Legislative Alert - ESOP Bulletin - Pending Amendment in Senate to Stop Department of Labor's (DOL) Regulatory Attack on ESOPs

by The ESOP Association | Jun 01, 2011

Update on DOL Proposed Rule Negative to ESOP Companies

The Department of Labor has concluded its public hearing on its proposal that appraisers of ESOP stock be fiduciaries to the ESOP, in addition to a current ESOP fiduciary.

While I have sat through other sessions where ESOP cynics’ comments made the session a nightmare for an ESOP/employee owner advocate, and while I can report that I found the DOL officials to be respectful of the ESOP concept, I must report there was no indication they would drop their desire to have the appraisers be fiduciaries.

In exchanges with witnesses who were not supportive of the proposed regulation, including the Chair of the Association’s Advisory Committee on Legislative and Regulatory Issues, Laurence Goldberg, the DOL officials put forth several ideas to ameliorate the concerns of ESOP advocates, that primarily were to limit the appraisers’ fiduciary responsibilities, but not to drop their core proposal that appraisers be fiduciaries.  Compromises are always welcomed, as no one gets 100% of everything he or she wants.

BUT…..and this is a big but:  The DOL officials might claim they only want to make sure valuations are as good as they can be, and they, the DOL enforcement arm, will not expand their current interpretation of when a valuation is wrong; but private sector lawyers do not have to read any final regulation narrowly.  In other words, making appraisers fiduciaries will not only result in existing ESOP companies paying more because their appraiser will have to buy fiduciary insurance, for which no one knows the cost as such a policy does not exist for appraisers right now, plus appraisers will probably hire their own “fiduciary” lawyer, and these costs will be paid by the ESOP company, reducing its profits, and reducing benefits to employee owners; but, and here is the but that is so worrisome, there will be many more lawsuits against ESOP companies and the appraisers as now the lawyers will have more pockets to go after.

And again, DOL has not documented its claims that bad valuations of private ESOP companies are widespread and common.

The data is overwhelming:  Most lawsuits against ESOP companies for fiduciary violations, of whatever nature, do not succeed.  But litigation is so expensive, time consuming, that many companies just settle for an amount less than the cost of winning the lawsuit.  A settlement pay day for lawyers’ bringing the law suits makes it worthwhile to find situation where suits may pay off.

What to do?

The fact that the hearings are concluded does not mean the ESOP community stops complaining about this proposal.

Please consider contacting your member of Congress, House and Senate, to protest along the lines of the suggested letter that is linked to this email bulletin. (To download a copy of the sample letter CLICK HERE.)  If you have already written, and have heard nothing in return, consider a polite inquiry of how your letter was handled.  If your letter resulted in a response, write again to say politely DOL is not budging from its proposal.

Bottom line — higher costs, perhaps prohibitive to ESOP creation and continued operation, is nonsensical coming from the Department of Labor, an agency that is supposedly trying to keep jobs in America, versus their being eliminated, or shipped overseas.  Our national ESOP policy is a proven engine for keeping good jobs, providing sizeable retirement benefits in nearly all instances, in high performing workplaces, right now, right here, in America.

Nice, respectful words from the DOL officials at the hearings do not alter the real world, potential impact of what they have proposed.  ESOP advocates should not sit by and let the DOL proposal become the law of the land.

Thanks for reading this bulletin.

J. Michael Keeling, CAE
The ESOP Association
202 / 293-2971 phone


Senator Kelly Ayotte (R) of New Hampshire has proposed an amendment to S. 782 that would amend ERISA to make clear that appraisers of private company ESOP stock are not ERISA fiduciaries. She is joined by Senators Olympia Snowe (R) of Maine and Scott Brown of Massachusetts (R).

Their amendment would stop the DOL proposed regulation mandating all private company ESOP appraisers be ERISA fiduciaries. Briefly, if DOL has its way, all private ESOP companies would pay significantly higher fees for appraisals, there would be extreme confusion over whether the appraiser or the trustee[s] and other current fiduciaries make the decisions about acquisition of shares, and most troubling, would leave private ESOP companies sitting ducks anytime aggressive trial lawyers could find anyone upset over a share value determination. [See The ESOP Association website, and the 12 blog posts, about the harm the DOL proposal will do to the ESOP community if finalized.]

To read the amendment, CLICK HERE

Please call your Senators' offices, or call and get permission to send an email to the appropriate staff person who works on tax, labor, or retirement savings issues for the Senator, and urge them to be for S. AMDT 467 to S. 782 to reauthorize the Public Works and Economic Development Act of 1965.

Your message is: "I am ______ of (name of company) in (location) and I urge Senator _____ to be for Senator Ayotte's amendment number 467 to S. 782 to stop a very negative ESOP position being proposed by the Department of Labor." Call 202/224-3121 and ask for your Senators' offices.

If you live in New Hampshire, Maine, or Massachusetts, call the offices of Senators Ayotte, Snowe, and Brown and say, "Thank you, thank you!"

If needed, click here to learn more about the DOL's proposed regulation.

If you want direct numbers for your Senators' offices, go the U.S. Senate, http://www.senate.gov, and click "Find Your Senator" in the upper right hand corner. The U.S. Senate website lists all Senators' office numbers.

No matter the final handling of the Ayotte amendment, it is extremely important that Senators hear the voice of the ESOP community, and that they are then more committed to making sure the current negative attitude towards ESOPs at DOL is dampened, if not silenced.