Senators Send Letter to New DOL Secretary Regarding Proposed Rule on the Definition of a Fiduciary

On July 25, 2013, Senators Mitch McConnell (R-KY), John Thune (R-SD), Kelly Ayotte (R-NH), and Roy Blunt (R-MO), sent a letter to the just confirmed new Labor Secretary, Thomas Perez, about the Department’s proposed regulation that would mandate all private ESOP company appraisers be ERISA fiduciaries.

In the letter, the Senators state:  “We cannot overstate the detrimental effect the 2010 proposed regulation would have on private ESOP companies that have a successful record of maintaining much needed jobs and providing generous retirement benefits for part-time, low-wage, and middle class workers. The Labor Department’s efforts to expand the definition of fiduciary to include independent ESOP appraisers will only hurt the very employees it seeks to protect.”

“We thank Senators McConnell, Thune, Ayotte, and Blunt for their strong support of ESOPs and for taking this step in emphasizing to the DOL just how harmful this proposed regulation is to the ESOP community,” said ESOP Association President, J. Michael Keeling. “These Senators are major leaders in the U.S. Senate — Senator McConnell, the Republican Leader; Senator Thune, Chair of the Senate Republican Conference; and Senator Blunt, Vice Chair of the Senate Republican Conference. And of course, Senator Ayotte, who first took up the ESOP cause protesting the DOL proposal, has now become a national figure in American politics.”

Click here to read the full letter – Letter to DOL.

News: Pro-ESOP Bill Introduced in the House; Bill Aims to Protect ESOPs

ESOP Association News

The ESOP Association sent out the following press release this afternoon. We are sharing with readers here.

For Immediate Release: May 17, 2013

For More Information: Amy Gwiazdowski, 202/293-2971, amy AT esopassociation.org

Pro-ESOP Bill Introduced in the House; Bill Aims to Protect ESOPs 

May 17, 2013 (Washington, DC) – Congressmen Brett S. Guthrie (R-KY), David Loebsack (D-IA), and Congresswoman Lynn Jenkins (R-KS) introduced H.R. 2041, a bill to modify the definition of fiduciary under the Employee Retirement Income Security Act of 1974 to make clear appraisers of employee stock ownership plans (ESOPs) are not ERISA fiduciaries.

H.R. 2041 is the companion bill to S. 273 introduced by Senator Kelly Ayotte in February 2013. This bill is a response to the Department of Labor’s (DOL) proposed anti-ESOP regulation mandating all private ESOP company appraisers be ERISA fiduciaries.

While the original proposal was withdrawn, if any regulation was finalized to make appraisers ERISA fiduciaries, there would be extreme confusion over whether the appraiser or the trustee[s], and other current fiduciaries, make the decisions about acquisition of shares on behalf of average pay employees. More troubling, it would leave private ESOP companies open to lawsuits by aggressive class action trial lawyers. Leaders at the DOL say a new proposal will be issued sometime in 2013. It is expected DOL will not alter the proposed regulation’s mandate that all appraisers of ESOP stock be ERISA fiduciaries.

“The DOL needs to wake up to the fact that private company ESOPs have tremendous positive records of sustaining jobs as evidenced during the Great Recession. As we’ve said before, research proves that ESOPs, and companies with other forms of employee stock ownership, provide more sustainable employment. According to the 2010 General Social Survey, employee stock owned companies laid off employees at a rate of 2.6% in 2010, whereas the rate for conventionally-owned companies was 12.1%. Bottom-line, ESOP companies’ employees, in the aggregate, save Uncle Sam $7 for every dollar Uncle Sam spent promoting employee ownership,” stated ESOP Association President, J. Michael Keeling.

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The ESOP Association is the national trade association for companies with employee stock ownership plans (ESOPs) and the leading voice in America for employee ownership. The core cause of The ESOP Association is the belief that employee ownership will improve American competitiveness, increase productivity through greater employee participation, and strengthen our free enterprise economy. More information: website – www.esopassociation.org and blog – www.esopassociationblog.org.

