18 April 2024

ESOP Practices Come Under Fire

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The federal government is stepping up scrutiny of how U.S. companies are valued for employee-stock-ownership plans, a vital source of retirement savings for millions of workers. Some owners are selling stakes in their companies to employee-stock-ownership plans at inflated prices jeopardizing those savings.

Since the start of fiscal 2010, the Labor Department has recovered over $241 million through suits or investigations that were resolved without going to court, nearly all of which involve valuations. Overall, the agency has filed 28 suits tied to employee-stock-ownership plans since October 2009, double the total in the previous six years.

Federal officials are expected to propose early next year rules aimed at toughening standards for outside appraisers who provide valuations for employee-stock-ownership plans. Now, appraisers must be hired whenever a stock plan is started and must tell workers once a year how much their shares are worth, but there are no minimum qualification standards for these appraisers or specific rules on how to perform their work.

To protect employees, a stock plan's trustees are required to turn to an outside appraiser when assessing the company's value and stock price if the shares aren't widely traded. Because more than 95% of companies with an employee-stock-ownership plan are closely held, appraisers often rely heavily on company management for information. That can lead to trouble.

Click here for the full article from The Wall Street Journal.

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