ESOP Appraisal Proposal Expected in Coming Months

All signs are pointing to a proposal on adequate consideration rules for employee stock ownership plans in the coming months according to recent regulator statements, a move that has been long sought after by the ESOP industry and some policymakers.

Adequate consideration, or the appraisal of the shares in ESOP plans, has been perhaps the main regulatory issue facing the ESOP industry. Many companies that issue shares to their employees as part of this type of qualified retirement plan only have a very small public market, if any at all.

This opacity can make fair pricing of those shares tricky since there is no market to benchmark pricing. This, in turn, can expose ESOP sponsors to regulatory and litigation risk if they are alleged to have mispriced the shares to the detriment of the plan participants.

A representative of the ESOP Association confirmed that their leadership met with the Employee Benefits Security Administration in December “to discuss our concerns and our main priorities regarding the rule,” and they are “well aware of EBSA’s work on a proposed adequate consideration rule.”

On April 2, at a conference hosted by the Aspen Institute, EBSA chief Lisa Gomez said that a proposal “is a very high priority,” and she expects one “certainly in the next couple of months.” She also said that Senator Bernie Sanders, I-Vermont, a proponent of ESOPs, calls her personally on a regular basis to ask about a pending proposal.

On Tuesday, the ERISA Advisory Council declined to take on ESOP adequate consideration as a research topic, instead opting for qualified default investment alternatives and health insurance appeals. This was done partially on the basis that EBSA was nearing a proposal on the ESOP issue and the Committee’s report, due at year’s end, would likely come later than a proposal on the same topic and therefore be of little use.

The WORK Act, passed alongside the SECURE 2.0 Act of 2022, mandated the Department of Labor to issue regulations in this area so that there can finally be legal certainty. Indeed, ESOP adequate consideration appeared in the Fall 2023 regulatory agenda for the DOL and the estimated date for a proposed rule was March of this year.