36th Annual Conference – Legislative Information

If you’re attending the Association’s 36th Annual Conference this week in Washington, DC, and will be meeting with your member of Congress, below are a few highlights on recent pro-ESOP legislation and information concerning a negative ESOP proposal in the President’s 2014 FY Budget.

You can find additional information in the Lobbying Kit which will be available at the Conference and in the 2013 Spring Advocacy Kit which is available on the website.

Senator Kelly Ayotte Renews Work to Protect Employee Ownership: Introduces Pro-ESOP Bill, S. 273

Press release here.

On February 13, 2013, Senator Kelly Ayotte (R-NH) introduced S. 273, a bill to modify the definition of fiduciary under the Employee Retirement Income Security Act of 1974 to exclude appraisers of employee stock ownership plans (ESOPs).

Co-Sponsors

Senator Roy Blunt, R-MO

Senator Amy Klobuchar, D-MN

Senator Mary L. Landrieu, D-LA

Senator Mitch McConnell, R-KY

This bill is a response to the Department of Labor’s (DOL) proposed anti-ESOP regulation mandating all private ESOP company appraisers be ERISA fiduciaries.

While the original proposal was withdrawn, if any regulation was finalized to make appraisers ERISA fiduciaries there would be extreme confusion over whether the appraiser or the trustee[s], and other current fiduciaries, make the decisions about acquisition of shares on behalf of average pay employees. More troubling, it would leave private ESOP companies open to lawsuits by aggressive class action trial lawyers. Leaders at the DOL say a new proposal will be issued in July 2013. It is expected DOL will not alter the proposed regulation’s mandate that all appraisers of ESOP stock be ERISA fiduciaries.

Pro-ESOP Bill Introduced in Senate, S. 742

Press release here.

The ESOP Association expresses strong support for S.742, the Promotion and Expansion of Private Employee Ownership Act of 2013, introduced April 17, 2013 by Senator Ben Cardin (D-MD) and co-sponsored by a bi-partisan group of Senators. Co-sponsors include:

Original Co-Sponsors

Senator Ben Cardin (D-MD)

Senator Roy Blunt (R-MO)

Senator Amy Klobuchar (D-MN)

Senator Mary Landrieu (D-LA)

Senator Pat Roberts (R-KS)

Senator Debbie Stabenow (D-MI)

Senator John Thune (R-SD)

Joined as Co-Sponsors as of April 23

Senator Mike Crapo (R-ID)

Senator Sherrod Brown (D- OH)

S. 742 would amend the Internal Revenue Code of 1986 and the Small Business Act to expand the availability of employee stock ownership plans (ESOPs) in S corporations and expand opportunities for existing S ESOP corporations.

The ESOP Association Disappointed with ESOP Proposal in President Obama’s Budget

Press release here.  Additional information here and here.

Today, The ESOP Association expressed disappointment over a provision in the President’s Fiscal Year 2014 budget that pertains to employee stock ownership plans (ESOPs). Included in the budget document is a provision to eliminate Internal Revenue Code section 404(k). This incentive for ESOP creation and operation permits a C corporation to deduct the value of dividends paid on ESOP stock passed through to employees in cash, deductions used to pay the ESOP acquisition loan, or when the employee reinvests in more company stock in his/her ESOP account balance.

“This is a major proposal to reduce an incentive to create and operate an ESOP; we are disappointed it has been included in the President’s budget,” said ESOP Association President, J. Michael Keeling. “It is counter-intuitive to eliminate an incentive for a policy that resulted in fewer layoffs during the Great Recession. According to the 2010 General Social Survey, employee stock owned companies laid off employees at a rate of 2.6% in 2010, whereas the rate for conventionally-owned companies was 12.1%.  It’s baffling to hear the Administration preach about creating jobs and then take away a proven policy that sustains jobs.”

