New Proposed Adequate Consideration Regulations

[RealityCheck]

Some takeaways on the new proposed adequate consideration regulations noted below.  Comments do not predict any revisions by the Trump administration, but the DOL did a credible job in the preamble discussion in terms of rationalizing its positions.

1.  The 1988  proposed regulations have been withdrawn officially.  So it would be very difficult to argue reliance on them in future disputes/litigation.

2.  It will be more challenging to minimize a discount for lack of marketability based on the put option rules.  The DOL notes that the put option belongs to the participant and not the plan, and fair market value is determined based on the plan’s ownership.  This is a change from the 1988 proposed regulations.

3.  It will be harder to justify a control premium.  DOL would expect the Trustee to exercise more authority over management and the board.  It remains to be seen how many trustees want to do this.

4.  The concept of justifying a control premium based on acquiring control in the future per a binding agreement has been eliminated.  However, these transactions have diminished greatly.

5.  ESOP transactions that are designed so as to minimize stock appreciation will be heavily scrutinized.  Preamble references a settlement with a public company involving preferred stock that converted into common upon release based on current value, so that the participants did not receive the benefit of common appreciation based on when the preferred was acquired.

6.  In the accompanying proposed prohibited transaction exemption safe harbor for ESOP acquisitions, indemnification of both the trustee and independent appraiser will be prohibited.  Not part of the proposed adequate consideration regulations, but a reflection of how the DOL views some ESOP advisors.  This view is reflected in the preamble to the proposed regulations.

[Peter Gulia]

A caution: The before-publication text, signed by Assistant Secretary Lisa M. Gomez on January 13 and filed with the Office of the Federal Register on January 16, shows the notice of proposed rulemaking, including its withdrawal of the 1988 proposal, is scheduled to be published on January 22 (Wednesday).

As soon as January 20 (after noon), President Trump or his chief of staff might direct the Labor department to withdraw the scheduled publication.

Over the past 44 years, a pause on executive agencies’ rules and rulemakings, even proposals, has been customary for an incoming President. For example, on January 20, 2021, President Biden’s chief of staff directed agency heads to “propose or issue no rule in any manner—including by sending a rule to the Office of the Federal Register (the “OFR”)—until a department or agency head appointed or designated by the President after noon on January 20, 2021, reviews and approves the rule.” Further: “With respect to rules that have been sent to the OFR but not published in the Federal Register, immediately withdraw them from the OFR[.]” https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/regulatory-freeze-pending-review/

A notice is not officially published until the Federal Register publishes it.

[MBESQ]

There is a good chance that the new proposed regulations will be withdrawn or never published officially.  Unfortunately, the new preamble is a summation of many things that the DOL finds troubling with ESOP transactions, and it’s not that ESOPs are bad per se.  In many respects, the rationale behind certain aspects of the 1988 proposed regulations have been undermined by the extensive discussions in the new preamble.  Of course, none of these documents are legally binding in court.  However, the new preamble does not paint a pretty picture other than from the perspective of a plaintiff’s attorney looking for a road map. 

[Peter Gulia]

Or, when a retirement plan considers buying shares, the plan’s fiduciaries could meet all the conditions the released but unpublished proposed rule and class exemption suggest.

[david rigby]

Not sure of the details:  is there a statute that permits a congress to overrule any regulation that was adopted within X months prior to that Congress beginning?  My best recollection is that happened in 2017.

[Peter Gulia]

The Congressional Review Act provides a way for Congress to undo an executive agency’s rule. It applies when the agency has made a final rule, published it in the Federal Register, and delivered notice to Congress. That starts a period of 60 legislative days (House) and 60 session days (Senate), with a reset if there is a new Congress.

(Your recollection is right; the 115th Congress enacted sixteen disapprovals, Public Laws 115-4, -5, -8, -11, -12, -13, -14, -17, -20, -21, -22, -23, -24, -35, -74, and -172.)

But what I describe above happens within the Executive branch. On Monday afternoon, President Trump or his chief of staff might direct whoever then acts for the Labor department to withdraw from the Office of the Federal Register’s publications queue what would have been the notice of proposed rulemaking.

[Peter Gulia]

Here’s President Trump’s regulatory-freeze order: https://www.whitehouse.gov/presidential-actions/2025/01/regulatory-freeze-pending-review/.

The order directs an executive agency to “[i]mmediately withdraw any rules that have been sent to the OFR [Office of the Federal Register] but not published in the Federal Register[.]”

There is an exception if the Director or Acting Director of the Office of Management and Budget “deems [a rule] necessary to address emergency situations or other urgent circumstances, including rules subject to statutory or judicial deadlines that require prompt action.”

Congress in SECURE 2022 § 346(c)(4)(B) directs the Secretary of Labor to issue guidance for “acceptable standards and procedures to establish good faith fair market value for shares of a business to be acquired by an employee stock ownership plan[.]” But the statute does not set a due date for that guidance.

As I read the order, President Trump directs Acting Secretary of Labor Vincent Micone (or a deputy or assistant) to withdraw Labor’s notice of proposed rulemaking about adequate consideration for employer securities.

Such an act today would withdraw the notice before a scheduled January 22 publication.
 

[Peter Gulia]

Today’s Federal Register shows no publication of what would have been the notice of proposed rulemaking about adequate consideration for employer securities or the notice of a proposed class prohibited-transaction exemption for selling employer securities to a retirement plan. https://www.federalregister.gov/documents/current

Among other consequences, the 1988 proposed rulemaking is not withdrawn.

Yet, Federal courts no longer defer to even a final interpretive rule, much less a proposed rule. Absent a legislative rule or regulation made under Congress’s delegation, a court interprets a statute, considering whatever sources of information might persuade the court.