ESOPs in Closely Held Companies Now Unlikely to Be Affected by Enron Legislation

As Congress continues to deliberate on reforming retirement plan law in the wake of Enron, it is becoming clear that closely held company ESOPs will probably not be substantially affected by any likely changes. In the Senate, the legislation introduced by Senator Kennedy (described below) will serve as the Democratic position; the Republican position appears to be coalescing around the Bush proposal. The Kennedy bill would affect closely held company ESOPs only in a few ways. For companies with over 100 participants in their plans, employees would have to be able to elect half the plan's trustees. In addition, the company would have to issue quarterly financial statements, standards for who is a fiduciary would be somewhat expanded, and fiduciary insurance would be mandated (most ESOP companies have it anyway). The Bush proposal, by contrast, does not effect ESOPs in closely held companies at all.

The Kennedy bill's trustee provisions are among its most controversial and seem very unlikely to survive the Congressional process. That means that, at most, ESOPs in closely held companies would be subject to relatively minor additional procedural requirements. In the House, it appears likely that the Bush bill, or a variant of it, will serve as the likely legislative vehicle, so any eventual compromise legislation between the two bodies looks very positive for closely held company ESOPs.