April 17, 2023

DOL Commits to Regulatory Process for ESOP Valuation Guidelines

NCEO founder and senior staff member

Update: On August 25, 2023, the DOL announced that the proposed rules will be released by the end of the year.

The U.S. Department of Labor has stated that it will undertake a formal notice and comment rulemaking “relatively soon” on the adequate consideration requirement governing the valuation of ESOP-held shares. The WORK Act (part of the SECURE 2.0 Act of 2022) required the Department of Labor (DOL) to set guidelines for ESOP valuation. Simultaneously, the DOL has been facing a formal petition under the Administrative Procedures Act (APA) brought by The ESOP Association calling for the same formal rulemaking. The DOL denied the petition under the APA but nonetheless agreed to a formal public notice and comment rulemaking with a  process that  includes publishing their draft proposed regulation through public notice and the opportunity for stakeholder comments.  The agency must then respond to those comments before issuing any final regulation.

Assistant Secretary of Labor Lisa Gomez told the ESOP Association, “the Department has decided to move forward with notice and comment rulemaking on the ‘adequate consideration requirement’ in connection with ESOP acquisitions of qualifying employer securities and looks forward to hearing from you and a wide range of stakeholders on the relevant issues. The Department expects to move forward and engage with interested stakeholders, including TEA, relatively soon as the first step of the rulemaking process. The specific timing of next steps in the process will depend on the breadth and depth of public input from those public engagement sessions with interested stakeholders. We look forward to additional input from TEA as we move forward with this process.”

ESOP advocates have long urged the DOL to establish clear guidelines for adequate consideration requirements in ESOP transactions. The DOL started a process on this decades ago but never completed it. The new regulations could be issued in a year or two or could take much longer. Valuation regulations will have a profound impact on the creation and ongoing viability of ESOPs. The community must engage with the regulatory process to ensure they adequately accommodate the needs of ESOPs and ESOP participants so the regulations do not discourage ESOPs. Advocates of the process note Congress's intent is to encourage ESOPs, and that the current lack of clarity impedes ESOP formation and results in inconsistent court and regulatory actions.