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The Employee Ownership Update

Corey Rosen

November 1, 2010

(Corey Rosen)

DOL Proposes to Define ESOP Appraisers as Fiduciaries

The Department of Labor's Employee Benefits Security Administration (EBSA) has proposed to define ESOP appraisers as fiduciaries (see "Definition of the Term 'Fiduciary,'" 29 CFR Part 2510 RIN 1210-AB32, reproduced here on the EBSA's Web site). The proposal is part of a broader redefinition of fiduciaries that would include investment advisors under specified circumstances as plan fiduciaries. It would also define ESOP appraisers as investment advisors for this purpose for retirement plans. The change would apply both to valuations and fairness opinions.

Under existing regulations, investment advisors (including appraisers) are not considered fiduciaries unless "they have discretionary authority or control, whether or not pursuant to agreement, arrangement or understanding, with respect to purchasing or selling securities or other property for the plan."

The proposal for ESOPs grows out of the EBSA's national ESOP enforcement project. In the explanation of the change, the EBSA says the project has focused "on identifying and correcting violations of ERISA in connection with ESOPs, which are designed to invest primarily in employer securities. A common violation found in the ESOP national enforcement project arises in cases where plan fiduciaries have reasonably relied on faulty valuations of securities prepared by professional appraisers."

The EBSA's concern here is that ESOP fiduciaries (as currently defined) may simply rely on an appraiser's opinion to make a decision, effectively ceding the decision to the appraiser. If the appraiser is providing bad advice, plan participants have to sue the trustee, who would then have to sue the appraiser for malpractice, something that has happened only a few times over the last 20 years, based on our recent ESOP litigation review.

The difficulty, however, is that making appraisers fiduciaries will potentially dramatically increase the cost of these services, perhaps by a factor of two or three (assuming they can find insurance), according to people we talked to. That, in turn, could discourage some companies from creating ESOPs or continuing them, thus punishing a potentially large number of ESOPs that no one would question to try to resolve the relatively small number of clearly poor ESOP appraisals. Complicating the matter is the fact that the DOL has never issued final regulations on how ESOP appraisals should be done, leaving many unresolved issues.

The NCEO will be submitting comments on the proposal, the EBSA welcomes comments from all interested persons. Comments can also be made directly to the EBSA to or via the comment portal at Comments must be submitted by January 20, 2011.

Winning Workplaces Videos on Employee Ownership

Five of the ESOP companies that have been named as winners of the annual Winning Workplaces award talk about their cultures in a useful compilation of short videos available at this link.

Must Unvested Restricted Stock Awards Have Dividend and Voting Rights?

Many employee ownership companies have restricted stock awards for employees. Whether the company is public or private, however, there is no legal obligation for restricted stock in C corporations to have voting rights or dividend rights (the company can have the employees waive those rights, or it can simply use a class of stock without those rights). Similarly, in S corporations, there is also no requirement for voting rights (S corporations can have shares with no voting rights without violating the two-class-of-stock rule). Restricted stock owners also need not receive a pro-rata share of distributions as long as their awards are unvested. Many companies do voluntarily pass on voting and/or dividend rights, however.

Great Site for Retirement Planning

The Employee Benefit Research Institute, a nonprofit that is easily the best source of information available on retirement plan issues, has created an extremely useful Web site to help people understand how much they need to save for retirement. It has a calculator, several useful brochures, savings tips, and more. I strongly urge companies to let their employees know about this. The site is at this link.

Wellness Issue Brief a Best-Seller

Our issue brief "Wellness Programs and Employee Ownership" has become the fastest-selling issue brief in our history, with more than 300 sold so far. The brief can be purchased for $15 for NCEO members and $25 for non-members in PDF format or in print (add $5 for shipping for print copies). To order or for more information, see our page for this publication.

This was one of the most enjoyable projects I have worked on here. The companies profiled here have developed innovative programs for saving money and helping employees lead healthier lives. The fit with the culture of employee ownership makes these programs "must haves" for effective companies.

Author biography and other columns in this series

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