NEWS: Senator Kelly Ayotte Renews Work to Protect Employee Ownership: Introduces Pro-ESOP Bill, S. 273

The following press release was sent out by The ESOP Association on Wednesday, February 13, 2013. We wanted to share the information with readers.

For Immediate Release: February 13, 2013

For More Information: Amy Gwiazdowski, amy AT esopassociation.org

Senator Kelly Ayotte Renews Work to Protect Employee Ownership: Introduces Pro-ESOP Bill, S. 273 

February 13, 2013 (Washington, DC) – Senator Kelly Ayotte (R-NH) introduced S. 273, a bill to modify the definition of fiduciary under the Employee Retirement Income Security Act of 1974 to exclude appraisers of employee stock ownership plans (ESOPs). The bill is co-sponsored by Senators Roy Blunt (R-MO), Mary L. Landrieu (D-LA), and Mitch McConnell (R-KY).

This bill is a response to the Department of Labor’s (DOL) proposed anti-ESOP regulation mandating all private ESOP company appraisers be ERISA fiduciaries.

While the original proposal was withdrawn, if any regulation was finalized to make appraisers ERISA fiduciaries there would be extreme confusion over whether the appraiser or the trustee[s], and other current fiduciaries, make the decisions about acquisition of shares on behalf of average pay employees. More troubling, it would leave private ESOP companies open to lawsuits by aggressive class action trial lawyers. Leaders at the DOL say a new proposal will be issued in July 2013. It is expected DOL will not alter the proposed regulation’s mandate that all appraisers of ESOP stock be ERISA fiduciaries.

“We’re very pleased to see Senator Ayotte not back down from protecting the best jobs policy, and the best deficit reduction policy, in Federal law,” said ESOP Association President, J. Michael Keeling. “The DOL needs to wake up to the fact that private company ESOPs have tremendous positive records of sustaining jobs as evidenced during the Great Recession. According to the General Social Survey of 2010, employer stock owned companies laid off employees at a rate of less than 3% whereas conventionally-owned companies laid off employees at a rate of more than 12% during the Great Recession. Bottom-line, ESOP companies’ employees, in the aggregate, were saving Uncle Sam $7 for every dollar Uncle Sam spent promoting employee ownership.”

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The ESOP Association is the national trade association for companies with employee stock ownership plans (ESOPs) and the leading voice in America for employee ownership. The core cause of The ESOP Association is the belief that employee ownership will improve American competitiveness, increase productivity through greater employee participation, and strengthen our free enterprise economy. More information: website – www.esopassociation.org and blog – www.esopassociationblog.org.

American Bar Association Section on Taxation Sends Letter to DOL on Definition of a Fiduciary

The American Bar Association Section on Taxation sent a letter in December 2012 to Assistant Secretary of Labor, the Honorable Phyllis C. Borzi, discussing the DOL’s proposed regulation on the definition of a fiduciary. The letter makes a number of recommendations to the proposed regulation including information on valuation which would impact ESOP companies. The recommendation states: “We recommend that Final Regulations provide that a person who provides advice, or an appraisal or fairness opinion, concerning the value of securities or other property (“Valuation Information”), including with regard to employer securities, without providing any advice regarding whether to consummate a proposed transaction, even where rendered in connection with an acquisition or disposition of such property (e.g., by an ESOP) will not be a fiduciary.” (Information found on page 3 of letter.)

“While the DOL continues to pursue the proposed regulation on the definition of a fiduciary, comments such as this one from the American Bar Association filter in opposing the regulation and pointing out flaws in the DOL’s thinking. One has to wonder why the DOL is being so persistent in pushing this regulation,” said ESOP Association President, J. Michael Keeling.

