Last week was exciting for the Employee Benefits Security Administration (EBSA) and for The ESOP Association members who will enjoy a dramatic shift in EBSA’s enforcement posture. The week began with the release of new guiding principles for EBSA enforcement activities that closely align with years of advocacy by The ESOP Association to end “regulation by enforcement” and move toward a fairer, more transparent regulatory environment for ESOPs. Just two days later, Assistant Secretary of Labor for EBSA Daniel Aronowitz reinforced that message before the House Education and Workforce Committee’s Health, Employment, Labor, and Pensions Subcommittee, where he described the steps EBSA is taking to “end the war on ESOPs.”
The Department of Labor (DOL) released the new enforcement guidance on April 14, and it is especially important because it directly addresses several long-running concerns for ESOP companies, trustees, and plan advisors. EBSA’s memo says enforcement should be, “fair, even-handed, responsive, and focused.” For ESOPs, that includes a clear rejection of open-ended investigations and recognition that the agency must provide advance notice of its interpretation of ERISA and fiduciary responsibilities.
The guidance addresses the adequate consideration issue by stating that, “until EBSA complies with the Congressional directive to provide ‘acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan,’ all pending and proposed ESOP valuation investigations must be reviewed against this guiding principle of fairness.” That is a major development for the ESOP community and an encouraging sign that EBSA is taking the need for regulatory clarity seriously.
The memo also sets expectations for investigation timeliness. Routine investigations involving less complicated issues should generally be completed in 18 months, while more complex investigations should generally not extend beyond 30 months without clear justification. The guidance also raises concerns about common interest agreements with plaintiffs’ lawyers and stresses that EBSA enforcement must avoid even the appearance of coordinating with private litigants. Together, these changes mark a meaningful shift away from the practices that have created a chilling effect on ESOP formation for decades.
Aronowitz reinforced that message during his April 16 testimony before the House Education and Workforce Committee’s HELP Subcommittee. In both his written statement and his exchanges with lawmakers, he made clear that EBSA is shifting the agency away from prior enforcement practices that pushed employers away from ESOPs because of litigation risk, depriving workers of the opportunity to build wealth through ownership.
Aronowitz was direct in his description of EBSA’s new approach to employee ownership: “We are pro-ESOP.” He also revealed that EBSA is reviewing about 90 pending ESOP cases under its new priorities and stated that, until the DOL finalizes the long-awaited adequate consideration guidance Congress has called for, the agency will not second-guess fiduciaries acting in good faith. He closed one answer with a message that resonated across the ESOP community: “We’re ending that war on ESOPs.”
Aronowitz also highlighted another issue that has hindered ESOP formation: abusive litigation. In his written testimony, he warned that meritless ERISA class action lawsuits have imposed significant costs on plan sponsors, even when plan sponsors ultimately prevail in court. That concern came into sharper focus during an exchange with Rep. Randy Fine, who introduced the ERISA Litigation Reform Act (HR 6084). Aronowitz noted that plan sponsors have prevailed in seven of the last eight most recent ERISA trials, but only after spending millions of dollars to defend themselves. While Aronowitz could not comment directly on HR 6084, The ESOP Association will continue to advocate for its passage.
Taken together, the enforcement guidance and Aronowitz’s hearing sent a clear message: EBSA is shifting its posture to treat ESOPs fairly and focus on real misconduct rather than responsible fiduciaries navigating unclear rules.
You can hear even more about these exciting developments at The ESOP Association’s National Conference, where Aronowitz is expected to speak on Friday, May 8. This is a valuable opportunity to gain firsthand insight into important regulatory and enforcement shifts for ESOPs. Register now!
