We have a dedicated purpose to maintain and continue to develop our position as thought leaders in the ESOP arena to meet the ever changing and evolving needs of our clients. This is not a static area in which we practice. It's very dynamic and subject to change. The only way to stay on top is to actively participate and contribute to the knowledge base at the ESOP industry conferences and add to the dialogue about what our colleagues and clients are doing across the country.
We just wrapped up our involvement in the California/Western States (CAWS) Chapter conference in San Diego and the ESOP Association’s annual conference in Las Vegas.The two phrases to summarize what we've been discussing, presenting and hearing at these two annual events are:
- Regulatory evolution
We're finding that since the number of ESOPs in the country is remaining relatively level, and the ESOP company populations are becoming larger and more mature, the needs of ESOP clients are moving toward strategic planning and modification of their plan strategies to meet the needs of new employees and to handle the benefit requirements of their in-place mature workforces. The ESOP industry is calling this “sustainability planning.” So, sustainability analysis and second and third generation ESOP planning were all the rage at the Las Vegas conference this year.
Consultants and advisors were comparing notes on best practices for everything from repurchase liability projections to plan document and trust redesign to liquidity event planning. We have experienced this as a significant area of our practice over the last several years, but the pervasiveness of the issues at the Las Vegas conference made for fertile discussions against which to compare our client strategies.
At the CAWS ESOP Association conference in San Diego in October, a significant amount of time was spent on how the regulators are dealing with ESOPs in investigations and audits. We addressed these issues in the conference sessions on legislative and regulatory updates and a panel on the IRS's and the Department of Labor’s (DOL) enforcement activities.
In a nutshell, we learned from our colleagues that enforcement activity has remained fairly level and constant. However, experts in the area like ourselves have had divergent experiences across the country, even within fact patterns that are very similar. This means that investigation and audit activity is a difficult arena in which to draw conclusions about what the valid concerns of the regulators are.
We also reported on the publication of several new settlement agreements with high-profile fiduciaries across the country that have fine-tuned matters of concern that the DOL would like to see addressed in ESOP transactions. We find those additional enforcement demands to be more evolutionary than revolutionary. For example, in one case the DOL has pushed for a more specific articulated set of criteria for demonstrating that an ESOP has acquired "control in fact" in a transaction to warrant paying a control premium when buying stock. This concept of "control in fact" is a term that has been floating around in the ESOP community since 1989 when the DOL published proposed regulations for determining fair market value of ESOP shares. However, problematically, it is a made-up term that has no foundation in corporate law or ERISA and has been treated as a "we will know it when we see it" element in enforcement actions. We finally see a case now which includes some articulation of what the regulators think is an appropriate set of criteria for “control in fact.” However, it's still not law and this is one of the many things that comes out of this evolutionary regulatory agenda.
For further information about the conferences in general, and for copies of our presentation slides, sustainability questionnaire, or the most recent settlement agreement checklists, please contact us. We'll be happy to send those to you.
Next year we expect the conferences to be equally exciting. We're looking forward to the National Center For Employee Ownership's (NCEO) ESOP conference in April 2018 in Atlanta, the CAWS ESOP Association conference in Monterey in October, and the ESOP Association's Las Vegas conference in November.