The American Institute of CPAs (AICPA) Seeks Support for S. 1232

S. 1232, introduced by Senator Kelly Ayotte (R-NH) in June 2011, is a bill to modify the definition of fiduciary under the Employee Retirement Income Security Act of 1974 to exclude appraisers of employee stock ownership plans. This bill is a response to the Department of Labor’s (DOL) proposed anti-ESOP regulation mandating all private ESOP company appraisers be ERISA fiduciaries.  If the proposed regulation were to be finalized as is, 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 open to lawsuits. More information can be found here.

On August, 9, 2012, the President and CEO of AICPA, Barry C. Melancan, CPA, CGMA, wrote to Senators Tom Harkin and Mike Enzi to ask for their support of S. 1232. Senator Harkin is Chair of the Senate Committee on Health, Education, Labor and Pensions and Senator Enzi a Ranking Member. The letter states:

“…the DOL’s 2010 proposed definition of fiduciary, which would contradict more than 35 years of accepted practice, will not solve the agency’s quality concerns regarding a limited number of ESOP appraisals. Rather, it takes a one-size-fits-all approach to correct an admittedly small potential problem which would benefit from a far more specific solution.”

“We have said it over and over again, but the DOL does not want to listen. The officials at DOL need to wake up to the fact that private company ESOPs have tremendous positive records of creating jobs that are locally controlled in high performing companies.  ESOPs are good for employees, companies, and our communities,” said ESOP Association President J. Michael Keeling. “While a new version of the regulation has not been proposed yet in 2012, the DOL continues to state that ESOPs will be closely examined and incorrect valuations are of particular concern. DOL officials refuse to listen and we have heard they have no intent to alter their views toward ESOPs. We thank the AICPA for their support of S. 1232 and ask members of The ESOP Association to reach out to their Senators and ask for their support of this bill.”

Does the current DOL care what Congress thinks about ESOPs? Apparently not.

On July 26, 2012, Mabel Capolongo, Director of Enforcement for the Department of Labor’s (DOL) Employee Benefits Security Administration, blasted ESOPs because retiring shareholders were selling their stock to the ESOP!

Duh. This is precisely what Congress has endorsed and encouraged since 1984 — to have exiting shareholders of private companies transfer ownership of productive assets to average pay employees in a leveraged ESOP transaction. (Prime example: Internal Revenue Code Section 1042.)

For example, Congress, right or wrong, eliminated some incentives between 1986-1995 that encouraged large, publicly traded companies to establish ESOPs, but the Congress and six former Presidents have consistently affirmed special laws to encourage the creation and operation of ESOPs in private companies, including a major expansion of ESOPs by enacting law in 1998 encouraging ESOPs in S corporations.

Today, it is estimated that 95% of ESOPs created and operating were formed because an existing shareholder sold shares to an ESOP, when it became time for him/her to leave from the company, usually because of age.

It seems DOL wants the existing shareholder not to help create broadened ownership but to liquidate his/her business, or sell it to a private equity firm, or a competitor, resulting in lost jobs!

Meanwhile, there is 35 years worth of overwhelming evidence that private ESOP companies are more productive, more profitable, and more sustainable, providing locally-controlled jobs, compared to similar private companies not employee owned.

Evidence is also clear that during the Great Recession employee stock owned companies laid off employee at a rate of less than 3% while traditionally owned companies laid off employees at a rate greater than 12%.

“The ESOP community wants to work cooperatively with regulators at DOL but having a top DOL official express alarm that exiting shareholders of private companies are selling the stock to an ESOP makes cooperation hard. The expression of dismay by Ms. Capolongo about exiting shareholders selling stock to ESOPs to the benefit of the employees, the company, and American communities demonstrates the Department has no regard for laws encouraging ESOP creation and operation,” said ESOP Association President J. Michael Keeling.

If you would like to read additional comments about the DOL’s enforcement project, read the Jul 27, 2012 issue of the BNA’s Daily Tax Report. The article can be found on page G-6.

