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Read a sample issue of the entire newsletter (September-October 2015).Sample Article from the July-August 2016 Issue:
ESOPs and the Department of LaborOn April 14, 2016, Timothy Hauser of the US Department of Labor addressed the NCEO's annual conference. Hauser is the deputy assistant secretary for program operations of the Employee Benefits Security Administration, and his responsibilities include overseeing EBSA's regulatory, enforcement, and reporting activities. This article is excerpted from a transcript of his remarks, which were not delivered from a prepared text.
At events like this, I think it's important to celebrate what is unique about ESOPs: the transformational potential they have for empowering people and for improving the level of engagement and the level of satisfaction that people have at the workplace.
But it is just as important to recognize what is not unique about ESOPs. What isn't unique about them is that they are retirement plans. First and foremost from a Title I of ERISA standpoint, the purpose of an ESOP is to provide retirement benefits to people. It's to provide a measure of security for people when they retire.
The Principles of ERISAWe are going to do a quick primer, a kind of "ERISA-lite." It sounds bad, I know. People think that ERISA is dry and technical. If you bring it up in social settings, people move away from you. But it really boils down to a few central precepts. The first principle is that ERISA uses a functional test of fiduciary status. You are a fiduciary if you have authority over plan assets, if you have authority over plan administration, or if you give investment advice for a fee, and it doesn't matter what your title is.
The second principle is that if you are a fiduciary, you have some very basic duties. You have the duty to be prudent, to be loyal to the plan, and an obligation to follow plan documents.
The third principle to know about ERISA is that it is very anti-conflict-ofinterest. It's not a question of disclosure. A basic premise of ERISA, unlike a lot of other laws, is that the best way to deal with conflicts of interests is not to have them.
The final principle is often what makes me an unpopular figure at these events, and that is enforcement. When a fiduciary breaches their obligations, the fiduciary can be held personally liable to the participants, the beneficiaries, and the plan to whom they owe the duty that has been dishonored.
If the rights of the participants and beneficiaries to prudent, loyal, and unconflicted conduct are to mean anything, they need to be backed up by enforceable remedy. A right that doesn't have a remedy associated with it is not really a right. It's more like a guidance or a principle of good living.
These same principles—the functional definition of fiduciary, the obligation to act with prudence and loyalty and to honor plan documents, and the obligation to refrain from conflicted transactions—apply to everybody responsible for ERISAcovered benefit plans.
I think there's a certain genius in the statutory structure. These are basic moral precepts. If you are managing someone else's money, you should exercise care, you should be a professional, and you should make reasonable decisions with that money. You should be loyal. That flows from the fact that it's not your money. It's not the plan's counterparty's money. It's the plan's money. You need to keep your promises, which means following the plan document.
These principles have the virtue of being flexible. They don't require a set of rules or a legal structure that specifies in minutia how every transaction is supposed to work.
These basic standards have been in the law of trusts and agency for hundreds of years, and they have been there because they work.
Interestingly enough, a lot of the things that make ESOPs really unique and make them especially valuable, I think, and may be motivating factors behind the tax preferences they receive and their special place in the statute, actually are not part of the legal structure.
Enforcement ProgramLet me talk about our enforcement program. When we bring lawsuits against people who, for example, overpaid for stock, we are not doing something that is hostile to ESOPs, that reflects some animus toward ESOPs, that runs counter to their purpose.
Quite the contrary. Enforcement is congruent with the purposes of ESOPs. We do it to promote the interests of the workers that ESOPs exist to serve. We do it to aid and facilitate all the issues of empowerment and engagement that ESOPs are meant to serve.
And that's where I need your help. If there is one area of our enforcement program where we consistently see problems it is in the appraisal context. We are more likely as an agency to find violations when we look at valuations in closely held companies than virtually any other category of financial transaction.
I'm quite confident that ESOP fiduciaries, like fiduciaries of all kinds of plans, do their level best in general to adhere to their basic fiduciary obligations, so what I am talking about now probably is a minority of the conduct.
It is the conduct that I tend to disproportionately see, because when an ESOP makes its way to my desk it's generally because there's been something abusive happening. You can pretty much pick any five-year period for the last couple decades and you will find that we've recovered hundreds of millions of dollars bringing cases involving these appraisals.
The cases we bring tend to be diametrically opposed to the principles I outlined earlier.
It is commonplace in the cases we bring, for example, if the ESOP is the buyer, for the seller essentially to have picked the appraiser, for the seller to have done all the interaction with the appraiser about what the price is going to be; for the fiduciaries to have paid much more attention to what the seller wanted than whether the price was right for the plan. Often there was a complete absence of negotiation. You see appraisals where the appraiser did not have complete, current, and accurate information about the company, or where the appraiser was selected without much consideration for competence or quality.
We can do better than these cases. I think it would be better for the ESOP industry if we can find a path forward where I bring many, many fewer cases.
We can do better if you can make sure that the plan is independent of the counterparty, if you make sure that the people looking at the appraisal look at it with a critical eye, if you make sure that the appraiser had the information he or she needed to do the job right.
A little bit of a plea here: anything you can do to help us on that score would be much appreciated. I have a number of plans going forward to try to help improve this marketplace and provide additional guidance. I don't believe the cases we bring are at all reflective of what happens in the ESOP community generally, but I think that when it happens it undermines what ESOPs are meant to serve.