ESOP advocates have long urged the Department of Labor (DOL) to establish clear guidelines for adequate consideration requirements in ESOP transactions. The WORK Act (part of the SECURE 2.0 Act of 2022) requires the DOL to set guidelines for ESOP valuation. Simultaneously, the DOL has been facing a formal petition under the Administrative Procedures Act (APA) brought by the ESOP Association calling for the same formal rulemaking. The DOL denied the petition under the APA but nonetheless agreed to a formal public notice and comment rulemaking with a process that includes publishing their draft regulation through public notice and the opportunity for stakeholder comments. The agency must then respond to those comments before issuing any final regulation.
In April, the DOL agreed to move forward on this project. Today, DOL Assistant Secretary for Employee Benefits Security Lisa Gomez stated that proposed regulations on the ESOP adequate consideration requirements will be issued by year’s end. Following the proposed regulations there will be a two to three month comment period and the ensuing processes for approval.
Valuation regulations will have a profound impact on the creation and ongoing viability of ESOPs. The community must engage with the regulatory process to ensure they adequately accommodate the needs of ESOPs and ESOP participants so the regulations do not discourage ESOPs. Advocates of the process note Congress's intent is to encourage ESOPs, and that the current lack of clarity impedes ESOP formation and results in inconsistent court and regulatory actions.