 are in the works.
  4. Those close to ESG will unlikely find anything surprising in the GAO report on the various reasons why ESG is not yet widely adopted by US retirement plans: questions over the reliability/comparability of disclosures, ratings and rankings–designed to help fiduciaries incorporate ESG factors–all continue to be cited as impediments. Regulatory uncertainty, and definitional ambiguities, also remain hindrances. I recently spoke on a number of these constraints to greater adoption by fiduciaries.

David Grim: SEC Release “Potentially Transformative”

David Grim (left), at tonight’s ICI General Membership Meeting, says the “proposed reforms represent potentially transformative changes for firms providing investment advice to retail investors” and that “firms have real opportunity to engage with regulators and shape any final policy outcomes.”

George Michael Gerstein Discusses Interplay of SEC Release With DOL Fiduciary Rule and State Developments

George Michael Gerstein (right), joining Larry Stadulis (not pictured) and Dave Grim (left) at the ICI General Membership Meeting, identified the moving regulatory pieces and impetus of major fiduciary law reform.