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The Employee Ownership Update

Corey Rosen

October 1, 2004

(Corey Rosen)

Government Accountability Office Urges Reform in Plan Proxy Voting

The Government Accountability Office (GAO) has urged Congress and the Department of Labor (DOL) to tighten rules for proxy voting in defined contribution and defined benefit retirement plans. The recommendations apply to the voting of any shares held in participant accounts, whether company stock or not. The GAO urged the DOL to be more aggressive in its investigations and enforcement procedures and suggested that Congress consider allowing the agency to assess monetary damages for improper proxy voting. The report argues that both fiduciaries who vote shares, as well as proxy voters who may vote shares on behalf of employees (such as mutual funds) are not subject to adequate disclosure rules about their voting guidelines and are subject to multiple potential conflicts of interest that may encourage them to side with management rather than the best interests of plan participants. It recommended greater us of independent fiduciaries when company stock is voted.

The DOL responded that it did not believe the problems merited this additional effort and that the imposition of additional requirements would discourage some companies from operating plans. The report, titled "Additional Transparency and Other Actions Needed in Connection with Proxy Voting" is available from the GAO web site at this link.

Tax Bill With ESOP, Deferred Compensation Provisions Still Uncertain

Two bills to amend the treatment of U.S. corporate income earned overseas that have significant provisions affecting ESOPs and equity compensation continue to face an uncertain fate. The American Jobs Creation Act of 2004 (H.R. 4520) and the Jumpstart Our Business Strength Act (S. 1637) would allow S corporation ESOPs to use distributions paid on both allocated and (as under current rules) unallocated stock in an ESOP to repay an ESOP loan.

The bills also both contain significant new restrictions on elections to defer taxation on deferred compensation, including stock-based compensation. Currently, employees can defer paying taxes on a vested benefit, including a stock award or a stock-equivalent award, by agreeing in advance to defer receipt of the benefit after it is vested. The Senate bill would affect all kinds of stock and stock equivalent programs; the House bill excludes stock options and restricted stock. Under both bills, the deferral would have to take place at least 12 months before the benefit becomes vested, and the election must be no later than the calendar year prior to the year in which the compensation is earned or, if shorter, within 30 days after starting participation in the plan.

The two tax bills easily passed both houses of Congress, but have substantially different additional provisions. A conference committee is working on a compromise, but time is quickly running out this session, although a lame-duck session is a possibility. As this was written, there were reports that a possible compromise has been reached on controversial elements in the bill that could move the legislation before the October recess begins. If the bill does not pass, there may be a lame-duck session of Congress that could take it up.

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