Congressional members accuse DOL of undermining ESOPs

BVWireIssue #193-3
October 17, 2018

ESOP valuations
expert testimony, breach of fiduciary duty, fair market value (FMV), overpayment, employee stock ownership plan (ESOP)

As reported by the ESOP Association, in a letter to the White House dated October 1, 27 members of Congress (including one who identified as a CPA) have voiced serious concerns about the DOL’s “investigatory and enforcement policies toward Employee Stock Ownership Plans (ESOPs).” The signors ask the president to intervene in a show of support for American businesses and workers.

The letter notes the important role employee-owned companies have played in the American economy and the role ESOPs have played in enabling employee ownership. Research has shown that employee ownership firms coped with the past two recessions better than conventionally owned companies, the letter says. It claims that, pre- and post-recession, ESOP-owned companies have performed better than private U.S. firms generally. It also maintains that DOL filings show that companies contribute substantially more to ESOPs than non-ESOP companies contribute to 401(k) retirement plans.

The concern is over the DOL’s enforcement policies, which the signors say, undermine ESOPs. The congressional members accuse the DOL of not providing substantive guidance on valuation and other important issues and of taking inconsistent positions on legal issues. Although it is the DOL’s place to go after bad actors, the department’s investigatory approach “is having a destabilizing effect,” the signors say. The fear is that no one will want to serve as a plan fiduciary.

The letter relates anecdotes that it claims show the DOL’s overstepping its mandate by threatening ESOP companies with extended investigations and lawsuits. According to the letter, these “tactics” began under the former administration but have continued under the present government. They are taking a toll on small businesses, the letter warns.

The signors ask the president to assist in persuading the DOL to work with the ESOP community to develop guidance on valuation and other key issues and to make the DOL halt its current “controversial oversight practices.”

Criticism of the DOL position vis-a-vis ESOPs has come from other corners as well. As we recently reported in connection with the pending appeal of the Brundle case, the American Society of Appraisers (ASA) also expressed strong opposition to the DOL’s ESOP-focused enforcement projects. In its amicus brief on behalf of the ESOP trustee, the ASA says the DOL policy has given rise to lawsuits “in which a plaintiff submits a blanket accusation, without factual knowledge, that ESOP fiduciaries breached their duties … and violated prohibited transaction rules because they relied upon an appraisal that allegedly resulted in the ESOP’s overpayment for the shares it purchased.” The ASA expressed unequivocal support for the Brundle ESOP trustee and ESOP appraiser.

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