The Employee Ownership Update
February 24, 2003
Retirement Reform Bills ReintroducedLeaders in the House and Senate have moved to start the process for reforming retirement plan law again with the introduction in each chamber of legislation paralleling what passed in each House last year. Because this is now a new Congress, that legislation must go back to committees for hearings and mark-ups before being considered on the floor. In the House, Benjamin Cardin (D-MD) and Rob Portman (R-OH) will reintroduce a bill that contains provisions passed by the House last year, along with some other provisions dropped for procedural reasons. John Boehner (R-OH) plans to reintroduce essentially the bill passed by the House. Both bills would exclude ESOPs from their requirements except ESOPs in public companies that are combined with 401(k) plans or that allow employees to buy stock through deferrals into the plan. For these plans, as well as for 401(k) plans:
Other provisions in the bill would provide fiduciary exemptions for advice to employees from companies operating the 401(k) plan, as well as outside advisors. It would also provide incentives for employee retirement planning.
- Employees would have to be able to sell stock in their accounts after it had been in their accounts for three years or the workers had been in the plan for three years (at the company's choice).
- Companies could not require that employees invest in company stock.
- Companies would have to provide quarterly account statements, including statements concerning the virtues of diversification.
On the Senate side, Tom Daschle (D-SD) has introduced S. 9, the "Pension Protection and Expansion Act of 2003," which incorporates provisions from the 2002 Democratic-controlled Senate Health, Education, Labor, and Pensions Committee. The provisions passed narrowly in 2002. The new Senate is likely to work off the House bill instead. S. 9 requires that employees be allowed to diversify employer stock in their accounts after three years' participation in a plan, requires employee representation on trust committees in plans with over 100 participants, provides fiduciary exemptions only for independent financial advisors who are hired by companies to educate 401(k) participants, and contains a raft of other provisions on executive pay and other retirement plans.
While it appears that Congress could now easily reach a consensus on the 2002 House-passed approach, the legislation's future is still cloudy. First, it will have to compete with a very busy legislative agenda. Second, the President's retirement plan proposals will need to be considered. Even though they have been pronounced as almost dead on arrival, some provisions n the proposals may surface in the reform debate. Because some of these proposals are controversial, even among Republicans, this could complicate chances for retirement reform of any kind.
Stock Option Accounting Bills ReintroducedBills to tie tax deductions to expensing stock options were reintroduced in both Houses by their 2002 sponsors. The "Ending to Double Standard for Stock Options Act" was introduced in the House by Pete Stark (D-CA) and in the Senate by John McCain (R-AZ) and Carl Levin(D-AZ). It is not likely that either bill will receive serious consideration given that the Financial Accounting Standards Board (FASB) will be reconsidering the issue and the International Accounting Standards Board (IASB) will be issuing new standards requiring expensing. Congress will undoubtedly wait to see what comes out of these deliberations.
Performance-Based Options Not Excludable from Shareholder VotesIn letters to Goldman Sachs and Texas Instruments, the SEC has ruled that companies cannot exclude shareholder proposals to require that options be performance based as "ordinary business matters." The letters follow a trend from the SEC to require companies to allow votes on how option plans are structured and accounted for. For details, see Goldman Sachs Group Inc., SEC No Action Letter, avail. 1/3/03 and Texas Instruments Inc., SEC No Action Letter, avail. 1/8/03.
DynCorp SoldDynCorp, one of the 10 largest majority ESOP-owned companies, has agreed to be sold to CSC Corporation for just under $1 billion. DynCorp had revenues of $2.3 billion and 23,000 employees worldwide, providing defense, security, aerospace, and aviation services. A management-led buyout acquired the company in 1987. The ESOP was a minority owner at first, but eventually bought controlling interest. The sale is pending final approval.
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