Department of Labor’s ESOP Tune Isn’t Changing

The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) has not yet released a new version of its proposed regulation on the definition of a fiduciary but officials at the EBSA are still focused on ESOPs. (See the June 25, 2012 blog post on reaction of U.S. Senator to indications DOL will not be altering its proposal to mandate all ESOP appraisers be ERISA fiduciaries.) According to an article in the June 12, 2012 edition of the Daily Tax Report, Assistant Secretary of Labor for EBSA, Phyllis C. Borzi, said the EBSA will be focusing on enforcement projects having to do with employee benefit plan contributions in the coming months.

There are several national enforcement projects EBSA will focus on in 2012, concerning ESOPs specifically though, the article states the following: “The Employee Stock Ownership Plans Project, which identifies and corrects violations of ERISA in connection with ESOPs, such as incorrect valuation of employer securities and refinancing of ESOP loans.”

“The fact that Ms. Borzi is naming ESOPs specifically in the list of enforcement projects for 2012 illustrates that there are dark clouds over ESOPs at DOL and its proposal to make all ESOP appraisers ERISA fiduciaries,” said ESOP Association President J. Michael Keeling.

ESOP Super Champion, Senator Kelly Ayotte, Seeks Allies to Protect ESOPs; Sends Out Dear Colleague Letter on S. 1232

Senator Kelly Ayotte (R-NH)

Senator Kelly Ayotte (R-NH) has sent a Dear Colleague letter to her Senate colleagues seeking co-sponsors for her pro-ESOP bill, S. 1232 — “a bill to modify the definition of fiduciary under the Employee Retirement Income Security Act of 1974 to exclude appraisers of employee stock ownership plans.”

Senator Ayotte’s letter discusses how S. 1232 (S. 1232 was introduced June 20, 2011) would prohibit the Department of Labor (DOL) from moving forward with its proposed regulation on the definition of a fiduciary. Her letter goes on to state that the proposed regulation would not only hurt ESOPs already in place but would jeopardize the creation of new ESOPs, result in the purchase of additional insurance coverages, the need to employ specialized counsel to deal with the new regulation, and expose ESOP companies and fiduciaries to unnecessary litigation. Her letter goes on to say that not only is the proposed regulation a hindrance to a program that is providing retirement benefits to employees, the proposed regulation is also an unnecessary step as there are rules already in place to correct ERISA violations. From the letter, “S. 1232 prohibits the DOL from moving forward on this proposal by creating an explicit exemption for ESOP appraisals from ERISA’s stringent fiduciary requirements. It is a pro-small business solution and simply codifies what has been in practice for over 35 years.”

Current co-sponsors of S. 1232 include: Senator Roy Blunt (R-MO), Senator Scott Brown (R-MA), Senator Susan Collins (R-ME), Senator Mary Landrieu (D-LA), Senator Mitch McConnell (R-KY), and Senator Olympia Snowe (R-ME).

Additional information about S. 1232 can be found on the Association’s website here and here.

As the Association has mentioned in previous newsletters and on the Association’s blog, the DOL is not backing down on its ESOP stance (See page 5 of the June 2012 issue — Department of Labor’s ESOP Tune Isn’t Changing — for more information. The June issue is available in the members only section of the Association’s website.).

Senator Ayotte’s spokesperson indicated that the Senator feels the DOL is not listening to the ESOP companies’ protests about its proposal which at this time is on “hold” at the Department. Statements by DOL officials indicate no intent to alter its aforementioned proposal with regard to ESOPs.

“The DOL continues to state that ESOPs will be closely examined and incorrect valuations are of particular concern as officials in the DOL’s Employee Benefits Security Administration have repeatedly stated,” said ESOP Association President J. Michael Keeling. “We thank the Senator for taking the lead on this issue. The DOL needs to wake up to the fact that private company ESOPs have tremendous positive records of creating jobs that are locally controlled in high performing companies.  ESOPs are good for employees, companies, and our communities. The ESOP community needs to ask Senators to join Senator Ayotte and her current co-sponsors.”

