The Employee Ownership Update
March 14, 2003
FASB to Take Up ExpensingAs expected, on March 12, the Financial Accounting Standards Board (FASB) unanimously voted to address whether and how to require companies to charge the grant of options to their income statements. FASB is aiming to complete the project by year's end and implement any rules in 2004. That would synchronize with the schedule for the International Accounting Standards Board to do the same thing.
Predictably, the announcement was greeted by strong opposition from various industry groups, including both the high-tech sector and the National Association of Manufacturers. A bi-partisan group of 15 Senators also sent a letter to FASB opposing expensing, arguing it would reduce the practice of granting options broadly.
Retirement Reform Bill Passes House Committee
Leaders 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, the Education and Labor Committee has passed H.R. 1000, the Pension Security Act of 2003. The bill 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 allow companies to test their defined contribution plans for discrimination based on a "facts and circumstances" exemption from normal eligibility rules. Companies would have to apply to the Secretary of Labor for this exemption. It would also provide incentives for employee retirement planning.
- Employees would have to be able to sell stock in their accounts contributed by employers 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).
- Stock purchased by employees would be subject to diversification immediately, subject to rules for periodic trading requirements in the plan.
- 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.
- For companies with stock already in the plan, the rules would phase in at 20% of the assets in company stock per year.
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, although the House rules on investment advice and eligibility exemptions could be controversial. 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.
European Economic and Social Committee Endorses Employee OwnershipOn February 26, 2003, the European Economic and Social Committee of the European Union strongly endorsed employee share ownership and profit sharing as a means to improve corporate performance, increase financial transparency in corporations, improve corporate governance, and improve the competitive standing of small and medium-sized enterprises. The Committee concluded that employee share ownership is the most comprehensive, if riskiest, form of financial participation. Share ownership in Europe, it said, it mostly limited to highly skilled or managerial employees, but should be broadened to all employees. The committee urged that companies using financial participation establish open-book management approaches and provide a governance role for employee shareholders. Rules for financial participation plans should be non-discriminatory and inclusive. Exemptions from cumbersome securities law prospectus requirements should be provided for employee plans. The committee pledged to undertake a series of studies to analyze how to encourage broader financial participation.
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