March 29, 2022

Proposed DOL Regulations on Exempt Transactions Raise ESOP Community Concerns

NCEO founder and senior staff member

On March 8, the U.S. Department of Labor (DOL) proposed new rules for prohibited transaction exemption (PTE) filings, rules that have raised concerns in the ESOP community. These filings are relatively rare, with about 20 per year. While ESOPs are statutorily exempt from having to make these filings, some ESOP professionals are concerned the DOL might subsequently extend the concepts in the proposal to ESOPs.

To obtain an exemption, the appraisers and trustees hired by a company seeking an exemption must be independent. The DOL wants to define "independence" to mean that no more than 2% of an advisor's revenue can come from the client seeking the exemption, an approach that, if applied to ESOPs, would rule out many current advisors in the ESOP field. In addition, no more than 2% of an advisor's revenue could come from companies seeking exemptions that use the same independent trustee. Finally, advisors would also have to be able to show they have no other interest in the subject transaction or future transactions of the same nature or type. An independent fiduciary would be required to maintain fiduciary liability insurance sufficient to cover any damages and could not be indemnified by the company; additionally, the insurance could not have an exclusion for actions brought by the DOL or another regulator.

Comments were originally due by April 14, but several major organizations requested an extension, and on April 8, the DOL announced that the deadline would now be May 29. A useful analysis of the proposal can be found on the site of the Groom Law Group.