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Press Releases

The ESOP Association Petitions U.S. Department of Labor to Undertake Congressionally Mandated Rulemaking

The ESOP Association
The ESOP Association and The Department of Labor


September 22, 2022 

The ESOP Association Petitions U.S. Department of Labor to Undertake Congressionally Mandated Rulemaking 

Washington, D.C. – The ESOP Association (TEA), the national trade association  representing companies with Employee Stock Ownership Plans (ESOPs) and ESOP  professionals, today exercised rights under the Administrative Procedure Act to petition  the U.S. Department of Labor (DOL) to undertake a long-delayed rulemaking essential  to the formation and ongoing operation of ESOPs. Since 1974, the Department of Labor  has steadfastly refused to fulfill requirements of the Employee Retirement Income  Security Act (ERISA) in violation of Congressional direction and stakeholders’ rights  under the Administrative Procedure Act (APA). 

“The Department of Labor has flouted Congress’ mandate within ERISA for nearly five  decades. On behalf of the millions of Americans with ownership in an ESOP, we have  filed this petition to compel Secretary Walsh to undertake the rulemaking Congress  directed in 1974, which was nearly completed in 1988 but has been mothballed ever  since,” said James Bonham, President and CEO of The ESOP Association. “The Labor  Department has failed to follow Congress’ requirements, and the regulatory vacuum has  created a chilling effect on ESOP formation and operation that has effectively denied  millions of Americans the opportunity for a better retirement and ownership in the place  where they work.” 

Employee Stock Ownership Plans (ESOPs) were created by Congress to provide a  vehicle by which a company’s employees could obtain an ownership stake in their  employer through a Qualified Retirement Plan (QRP). Today, more than 6,247  companies are fully or partially owned by more than 10 million employees through an ESOP.¹ However, because ESOPs are stuck in a regulatory no-man’s land, countless businesses have turned away from an ESOP due to the DOL’s failure to provide clear  regulation and guidance as Congress directed. Instead, DOL has pursued a strategy of  “regulation by litigation”, undertaking thousands of investigations and filing lawsuits  against ESOP trustees and founders. 

The APA was enacted to specifically prevent government agencies from regulatory  abuses like the DOL’s approach to regulating ESOPs. Accordingly, The ESOP  Association has formally registered an APA petition with U.S. Labor Secretary Marty  Walsh, who is required to provide a formal, written response to the petition. Should the DOL respond that it will not enter a formal notice and comment rulemaking process, a  court may force the Department to fulfill its responsibilities.  

In its petition, The ESOP Association stated “The Department’s unchecked, ex post  facto approach to regulation has been devastating: it has sown confusion, emboldened  and expanded an opportunistic class action plaintiffs’ bar, driven up insurance costs,  and pushed insurers out of the market. At bottom, the Department’s policies have  discouraged companies from establishing new ESOPs, driven others to dissolve their  ESOPs, and prevented innumerable American workers from building wealth through  equity as Congress intended. Employers, ESOP fiduciaries, and, most importantly,  current and future ESOP participants, need the Department to regulate as Congress  directed 50 years ago—transparently, prospectively, and with stakeholder input—so that  American workers can reap the rewards that ESOPs provide.” 

In a recent example of DOL’s abusive regulatory tactics, DOL investigated Bowers +  Kubota Consulting, Inc., an architectural and engineering firm based in Hawaii, alleging  the ESOP acquired its employer’s stock for more than fair market value. Bowers +  Kubota’s founders refused to cave to DOL pressure, and after several years prevailed  on every argument advanced by DOL in federal court. In fact, the federal judge presiding over the bench trial resoundingly struck down each of the government’s  arguments and ruled that the defendants “did not violate any provision of ERISA with  respect to the sale of the Company to the Company's ESOP.” 

The ESOP Association has joined the company through an amicus brief seeking to  recover defendant’s legal fees from the government. 

“Governing by threats, harassment, and the arbitrary whim of bureaucrats should not be  standard procedure,” said Brian Bowers, President of Bowers + Kubota. “Although we  won our case against the DOL, it took years of effort and millions of dollars in legal fees  and the fight continues as we attempt to recover our costs based on the legal concept of  loser pays. No business should endure what we did, especially when trying to secure  employees’ financial futures. We urge the Department to work with the ESOP  community and develop appropriate regulations so ESOPs can go about their business of empowering and enriching employee owners’ lives and not be subject to attack  whenever the government decides to move the goalposts.” 

As with all qualified employee benefit plans, ESOPs are governed by ERISA. Congress  designed ERISA to allow ESOPs to buy employer stock using funds borrowed from the  ESOP’s sponsoring company itself – employees almost never contribute any of their  own funds for an ESOP’s acquisition – so long as the ESOP pays no more than  “adequate consideration.” Virtually all ESOPs are established via this legal standard,  known as the “Adequate Consideration Exemption.” 

When ERISA was passed in 1974, Congress directed the DOL to issue regulations  outlining more specifically how parties to ESOP transactions could satisfy the Adequate  Consideration Exemption. The Department itself has long recognized that such a 

regulation is crucial to eliminate confusion surrounding the vaguely written standard and  to protect ESOPs and their participants from potential abuse. To issue a regulation, the  Department would need to engage with interested stakeholders in the notice-and comment rule-making process required by the APA. Unfortunately, the Department has  ignored Congress’s directive and circumvented the APA’s requirements using a  procedurally improper tactic of “regulation by litigation.” 

Fleshing out the definition of the Adequate Consideration Exemption would create a  uniform, transparent standard governing the process by which parties to ESOP  transactions can establish a company’s fair market value, which is crucial to ensure that  ESOPs do not overpay for employer stock.  

Bonham added: “When Labor Secretary Marty Walsh was mayor of Boston, he was a  champion of employee ownership and ESOPs. On behalf of more than 10 million  employee owners, we stand ready to work with Secretary Walsh to help the Department  formulate a clear and fair rule that will eliminate uncertainty and help more Americans  realize the dream and benefits of employee ownership. Failure to issue a rule will continue the chilling effect on ESOP formation at a time when our government is trying  to promote retirement security and address the massive wealth and income gap  plaguing our economy.” 

The ESOP Association’s full petition to the DOL via the APA can be found here. For a  Fact Sheet on the petition and issues, click here. For the amicus brief in support of  Bowers + Kubota Consulting’s appeal to receive reimbursement of its legal fees, click  here. For more information on the APA, click here.


About the ESOP Association 

The ESOP Association is the largest organization in the world supporting employee owned companies, the more than 10 million U.S. employees who participate in an  ESOP, and the professionals who provide services to them. Headquartered at the  International Employee Ownership Center in Washington, DC and operating as a 501(c)6 organization with the affiliated Employee Ownership Foundation, The ESOP  Association conducts and funds academic research, provides more than 160 annual  conferences and events attended by nearly 15,000 individuals, and advocates on behalf  of employee owners and their businesses to federal and state lawmakers. 

For Media Inquiries, Contact: 

Greg Facchiano  

Vice President, Government Relations and Public Affairs 



¹ According to publicly available data included in most recent U.S. Department of Labor form 5500 from 2019