Is Congress Protecting Its Constituents or Running Interference for Bad Actors?

November 14, 2018

A group of twenty-seven legislators has authored a letter asking President Trump and the Department of Labor (“DOL”) to provide the ESOP industry with guidance on substantive issues, most importantly the issue of valuation, and to stop engaging in what it termed “regulation through litigation”. The letter asks the DOL to collaborate with the ESOP community and basically requests the President and the DOL to stop engaging in enforcement activities until such meaningful guidance is provided.

ESOPs, ERISA, and the DOL

An ESOP is a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer. While ESOPs are often used to give the employees a vested interest in the company’s success, they can be used for improper purposes, which harms employees and violates the Employee Retirement Income Security Act (“ERISA”), a federal statute that protects employee retirement assets from abuse. Because ESOPs must comply with ERISA, there is a fiduciary duty for those who administer, manage, or control ESOP plan assets, and the fiduciaries must act solely in the interest of plan participants and beneficiaries.

EBSA’s Role

The Employee Benefits Security Administration (“EBSA”) is the division of the DOL responsible for investigating ESOPs for compliance. Although the letter from Congress suggests that no guidance is provided by the DOL, EBSA’s website lists ESOPs as a national enforcement project, a position held since 2005, and EBSA makes clear that it investigates and enforces ERISA violations in ESOPs in several areas:

  • Ensuring that when plan sponsor stock is bought or sold by an ESOP the plan fiduciaries make such exchanges for the fair market value of the stock;
  • Conflicts of interest in ESOP purchase and sale transactions, particularly when one of the persons engaged in the transaction also serves in some fiduciary role over the plan itself;
  •  Ensuring the duty of fiduciaries to control waste and monitor the plan, as well as the duty to pay benefits due under the ESOP, are complied with; and
  • Ensuring that sound procedures and practices are in place by the institutional trustees overseeing plan operations

What does Congress Want?

The signatories of the letter are seeking drastic action:

We request your assistance in protecting ESOPs and employee ownership. Specifically, we believe the Department could immediately eliminate some of the regulatory uncertainty by collaborating with the ESOP community to develop clear guidance with respect to valuation and other important issues. Furthermore, the Department should consider immediately halting controversial oversight practices currently in use while the agency develops more efficient investigatory mechanisms that limit the burdens and costs on small businesses.

Anyone reading that would be under the impression that DOL has given no guidance, or murky guidance, with respect to valuation. Yet nothing could be further from the truth.

DOL Guidance on Valuation and other ESOP-related Issues

The letter from Congress is puzzling, given that the DOL EBSA enforcement site has a clickable link titled ESOP Agreement – Appraisal Guidelines. Clicking on that link provides all the guidance an ESOP practitioner could want, and indeed everything sought in this letter. The link is to a 2014 settlement agreement with GreatBanc. It gives guidance on a myriad of issues, including how to select a valuation advisor, how to avoid conflicts of interest with the valuation advisor, how to exercise proper oversight of the advisor, the necessary financial statements, how to engage properly in the fiduciary review process, how to use the valuation report, the fair market value transaction requirements, and additional concerns. While the appraisal guidelines in the GreatBanc settlement are legally binding only on GreatBanc, the DOL suggested that the ESOP industry would “do well to take notice” of the process steps it put in place. There are more recent settlements in two other cases which build on the guidance set forth in GreatBanc and explain in detail every question raised in the Congressional letter.


It appears as if certain Congressional constituents (or donors) are annoyed at being aggressively monitored and sued by the DOL and want the government to lay off. The letter appeals to the current administration’s desire to undo and rollback regulations from the prior administration, noting that the enforcement tactics being employed against ESOPs “began under the prior Administration, but unfortunately have continued under this Administration.” Of course, since ESOP’s have been a national enforcement project since 2005, heightened action actually began under the Bush administration, and hopefully the current administration is not fooled by the naked appeal to stop enforcing the law against the ESOP community.

Contact Us

If you think you may have suffered losses to your retirement savings because of an ESOP transaction, we would be interested in investigating your case. Cohen Milstein’s attorney Michelle Yau is here to answer your questions and to learn about your experience with your ESOP. To schedule a phone appointment, please call our office at (202) 408–4600.

Cohen Milstein Sellers & Toll PLLC
1100 New York Avenue, N.W., Suite 500
Washington, D.C. 20005
Telephone: 888-240-0775 or 202-408-4600