Phyllis Borzi, Assistant Secretary of Labor, Employee Benefits Security Administration, Receives Letter from the U.S. House Committee on Education and the Workforce

On November 18, 2011, the U.S. House Committee on Education and the Workforce sent a letter to Assistant Secretary of Labor, Employee Benefits Security Administration, Phyllis Borzi, in regard to the Department of Labor’s (DOL) proposed regulation on the definition of a fiduciary and her testimony given at a July 26, 2011 Committee hearing. The hearing, “Redefining Fiduciary: Assessing the Impact of the Labor Department’s Proposal on Workers and Retirees,” was held to examine the Department’s proposed regulation on the definition of a fiduciary. If you would like to view of a copy of the letter, click the following – Committee on the Education and Workforce Letter to the Honorable Phyllis Borzi.

We’ve talk about the DOL’s proposed regulation on the blog numerous times. If you would like a re-cap, please visit this page. This page contains information on the proposal going back to November 2010 when The ESOP Association and its members began protesting the regulation. The regulation, as of September 2011, has been withdrawn but the DOL has stated it will issue a new proposal in early 2012. The fact that the letter, dated November 18, 2011, was sent after the withdrawal of the proposals sends a strong message that concerns about the impact of this proposal have not been alleviated by the DOL.

The letter to Assistant Secretary Borzi, signed by the Committee on Education and the Workforce Chair, John Kline (R-MN), and Chair of the Subcommittee on Health, Employment, Labor and Pensions, Phil Roe (R-TN), states, in addition to pointing out that the proposal should be published with a full economic analysis, that “The empirical rationale for proposed changes to the regulation has not been forthcoming.” A list of questions regarding the problems the DOL wishes to solve with the proposed regulation was posed to Assistant Secretary Borzi. It was also pointed out that earlier in 2011 the Committee had sent Assistant Secretary Borzi a letter and additional requests for information after her testimony to the Committee. Those requests for information were answered late and incompletely in the opinion of the Committee.

Among the list of 12 questions regarding the proposal was an ESOP related question under the section of questions marked “Scope of the Purported Problem:”

“3. Similarly, how many enforcement actions have been brought against ESOP trustees that have hinged on faulty valuations? What have been the outcomes of these cases?”

Congressman Todd Rokita (R-IN), in early 2011, sent a letter to Assistant Secretary Borzi about the proposed regulation regarding information on faulty valuations and asking for clarification from the Department. As the Association stated in a blog post of May 24, 2011, (Note: you will need to scroll down to the May 24th entry.) — DOL is moving to establish the “details” of what is a correct private ESOP company appraisal as opposed to having the transparency to say, “We do not like the way nearly all ESOPs are valued by appraisers that claim to be good appraisers, who probably do all the appraisals of the ESOP companies who are members of The ESOP Association.” If you would to read a copy of the response from the DOL’s EBSA to Congressman Rokita, click the following Congress Rokita and EBSA exhange on ESOPs.

On May 23rd of this year, the Association wrote to the Office of Management and Budget about the proposed regulation pointing out that in preparing and issuing the proposed regulation that ESOP appraisers be ERISA fiduciaries, the DOL ignored Executive Order 13563 from the White House about how to develop and issue regulations. This Executive Order guides Executive Branch agencies to only issue regulations, or to at least use a process in developing regulations, that does not impose harsh burdens on business — especially small businesses. The Association’s letter to the Administrator of the Office of Information and Regulatory Affairs, Mr. Cass R. Sunstein, stated that the DOL’s proposed regulation did not meet the standards set in the Executive Order. If you would like to read a copy of the Association’s letter, click the following ESOP Association’s Letter to Office of Information and Regulatory Affairs.

The letter from the Committee on Education of the Workforce echoes many of the Association’s thoughts in regard to the proposed regulation and its impact on small businesses and the burdens that will be placed on the companies trying to provide retirement security for their employees.

Obviously, we’ll be watching and reporting on the outcome of this when information is available.